“Belling the Cat” of Investments in Higher Education

In their provocative new publication “Rich Schools, Poor Students: Tapping Large University Endowments to Improve Student Outcomes,” Jorge Klor de Alva and Mark Schneider painstakingly document yet another of the ways that the overall higher education investment in America favors the well-to-do – both institutions and students alike. By combining the property tax benefits as well as the inviolate status of large endowments, Klor de Alva and Schneider raise the issue of indirect public subsidies, putting them on the table along with the myriad other subsidies, including tuition, state and federal appropriations, and financial aid.

The findings are, frankly more extreme than I would have imagined. Over $100,000 per student at Princeton (my alma mater) with $50,000+ totals at the other leading non-profit, elite institutions. The authors then elaborate on who attends those institutions from a needs-based vantage point. Not unsurprisingly, although their numbers have improved, Pell-eligible students still constitute small minorities of the student populations at these institutions. The net effect is a huge cross-subsidy to everyone else and their families.

As a solution, the authors propose an excise tax on the largest endowments, scaled to the size of the endowment, while continuing to protect the deductions that go to donors, thus preserving that advantage. And they suggest that the proceeds go to improved student services (and hopefully improved outcomes) at institutions that serve a majority of low income learners. This might be called a “robin hood” approach by some; but I think of it as a progressive move to put our money where our societal and educational challenges, rural and urban, lie.

As author and professor Jeffrey Selingo reports, some people might well disagree with Klor de Alva and Schneider’s solutions to the problem, either the excise tax or how its proceeds would be used. And some people might argue against the whole proposition, citing the disruption it would cause these premier teaching and research institutions.

The simple fact of revealing the extent of the hidden subsidies for the 100 wealthiest colleges and universities, however, and asking whether this was really the intent of the policy makers when they were put in place, is long overdue. My study of the origins of these policies suggests no such intent. The institutions were deemed a social good, as were churches and other community institutions and given a pass on property taxes. The same gentle treatment was applied to endowments with the “misunderstanding” that they actually reduced the demand for public support by helping keep non-profit private institutions solvent.

As the run-up in tuition and costs has underscored in the last 20 years, the traditional equation is no longer working. I might suggest a different “fix” with the money raised by the excise tax, whatever its rate. Why not put the money – with a negotiated base allocation for each state that favors smaller, rural, and poorer states – in a trust fund to be allocated annually to the Governor of each state for re-allocation “from the bottom up” to the operating budgets of community and state colleges?

No matter what, the political and policy communities, not to mention the institutions that serve marginalized students and their families, owe Klor de Alva and Schneider great thanks for “belling the cat” of this extraordinary cross subsidy and the unintended inequity it represents.

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