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Turning Grinches into Santas

January 7th, 2013 by dfarish

In my last post, I criticized wealthy campuses for focusing too much on the size of their endowments and the returns on their investments, and not enough on making their campuses financially accessible to more students. In this post, I will suggest why they strayed, and why it is important that they rediscover a more socially useful path.

It all begins with an analysis of mission and purpose. Private colleges were established in this country to meet the need of various religious denominations to prepare members of the clergy here in the colonies, rather than having to import them from Europe. A number of institutions still retain their religious affiliation, although very few of them limit their educational efforts to the preparation of clergy. However, most private colleges today have at best a distant relationship to a particular religious denomination, or have become entirely secular, and their educational programs have expanded dramatically to include all of the traditional arts and sciences, and very often professional programs as well.

Around 1790, both Vermont and North Carolina recognized the need for more well-educated citizens, and so began the era of public colleges and universities, wherein the state provided a substantial tuition subsidy. The federal government became involved in 1862, passing the Morrill Act that granted federal land to each state, the proceeds from the sale of which were used to create colleges of agriculture and engineering.

Private junior colleges began around 1900, but, in the years following WW-II, all of the states rapidly expanded the number of public junior colleges (now generally termed “community colleges”), to expand postsecondary education opportunities.

Today, more than 21 million students are enrolled at more than 4,600 colleges and universities, figures that include more than 1,200 for-profit campuses that enroll about 2 million students.

There are about 1,700 public nonprofit campuses; enrollment is roughly 7 million at both the 1,000 community colleges, and at the 600 four-year colleges and universities.

The private nonprofit campuses also number about 1,700. Almost all (1,600) are four-year schools, collectively enrolling nearly 4 million students. Roughly 100 are two-year schools, with about 30,000 students.

Be they two-year or four-year, public or private, the nonprofit colleges and universities largely share a common vision: to provide their students the best possible education that the institution can afford.

Of course, what the institution can afford varies widely. Schools with large endowments can afford to hire the most prestigious faculty; the most prestigious faculty attract gifted students; outstanding faculty and students enhance the reputation and ranking of the institution; top-ranked colleges are highly desired by ambitious students, and they can therefore charge the highest tuitions.

So if the market will tolerate very high tuition prices, isn’t it reasonable that top-ranked colleges price themselves accordingly?

Ah, but here’s where things break down. The original mission of colleges and universities in this country was to provide a service to society (educating clergy, teachers, engineers, and so on) at a price that society could afford. They were established as nonprofit institutions, and were exempted from taxes as a consequence – because society rightly saw them as enormously beneficial. They were allowed to establish endowments, earnings on which and gifts to which were not taxed. The endowments serve to smooth out the inevitable hills and valleys of revenue and expense, and allow the colleges to survive in tough economic times.

But as a few colleges and universities began to amass very substantial wealth, they began to operate more like for-profit corporations. Consider: more than 75 schools have endowments in excess of $1 billion (Harvard’s endowment exceeds $30 billion) – at a 5 percent drawdown, these endowments each generate between $50 million and $1.5 billion annually for their school’s operating budget. However, rather than replacing tuition dollars with endowment drawdown dollars and making themselves more financially accessible to more prospective students, they continue to raise their tuitions in order to spend more per student each year. Because a lot of money is evidently never enough, they also continue to augment their endowments through a never-ending series of multibillion-dollar fund-raising campaigns.

Most public and private colleges spend between $12,000 and $30,000 each year for each student’s educational costs. However, a few of the very richest colleges and universities are spending more than $100,000 per year per student.

Why?

I would hope that the long term goal of all colleges and universities – public and private – would be to grow their endowments over time in order to reduce their need for public subsidies and for tuition-generated revenue.

If that isn’t their goal, then why does society continue to tolerate the tax-exempt status granted to institutions that care more about their financial success than their public mission?

Will Grinches, over time, become Santas? Apparently, only if they are shamed into it.