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Wealthy universities are doing a poor job helping low-income students, report says

The Wharton School of Business at the University of Pennsylvania in Philadelphia. The University of Pennsylvania has a $6.5 billion endowment that researchers at the Education Trust said could be better used to support low-income students. (Rusty Kennedy/AP)
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The top 4 percent of colleges and universities hold three quarters of all endowment wealth in higher education, yet four in five of those 138 schools expect the neediest families to hand over more than 60 percent of their income to cover the cost of attendance, according to a report released Thursday by the Education Trust.

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Advocacy groups and lawmakers are placing greater scrutiny on the ways in which the nation’s most elite halls of learning spend their wealth, as families struggle with the exorbitant cost of college. Critics of these schools question their commitment to using their largesse to educate students, especially those from less fortunate families. Universities have argued that their endowments are not savings accounts that can easily be drawn down and that they are raising money to cover the financial need of low-income students. Policy analysts at Education Trust say they could do more.

“We know that a lot of these institutions are doing great things for low-income kids, reducing the price that they pay. We’re just asking them to do more because they have the capacity to do more,” said Andrew Nichols, a co-author of the report and the director of higher education research at Education Trust. “To whom much is given, much is required.”

Nichols and his co-author, José Luis Santos, looked at the spending rates of universities with at least $500 million in endowment funds and concluded that many could provide more scholarships to low-income students if they doled out a little more of those funds. Although private foundations must spend at least 5 percent of their endowments by law, universities are under no such obligation.

The pair identified 35 institutions that spent less than 5 percent of their endowments in 2013 and estimated that they could collectively generate an additional $418 million by simply hitting that 5 percent threshold. That money could pay the tuition for an additional 2,376 low-income students or reduce the cost of attendance by an average of $8,000 a year, according to the report.

If the University of Pennsylvania, which spent 4 percent of its $6.4 billion endowment in 2013, upped the rate by 1 percent, the Ivy League school could generate an additional $65 million, according to the report. With that money, the school could double the enrollment of students eligible for Pell grants, whose families typically earn less than $60,000, from 109 to 218 students and cover costs for all four years.

UPenn officials took issue with the methodology of the report, which used tax documents, known as 990 forms. The authors acknowledged the limitations of the data, noting that many schools have multiple tax ID numbers and names that make it difficult to account for all of their wealth and conduct comprehensive reviews — all the more reason for more transparency, Nichols said. Still, he and Santos matched the tax data with what universities reported to the Department of Education.

In a letter to Education Trust, UPenn spokesman Stephen J. MacCarthy said the 990 form researchers used included endowments funds tied to its hospital, which skewed the calculation. He explained that the university has an effective spending rate of 6.5 percent for financial aid, and challenged the assertion that the school could easily afford to do more without compromising its financial standing in the future.

“Every dollar spent today means there will be fewer dollars to spend in the future,” MacCarthy wrote. “We are charged with finding an appropriate balance. Saying that spending today has no impact on the future is simply not true.”

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Colleges and universities maintain endowments, a collection of tax-exempt donations and investments, to pay for salaries, research, financial aid and other expenses. Wealthy donors, however, often place conditions on their money, directing the funds to only be used for athletics or to support specific kinds of research, for instance. As a result, schools say their hands are often tied.

“Access and affordability are critical to the missions of colleges and universities, and you do see a lot of schools trying to do more for low-income populations. But schools are having to balance a lot of aspects of their missions when they look at where they need to provide resources,” said Liz Clark, director of federal affairs at the National Association of College and University Business Officers (NACUBO).

She said that any money that is redirected would still have to be accounted for, meaning schools would have to find other sources of revenue, like tuition, to cover salaries and operations if they were to pour more money into financial aid. A recent NACUBO survey found that schools with the largest endowments were more likely than others to devote a lot of their funds toward financial aid.

While Nichols said he understands the challenges in the structure of many endowments, universities are not powerless, passive actors when it comes to determining how endowments are spent or fundraising and receiving financial gifts. He said they could ask donors to set aside portions of all new gifts to support low-income students or even renegotiate the terms of existing endowment agreements to free up funds.

“We understand that endowments are complicated, but they don’t have to be. They’re complicated because they are set up that way,” Nichols said. “Restrictions are a byproduct of their own actions. It’s not something the federal government regulates. Institutions come to those agreements.”

Brian Flahaven, director of advocacy at the Council for Advancement and Support of Education, said university endowments have been on shaky ground coming out of the recession. He pointed to a NACUBO study that showed endowments at 812 schools returned an average of 2.4 percent for fiscal 2015, compared to 15.5 percent the prior fiscal year. The typical goal, Flahaven said, is to get around an 8 percent return each year to maintain purchasing power. The average return is closer to 6 percent over the past 10 years.

“Institutions have to have a spending policy that makes sure they are getting a return that exceeds their spending, inflation and their administrative costs for the endowment,” Flahaven said. “It’s easy to say they should increase spending to 5 percent, but that’s not always easy to do.”

The rich get richer in higher ed: 40 colleges hold two-thirds of the wealth, and growing

Still, charitable contributions to colleges and universities climbed 7.6 percent to $40.3 billion in fiscal 2015, according to the most recent survey from the Council for Aid to Education. Nearly 40 percent of the gifts schools received last year were earmarked for scholarships and grants. The lion’s share of that money went to elite private universities, with 20 schools accounting for more than 25 percent — or $11.5 billion — of the donations. Stanford University and Harvard University pulled far ahead of the pack by taking in at least $1 billion in contributions.

Despite the tumultuous effect the financial crisis had on university endowments, since the recession, the wealthiest 40 universities increased their overall assets by 50 percent in the past five years, according to Moody’s Investors Service. The financial performance of those schools at a time when many families are struggling to cover the cost of college has led lawmakers to question whether wealthy schools are doing enough to serve students.

Congressional Republicans have asked 56 private universities, each with endowments exceeding $1 billion, for information about the use of that money. New York Republican Rep. Tom Reed, meanwhile, has proposed forcing schools to devote 25 percent of their annual endowment income toward financial aid, or risk losing tax-exempt status.

“It’s up to policymakers and folks in the advocacy community to figure out what a good policy solution looks like, one that could leverage endowments to ensure the money is spent for low-income students,” Nichols said. “That could be some sort of tax on institutions that don’t meet a certain spending threshold for need-based aid. There are a lot of different options.”

Want to read more about endowments? Check out these stories:

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