On Tuesday, a House Ways and Means subcommittee kicked off the first of several planned hearings on how the tax code affects higher education, focusing on universities that use their endowments to lower student expenses.
Jeff Amburgey, vice president for finance at Berea College in Kentucky, testified that the liberal arts school is using its $1.1 billion endowment to cover tuition for all students by committing all unrestricted donations to long-term investment, a policy started in the 1920s. The roughly 1,600 students at the school receive enough federal, state and institutional grants to pay for an average 92 percent of the $34,380 total cost of attendance.
“Berea’s model is very fragile because it’s based on external market forces, so we are impacted by things that are beyond our control, but we put in place safeguards to help us get through tough times,” Amburgey said. “We manage our costs to stay true to our commitment to students.”
Universities maintain endowments, a collection of tax-exempt donations and investments, to pay for salaries, research, financial aid and other expenses. Donors 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 often say their hands are tied, but many higher education experts argue that universities could restructure their policies.
Washington College President Sheila Bair told the House committee that most of the major gifts the Eastern Shore school received last year were for scholarships because administrators encouraged donors to give money for financial aid. The private college has an endowment of about $200 million, 60 percent of which is dedicated to scholarships.
Rep. Peter Roskam (R-Ill.), chairman of the Ways and Means Oversight committee, asked whether the tax code should be used to encourage people to donate money specifically for scholarships at universities. He said there are already tax incentives for companies to contribute inventory donations that receive an added benefit if it helps the needy. Something similar could be applied to colleges, though Roskam stopped short of proposing any such legislation.
“We need to do some more exploring,” Roskam said of the incentive idea. “It doesn’t matter where you are on the political spectrum, everybody is agreeing that direct giving towards enhanced student aid and scholarships is a good thing.”
There is legislation in the works that would steer more endowment funds toward financial aid. New York Republican Rep. Tom Reed, a member of the subcommittee, plans to introduce a bill requiring colleges with endowments above $1 billion to set aside up to 25 percent of their investment earnings toward financial aid, or risk losing tax-exempt status.
“I recognize that endowments are a bridge to getting the college cost issue under control, so I don’t see it as a single magic bullet and a panacea,” Reed said at the hearing.
Bair called Reed’s legislation reasonable, but said colleges should really adopt that policy on their own.
“It saddens me that Congress would need to require colleges to do something so obviously in the best interests of their students,” she said in a prepared statement to the committee.
At the hearing, Mark Schneider, vice president and institute fellow at the American Institutes for Research, called for an excise tax of up to 2 percent on private colleges with more than $500 million in endowment funds. The more money schools devote to financial aid for low-income students, the lower their tax burden. Schneider said the policy could generate $5.2 billion that could be used for federal student aid programs or to help students at community colleges.
“Because so much wealth is now concentrated in so few hands, there are questions about the extent to which the public interest is being served by the distribution of these endowments,” Schneider testified. “Taxpayers are subsidizing rich students at rich universities.”
The hearing comes as colleges are experiencing declines in the value of their endowments. Investment advisory firm Wilshire Associates recently reported that funds with more than $500 million lost nearly 1 percent in the fiscal year ending June 30 due to market volatility. Still, Moody’s Investors Service says the wealthiest 40 universities have increased their overall assets by 50 percent in the past five years.
Want to read more about endowments? Check out these stories: