Lawmakers and advocates are calling on colleges and universities to divert more of their endowment funds toward scholarships to combat rising tuition rates, but institutions argue that view is short-sighted.
Legislators have been cracking down on college endowments, with many arguing that institutions should dig deeper into their endowments to expand financial aid programs or reduce tuition. President-elect Donald Trump has also said he would work with Congress to demand that institutions with large endowments divert more money toward students or risk losing their tax-exempt status.
Critics argue that colleges and universities are using their endowments for nonessential projects such as state-of-the-art student centers and athletic fields when that money could be spent on financing low-income students' education. But representatives of many institutions say supporting low-income students is exactly what they're trying to do, although it has become increasingly difficult to accomplish in a challenging economic climate.
What really drives college costs? Hint: It's not climbing walls.
Duke University's VP for public affairs, Michael Schoenfeld, says a lot of confusion surrounds the purpose of college endowments.
"Many people, especially students, believe there's a safe in the president's office with $7 billion and the president decides who his favorites are to get the money," Schoenfeld says. "It's much more complicated than saying you have $7 billion in the bank, why not spend more?"
While Duke's endowment reached nearly $7.3 billion at the end of 2015, Schoenfeld notes that the university spends about $1.3 billion in endowment funds each year, with about half of financial aid spending coming from the endowment fund.
"The endowment is essential to keeping tuition down," Schoenfeld says. "If you come to Duke as an undergraduate, the cost is about $90,000. The price we charge is about $60,000. How do you do that? A large chunk of that comes from the income from the endowment."
How one university helps its board stay focused on critical finance issues
Critics have railed against multi-billion dollar endowments, but few colleges and universities have endowments as large as Duke's. According to the American Council on Education, 84% of public and private institutions have endowments of less than $50 million.
Take Queens University, which has an endowment of slightly more than $100 million. According to CFO Matt Packey, Queens spends about 5% of its endowment annually. And about 70% of earnings taken from the endowment each year go toward scholarships.
"The way an endowment works is you invest the money so it generates return earnings," Packey says. "In your 401(k) you invest that money and generate dividends, interest and returns on that money. In our case we spend that dividend and interest on scholarships but we leave the base alone so it remains forever."
The University of Virginia (UVA) has faced scrutiny for its $2.2 billion strategic investment fund made public this year, which is separate from its $6.8 billion endowment that is meant for academic and research opportunities. But credit analysts say that such reserves offer a strong defense against changes in the economy and political climate, as well as more flexibility than endowments.
"It seems like they're using the fund in the manner that it was envisioned to serve," says Charlene Butterfield, credit analyst at S&P Global. "The fact that they're using it to make sure they're providing the best education for their students and serving that demographic—that's what it's designed to do" (Rees Shapiro/Douglas-Gabriel, Washington Post, 11/11; Glenn, WFAE, 11/14; Glenn, WFAE, 11/15).
How financial aid can help support student success
Next in Today's Briefing
How 3 universities bounced back from failed student success initiatives