For the past several weeks, we have been considering the ramifications of a Moody’s study done in April of this year that noted a widening gap in wealth between a handful of very rich colleges and universities, and all of the other institutions of higher education in America.
Even as I was writing the posts in this series, something occurred that dramatically underscored my concerns about the wealth gap in higher education. John Paulson, a hedge fund manager and multibillionaire, gave $400 million to the world’s richest university: Harvard.
Wow! That’s an enormous amount of money! A gift of that size would have instantly placed the beneficiary among the richest 200 institutions of higher education in the country – even if that institution’s endowment had been zero when the gift was received. But think about this: John Paulson’s gift of $400 million is, on the one hand, the largest gift in Harvard’s 379-year history; but, on the other hand, it increases Harvard’s endowment by a little more than one percent, and, after taxes, it represents less than two percent of Paulson’s net worth. Isn’t it extraordinary that a gift of $400 million can be made with so little sacrifice on the part of the donor, and have so little impact on its recipient? And since $400 million is equal to the total annual income of all of the people in a city with a population of 25,000 (median family income in America is just over $51,000; assume three people per family, on average), this gift to Harvard epitomizes the outrage of many that our economic rewards system is completely out of balance.
The fundamental problem facing higher education today is that far too many prospective students cannot gain access to an affordable, high-quality college education. The causes of this problem are many, as I have outlined in previous posts to this blog site, but two in particular stand out:
- Higher education is just too expensive for the average American family – because:
Higher education costs have been rising much more rapidly than has median family income, meaning that higher education continues to become less affordable for more people with every passing year; and
The ability of colleges and universities to use endowment earnings to subsidize their costs has been thwarted because the only endowments that have grown significantly are those of the already very rich universities – and there just aren’t enough of these rich universities to accommodate more than a tiny fraction of the college-bound population.
- Too many colleges and universities are thwarted by lack of money in their efforts to offer a high-quality educational experience – because:
Public universities are too often caught between the politicians’ desire to keep tuition increases to a minimum (to appease angry parents of prospective college students), and their decision to reduce appropriations to public colleges and universities still further (because of limited tax revenues), with the consequence being that the public institutions have insufficient dollars to offer a quality education; and
Too many private colleges are caught between the need to recruit a full class of students (necessitating big tuition discounts), and the need to have sufficient tuition money to guarantee a quality education.
The easiest solution would be to have more philanthropic dollars flow to the institutions that need those dollars in order both to subsidize students yet still be able to offer a quality education – but of course the point of these blog posts is that that is precisely what has not been happening.
What to do?
There are several options:
- Convince society that higher education is a public good. If the American public believed now, as it did between 1950 and 1970, that our national economy would be stronger if more people received a college education, we would see a general willingness to finance much more of the costs of higher education from the public purse. But because median family income has been essentially constant (in inflation-adjusted dollars) for 30 years, most people are very reluctant to have their taxes increased, even for the long-term societal benefit of a better-educated workforce. So, regrettably, this solution is unrealistic.
- Prohibit universities and colleges with endowments in excess of $1 billion from participating in federal student assistance programs such as Supplemental Educational Opportunity Grants (SEOG), Pell Grants and Federal Work Study. It is outrageous that incredibly rich universities are competing with their much less affluent peers for scarce student assistance dollars, but they are. In fairness, the Pell program is basically a voucher system wherein the federal dollars follow the student – so someone eligible for a Pell Grant who is admitted by Harvard takes that award with him or her. Similarly, the Federal Work Study program awards dollars to an institution based on the percentage of low-income students enrolled at that institution. Harvard and the other super-wealthy universities could be magnanimous and refuse to accept the money, of course, but they are under no obligation to do so. In any case, this potential solution is unlikely to happen because selecting one particular endowment threshold beyond which institutions would lose access to federal funds would be subject to claims of arbitrariness.
- Eliminate the charitable deduction on gifts to universities with an endowment of larger than $1 billion. In my view, this action would establish the unwelcome precedent of having charitable deductions subject to being taken away. If we start with a threshold of $1 billion, might this figure eventually be lowered (for purposes of raising more revenue through taxes) – or eliminated altogether? Moreover, a change of this type would be resisted by those seeking to support their own alma mater – why should they be discriminated against, just because they are alumni of rich universities? Politically, this solution is probably a non-starter.
- Tax the investment earnings (not the gifts themselves) of all endowments at the prevailing capital gains rate, and use this additional tax revenue to expand federal support of programs such as Pell, SEOG and Work Study. Because it would apply to every institution, irrespective of endowment size, this solution avoids claims of arbitrariness. Very wealthy institutions would pay many more actual dollars than would institutions with very modest endowments, but the tax rate would be the same for both types of institutions – and since taxes would only be paid on actual investment earnings, universities would be protected from large tax bills in years when their endowment earnings were modest. Since the institutions would continue to receive the full value of donations, and since the donors themselves would continue to receive the same charitable deduction on their income tax returns, the only real change is that institutions would no longer receive 100 percent of the value of their investments – but the relatively modest tax would nonetheless generate billions of dollars annually (often more than $10 billion) that would greatly increase affordable higher education for successive generations of students.
There are two issues to be mindful of with this proposal: First, the tax revenue generated from this model would presumably vary enormously from year to year, as a function of the relative robustness of the economy. A system would have to be devised to distribute the funds collected in a manner that would avoid dramatic changes in the amount distributed in any given year. Second, these funds must be seen as additive to current federal aid dollars, not as a replacement for those dollars. Historically, we have seen many examples of supposedly dedicated tax dollars (think: gambling taxes, or gasoline taxes) being used for purposes other than schools, roads and bridges, and these examples of “repurposed” funds may well lead to much skepticism regarding the long-term willingness of Congress to uphold the specific intent of what I am proposing.
Of course, none of these changes would be necessary if very wealthy donors chose voluntarily to direct their money to institutions that would actually be transformed by their gifts, rather than being made just a little bit richer than they already were. This is not an idle thought. There are a few very significant examples where a wealthy donor has given significant money to a needy institution with which the donor has had no previous relationship.
I am well aware of one such example, having worked at a campus that received just such a gift.
In 1992, Glassboro State College, a small public university in southern New Jersey with an endowment at the time of less than $1 million, received a pledge of $100 million (to be paid over 10 years) from Henry Rowan, a local industrialist. Mr. Rowan was a graduate of MIT, but quite reasonably thought that his money was not nearly enough to transform that very wealthy institution – yet it might very well be enough to transform Glassboro State College. The risk, of course, was that Glassboro might have used the money unwisely, and, in the end, not have been transformed at all.
As it happened, Glassboro State College (now “Rowan University”) was transformed. Over the past 20 years, Rowan University has developed a College of Engineering, a College of Professional and Graduate Education, purchased 600 acres of land for future expansion, constructed an “innovation center” including both a business incubator and space for start-ups in science and engineering, built new buildings for the sciences and for the College of Education, constructed a “village” of townhouses for upper-division student housing, worked with the Borough of Glassboro to develop 23 acres of land linking the campus with the downtown, including a Barnes and Noble bookstore, a building for the Honors College, a hotel, a parking garage, and three privately-owned but university-leased residence halls with more than 1 000 beds – and created a medical school.
In an ideal world, the transformation that Glassboro State College underwent as a consequence of what was at the time the largest gift ever given to a public university would have encouraged other very wealthy philanthropists to seek their own “Glassboro States” to transform – but that just hasn’t happened. To the contrary, in recent years more money than ever has flowed to the already very rich universities, further widening the wealth gap and doing nothing to increase the number of seats available for high-achieving students in high-achieving universities.
Our nation desperately needs more Henry Rowans – wealthy individuals who are willing to take the calculated risk that their money can transform good colleges and universities into exceptional institutions. As things now stand, however, we continue to gamble our nation’s economic future on the hoped-for success of the few privileged students who are able to attend a small handful of extraordinarily wealthy colleges and universities – institutions that have been made wealthy through the tax-exempt contributions of the parents of these same students. Isn’t it time that we took a hard look at what passes for economic and educational policy in our country? Might we not encourage – demand – that the candidates for president in 2016 tell us their thoughts on this issue?