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:

1. Higher education is just too expensive for the average American family – because:

1. 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

2. 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.

2. Too many colleges and universities are thwarted by lack of money in their efforts to offer a high-quality educational experience – because:

1. 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

2. 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:

1. 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.

2. 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.

3. 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.

4. 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?

In the first three parts of this series, we initially looked at a report from Moody’s regarding the growing separation by wealth between a small number of extraordinarily rich colleges and universities and the very large number of institutions that are heavily dependent on tuition to fund their annual budgets. Subsequently, we reviewed the history of wealth acquisition by the very rich campuses and noted that it was a relatively recent phenomenon. Then we examined the consequence of this imbalance in wealth in terms of the long-term viability of tuition-dependent colleges and universities.

Now, in Part 4, we will consider the relationship between historic patterns of public and private financial support for higher education, and the current very high level of frustration, on the part of parents, politicians and pundits, regarding the diminishing opportunities for young people to receive a college education that is both excellent and affordable.

At certain points in our nation’s history, public opinion has held that higher education is a social good, whereas at other times higher education has been perceived as a private benefit. Those swings in opinion have had profound effects on public policy, and, as we shall see, have contributed to the very significant economic challenges our country is facing today.

Examples of times when there was broad public support for the use of taxpayer dollars to subsidize educational costs include:

1. 1790, and the advent of public institutions of higher education (the Universities of North Carolina and Vermont);

2. 1862’s Morrill Act, establishing land-grant universities for the purpose of creating expertise in agriculture and engineering (“Justin Morrill, the man behind America’s higher education,” The Boston Globe, June 21, 2015);

3. 1944’s G.I. Bill, which opened the doors of higher education to more than two million returning servicemen and women;

4. The period from roughly 1950 to 1980, when a dramatic expansion of state and community colleges resulted in a quadrupling of the percentage of American adults with a college education.

During the last 35 years or so, however, the prevailing view in America has been that higher education is primarily a private benefit, and therefore the responsibility for paying for higher education rests with the individual. Reflecting this belief, state appropriations to public higher education have dropped precipitously, leading to dramatic increases in tuition prices at public institutions, and a sharp reduction in affordability on the part of prospective students and their families.

A few statistics:

1. The average list price for tuition and fees at public four-year colleges and universities in America in 2014-15 was $9,138; with room and board included, the price was $18,943.

2. The average list price for tuition, fees, room and board at private, nonprofit, four-year colleges and universities in America in 2014-15 was $42,419.

3. The median family income in America in 2013 was $51,939.

4. Measured in inflation-adjusted dollars, between 1985 and 2010 the list price for public universities increased by 157 percent, and by 137 percent for private colleges and universities.

5. On the other hand, median family income between 1985 and 2010 increased by just 8 percent.

(To be sure, the prices cited above are list prices; the actual price paid by most students, especially at private colleges, is much less. Even so, there is no disputing the fact that the average family must pay a much larger proportion of family income to send a child to college today than was the case 30 years ago. That fact alone accounts for much of the concern of parents that a college education has simply become too expensive, and may no longer be “worth it.”)

How does this shift in public policy regarding the funding of higher education relate to the subject of this blog: wealth inequality among colleges and universities?

To the extent that people actually expected that philanthropic dollars would somehow replace the dollars that the states took away from public institutions, they must be terribly disappointed. In the first place, there aren’t enough philanthropic dollars to substitute for the missing public dollars, and, in the second place, philanthropists are obviously free to follow their own wishes regarding the target of their gifts – and since many of them are graduates of wealthy and prestigious private colleges and universities, those are the institutions that have been most favored, a point made emphatically in the Moody’s study that is the subject of this series.

As a consequence of losing state dollars and of rising costs, over the past 35 years all colleges and universities, public and private alike, created, or expanded, offices of “development” or “advancement” (read: gift-seeking), in order to remain competitive with their peers – and some have been far more successful than others (see Part 2 of this series). Highly uneven success in fund raising resulted in the enormous wealth inequality we now see among the nation’s more than 2,000 four-year colleges and universities. In addition, lack of significant philanthropic success has forced the great majority of private and public colleges and universities to raise their tuition prices to cover their costs – and since median family income has not kept pace with rising college prices, more and more families are finding it very difficult to pay for a college education. The growing inability of American families to afford to send their children to college threatens the overall American economy because we are falling farther and farther behind other countries in the percentage of adults with a college education (“Take a trip abroad, see the US in decline,” The Boston Globe, June 21, 2015).

Somewhat paradoxically, the richest (and therefore the most prestigious) colleges and universities have had no trouble enrolling large numbers of students whose families are both able and willing to pay full price – and full price at these schools is generally around $60,000 per year – even as less well-known colleges struggle to attract a full class of students where the discounted price averages less than $30,000 per year. The paradox is explained by the growing wealth and income inequality in America today (see particularly my blog post on Sept. 30, 2014): wealthy individuals can afford to send their children to these rich and prestigious colleges and universities, and are only too happy to do so because their children will be surrounded primarily by children from equally wealthy families, and because of the presumed status of the elite brand name that will appear on their children’s diplomas.

The current path our nation is on will ensure that the problems I have been discussing will only become more severe, resulting in an even more stratified society and a national economy that continues to weaken. But does our nation’s economic future depend solely on society once again deciding to embrace the notion that there is great public benefit from having a highly educated populace – or are there steps to address the growing stratification of colleges by wealth that would, if taken, once again expand affordable access to a quality education?

Next time, Part 5: A New Course Heading for the Ship of State.