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A Way to Increase Socioeconomic Diversity at Elite Colleges

Published:  September 19, 2007

The Senate Finance Committee appears to be moving forward with a proposal that would require wealthy colleges and universities to spend a minimum percentage of their endowments each year a move which we at Higher Ed Watch strongly support. Private foundations, like the Bill & Melinda Gates Foundation for example, are required by law to spend at least five percent of the value of their endowments each year, but colleges are exempt from such a mandate. As a result, with the help of the Internal Revenue Code, institutions of higher education can legally amass and horde vast sums of wealth.

We applaud Congressional Committee leaders for sticking to their guns and pushing their endowment proposal in the face of significant opposition from higher education officials. But its at least equally important, if not more, to make sure that the endowment funds are put to the best possible use. The public has an interest in both the extent and manner in which colleges spend endowment funds that after all are raised with substantial public support via the federal tax code.

Right now, its not entirely clear what the committee has in mind with respect to which goals it has for increased higher education endowment spending. News reports suggest that the tax committee's lawmakers want to force colleges to keep their tuition increases down.

The government certainly needs to take steps to curb the growth in tuition and fee increases, but were not sure that requiring endowments be used to keep tuition and fee growth down would produce most efficient bang for the buck. Instead, the government might have a much greater impact if it required the wealthiest colleges to use a share of their endowment funds to increase the socioeconomic diversity of their campuses.

As has been widely noted, most elite colleges are not doing nearly enough to recruit, enroll, and graduate low-income students. Too often these schools resemble country clubs, closed off mostly to those who do not come from privileged backgrounds. And those minority and low-income students who are admitted tend to drop out at much higher rates.

According to the Census Bureau, 61 percent of households earned under $60,000 in 2005. But in that same year, Higher Ed Watch found that the 38 private colleges with endowments over $1 billion enrolled on average only 19 percent of their students from families with incomes under $60,000.

The numbers are even bleaker for Pell Grant recipients, who usually come from households making under $40,000 a year. At colleges with billion-dollar-plus endowments, only 12 percent of students on average receive a Pell Grant.

Congress should require elite institutions to spread some wealth to less advantaged students. If colleges were held to the same 5 percent standard as other nonprofits, a $1 billion college endowment with an average spending rate (about 4 percent) would have to spend an additional $8 million each year. If that same endowment were held to the actual average nonprofit spending rate of 7 percent, an additional $28 million would be available.

Cumulatively, if all 38 private colleges and universities with endowments larger than $1 billion were required by law to increase their endowment spending rates to 5 percent of total funds and dedicate increased spending to need-based financial aid, an additional $1.4 billion a year in need-based financial aid would be available to low-income students. At 7 percent, this figure would jump to $4.7 billion a year.

Some might argue that Congress already sufficiently took care of low-income students when it approved legislation that boosts the maximum Pell Grant from its current level of $4,310 to $5,400 over five years. We disagree. While the increase will help more low-income students gain access to college, we dont think it will have much of an effect on increasing socioeconomic diversity at the elite and most expensive private colleges and universities.

Congress, however, could have a real impact on low-income student financial access to elite and super-expensive private colleges by requiring the wealthiest colleges to devote a portion of their endowment funds to recruit, enroll, and retain low-income students. Recruitment efforts are necessary to get low-income and moderate-income students through the door, and financial aid and other academic services will be needed to support them once inside.

If the leaders of the Senate Finance Committee are serious about using endowment funds from those colleges with the most, they should set aside the flashier goal of curbing tuition increases and instead focus on channeling endowment aid to those with the least. They're likely to get much more bang for the buck.

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