Colleges Have the Cash. Time to Start Spending More of It Helping Students

In a recent New York Times op-ed, Victor Fleischer, a professor of law at the University of San Diego, raises legitimate concerns regarding one university’s nearly half-a-billion-dollar payment to private equity fund managers for overseeing the investment strategy on a portion of its endowment fund. In particular, he calls into question the extent to which higher-education institutions with significant financial resources are using enough of that money for educational purposes, including easing the financial burdens of students who, left to their own devices, are borrowing increasingly large sums of money to pay for their schooling.

I agree with him, however the scope of the problem isn’t limited to the schools and universities with $100-million-plus bank accounts that Fleischer targets.

Certainly, nary a week or two goes by without word that a significant gift has been made to a prominent university. The much-heralded donations are often earmarked for specific projects, such as a new building, the modernization of an existing structure, the support of a new academic undertaking or, perhaps, the sponsorship of unique research. Less publicized smaller contributions, which are routinely made by parents and alums, may also be held in reserve to fund building projects or targeted academic pursuits, or, as is often the case, to bolster the school’s rainy day fund: the endowment.

A look at the typical not-for-profit school’s annual financial statements, however, suggests a slightly different story: Institutions are increasingly using the investment income (including interest) generated by these endowments (and, sometimes, principal amounts from the fund itself) to offset operational shortfalls.

Said differently, rather than taking steps to address the problems of spiraling administrative expenses, the dubious strategy of meeting enrollment goals by discounting tuition prices for some (which is analogous to marking down an exorbitantly-priced item to the level of “expensive”) and, perhaps, relaxing admission standards for others, school officials have instead chosen to bridge the widening gap between revenues and expenses by compromising the financial generosity that was intended to assure institutional longevity.

Which brings me back to the philanthropic activities on the part of those at the top of the income-earning food chain.

Although I understand the pride that comes from having a building named after an especially generous benefactor, I would argue that a more worthy use of his or her money would be to reduce the cost of tuition across the board. In fact, automatically restricting a meaningful percentage of all donations to that purpose (including the investment income that comes from that) may even inspire boards and administrators to take corrective actions that are long overdue, because fewer freshly-contributed dollars will be available to offset the red ink.

In other words, rather than battling with reluctant managers over how much to draw down existing endowment funds for educational purposes (including tuition assistance), as Fleischer advocates, why not control the flow of money at the source: when the donation checks first arrive in the mail?

The federal government can also help stimulate tuition-specific gift-giving by redirecting a portion of its annual financial aid budget to match the value of these restricted donations, dollar for dollar. It can do even more by incenting colleges and universities within this vastly overbuilt and redundant network of higher-educational facilities to combine.

If policymakers lack the political courage to reconstitute the Department of Education’s entire higher-education budget so tuition-free degrees become a reality for in-state students attending the nation’s public colleges and universities, they should at least agree on a plan to foster tuition-specific public/private partnerships that have the potential to at least get us part of the way there.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.