“Tax the rich” has become an attractive bipartisan policy approach to higher education institutions.
Some Congressional Republicans are crafting legislation that would require more investment income from university endowments to be spent on student aid, according to the Washington Examiner.
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If they fail to comply with the new rules, they’ll be hit with higher taxes.
The measures aim to keep colleges from stockpiling cash even though tuition and fees for students have continued to grow.
Endowments have seen large gains since the recession, leaving at least 90 colleges and universities with more than $1 billion in funds.
Colleges and universities have voiced strong opposition to the plan, saying that supporters of the plan don’t understand the details of endowments and how they are used.
Part of the push against large endowments are that the richest schools tend to get large subsidies per-pupil. University endowments receive favorable tax treatment, and richer schools tend to perform better, attracting research funds and other perks that overlook community colleges and regional schools.
Endowments also receive many donations earmarked for specific uses. Funding an engineering department, building a campus recreation area, or funding scholarships. If a law requires 10 percent of that funding to go toward a student fund, some donors might withhold their donations. A lack of control over the money could have unintended consequences that leaves future students worse off.
Given that the overall effect would show relatively small benefits (going after university endowments will not make student loans a relict of the past), the loss of financial control and independence could do more harm than good. That doesn’t preclude a law that gives schools a financial responsibility for high student debt, but unintended consequences should be remembered when crafting legislation.
American universities have the uncommon distinction of endowment funding; the majority of universities in Japan, for instance, are financed by debt, but capital reserves held as endowments. American companies also operate along debt finance lines instead of capital reserves. Prestige, favorable tax climates, or a conservative approach of higher education institutions might account for why endowments exist in the first place.
Before legislators wield the blunt instrument of policy to confront endowment growth and lessen college costs, however, they should understand how and why universities use endowments.
