Should Colleges Be Required to Spend More From Their Endowments?

September 26, 2007

Should Colleges Be Required to Spend More From Their Endowments?

A Wednesday hearing of the Senate Finance Committee on overseas investments because the platform for a discussion of whether college and universities should be required to distribute a minimum percentage of their assets each year.

During testimony, Jane G. Gravelle, a senior specialist for economic policy at the Congressional Research Service, told lawmakers that college and university endowments earned an overall return of 15.3 percent in 2006.

Those same endowments, however, spent 4.6 percent of their earnings last year.

For institutions that had endowments larger than $1-billion, the total distributed for aid to undergraduate students was 2.85 percent of total endowments.

The conclusion? Some observers say the federal government is letting these institutions fatten their endowments tax-free without turning out enough money on the other side.

Ms. Gravelle says Congress could consider requiring universities to spend at least 5 percent of their endowments annually to maintain their tax-exempt status — a requirement that is already in place for private foundations. She also said Congress could impose a tax on institutions that raise tuition above a predetermined threshold.

The idea of a minimum threshold was encouraged by Lynne Munson, an adjunct fellow for the Center for College Affordability and Productivity in Washington.

“Many schools have been rolling over so much money for so long that they should easily be able to accommodate a higher rate of payout,” Ms. Munson said in testimony before the Finance Committee. “Possibly the most significant change for policy makers will be to make sure that any newly directed monies actually go toward aid for tuition reduction and don’t become part of a shell game.”

What do you think? Should colleges be required to spend a certain percentage of their endowments each year? Should all endowed institutions be required to to do so?

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— Peter Panepento

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