Massive Endowments

The annual college endowment report from the National Association of College and University Business Officers (NACUBO) was released yesterday. Overall, it was a great year for higher education, with average earnings of 17.2 %. The richest institutions (over $1 billion in assets) did even better, earning 21.3%. One consequence of the growth is that institutions are having a hard time figuring out how to spend all the new money; endowment spending as a percent of assets dropped to 4.6%, the lowest rate since 1999. This will probably provide fresh ammunition to those in Congress and elsewhere who have proposed that institutions be required to spend a fixed percent of assets--usually 5%, the legal standard applied to many non-profits already. As Rich Kahlenberg said in the Wall Street Journal, "The price of college is rising and endowments are growing and people are frustrated by those two things going on at once."

On some level, the top schools are victims of their own success. As has already been widely reported, Harvard earned $5.7 billion on its endowment last year, which is by itself larger than the total endowment of all but a handful of institutions. This is the principle of compound interest in action--when you meet with a retirement advisor, they always show you the parabolic curve of expected earnings and point out that you make most of your money in the last 10 years. Universities have a longer investment time horizon than any other institution that currently exists, governments included, so it's no suprise to see their longevity paying off.

But all that money raises some uncomfortable questions, about the price of college as Kahlenberg suggests (it's no coincidence that Harvard and Yale timed the announcement of their new endowment-funded financial aid programs to hit the news in the weeks before the NACUBO report), and--more importantly, in my opinion--why, exactly, all of this is being subsidized by the government in the form of tax preferences for everyone involved. As Richard Vedder pointed out in the Post over the weekend, Princeton recently built a new residence facility, Whitman College (above), named after major donor and alumna Meg Whitman, CEO of Ebay, which cost a staggering $388,571 per unit, roughly what Donald Trump spends building a luxury resort. Here we have a fabulously wealthy person donating money to a fabously wealthy university to built a fabulously expensive facility for the benefit of students who come from, in many cases, very wealthy families. I have no problem with that personally if that's how they want to spend their money, but why am I, as a taxpayer, footing part of the bill?