Yet another story about how the well-endowed universities -- rich in alumni gifts, rich in real estate, rich in hedge fund holdings -- are struggling to find ways to spend more of the income annually to avoid being forced to follow the same rules as private operating foundations.
Shortly after the first stories appeared about the generosity and altruism of Harvard and some of the other Ivies in providing financial aid for undergraduates from families with annual incomes as high as $180,000, an excellent op-ed, entitled "The real story on Harvard's generosity," appeared in the Boston Globe (12/31/07):
The underlying story, of course, is the university's effort to make sure that Congress doesn't mandate that universities spend 5 percent of their endowment funds every year, as private foundations are required to do.
After the 5 percent issue was raised a few weeks ago before the Senate Finance Committee, alarm bells sounded throughout the academic world. Senator Chuck Grassley, the top Republican on the committee, said that Congress should consider requiring schools to spend a minimum amount of what their endowments earn. Failure to do so would bring with it serious consequences: the loss of tax-exempt status on endowment earnings. Hardly Senator Grassley's soul mate, Senator Hillary Clinton on the campaign trail challenged the wealthiest schools in the United States to "devote substantially more of their endowment to recruiting more low-income and minority students."
Could Harvard's announcement be a preemptive move? The numbers tell the real story. Harvard estimates that it may spend an additional $22 million to assist families earning between $60,000 and $180,000 a year. Under the plan, families with incomes of $120,000 to $180,000 will be asked to kick in 10 percent of their income toward tuition. Given that the yearly cost of Harvard is $45,620, some families will still be paying almost $20,000 per year. Even if the initiative does total $22 million, compare this with the figure Harvard could be required to pay if Congress mandated that Harvard and other universities spend 5 percent of their endowment income.
Five percent of $35 billion is $1.75 billion. Harvard's Alumni Affairs and Development Office reported that the university spent 4.3 percent of the endowment in fiscal year 2006. The difference between 4.3 percent and 5 percent might not seem significant at first glance, but the savings to Harvard was $245 million in one year alone.
Quite a trick. Spend at best a tiny fraction of the endowment, while reducing growing political pressure in Washington and around the country that could potentially cost the university more than 10 times the additional amount of financial aid.
I commend the full article to your attention. It raises some very important questions.
Back to the current article re Harvard Law:
Harvard’s third-year-free program is expected to cost the law school an average of $3 million annually over the next five years, Ms. Kagan said, but that number is just an estimate because it is unclear how many students will take advantage of the offer. The law school’s share of the university’s endowment of $34.9 billion is more than $1.7 billion.
From 2003 to 2006, as many as 67 and as few as 54 of the 550 students graduating from Harvard Law went to work for a nonprofit organization or the government. That translates to 9.8 to 12.1 percent of the graduating class. A vast majority of students have chosen to join law firms, where they can earn well over $100,000 a year immediately after getting their degree.
$35 billion. Tax-free. In addition to being subsidized on some of America's most valuable land. Cui bono?
$1,700,000,000 endowment for the law school. Tax free. And growing rapidly -- in part because they can invest it in things that arguably sap productivity gains out of the economy! Let's say that at any one time they have 1700 students. That's $1 million per student! plus whatever the university as a whole can spare from its other $33 billion.
And all this is to avoid having we-the-people require them to spend 5% of that endowment each year -- $50,000 per student -- instead of "letting it ride" ... taxfree.
The article ends with this:
If a student tried to switch to a high-paying job on the sly, Ms. Kagan said, “then we’re going to ask for the money back.”
And risk offending a potential donor?
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