Taking a Closer Look at College and University Endowments: New Report
A new report from Sandy Baum, Cappy Hill, and myself, out today, provides an overview of college and university endowments. We seek to inform the public policy debate by exploring how endowments are structured and used, and discussing the extent to which the favorable tax policy for higher education institutions serves the public interest.
We find that the distribution of endowment assets is highly skewed across institutions. The median endowment per student for all postsecondary institutions is $12,600, while the wealthiest doctoral institutions have a median endowment per student of $1.3 million. Exploring further, we conclude that institutions with high endowments per students do use these resources to lower net prices for students, but do not necessarily enroll greater shares of students with financial need compared to other institutions. This is notable, given that the criticism of large endowments is, at least to some extent, rooted in frustration about the under-representation of low- and middle-income students in wealthy, highly-selective institutions.
As we consider the tax policies that benefit endowments and subsidize higher education (such as the charitable deduction for contributions to higher education and the exemption of endowment earnings from income taxation), we must keep in mind that they serve as blunt policy tools for affecting institutional behavior. Many endowment assets are restricted to particular purposes, and the available data do not make it possible to determine to what extent these restrictions in fact constrain the spending decisions of colleges and universities. We must also keep in mind that the benefits of the tax-free return on endowments accrue largely to institutions with sizeable endowments, which direct them toward programs they and their donors identify. This may or may not align with what public policy makers believe is important. These realities of endowment structure and use are often not fully understood.
Most recently, university endowments were brought to the public’s attention with the federal tax law, the Tax Cuts and Jobs Act, which includes an excise tax on the net investment income at institutions with the largest endowments per student (related to the skew of assets mentioned above: only ~30 institutions will pay the tax). Unlike the favorable tax treatment of higher education institutions, which acknowledges the benefits of an educated population and serves as a mechanism to transfer resources to higher education, the tax law will take resources from a small set of well-endowed institutions to marginally reduce the overall federal government deficit. It does nothing to encourage institutions to educate a greater share of lower income students, and indeed it’s yet to be seen if the tax might take away resources from need-based programs. If the federal government and other policy makers would like to seek strategies for directing its subsidies to the students who need them most, those strategies need to be rooted in the realities of endowment wealth.