College funds booming, while students, cities struggle
The news on the higher education front continues to be disconcerting. The college graduates of 2011 faced an unemployment rate of 8.8 percent, which doesn’t even include the one-third of recent graduates who began working in positions that did not require a college degree. Two-thirds of the graduating class of 2011 finished school with loan debt averaging $26,600.
Such a situation presents a big ethical dilemma for the private college system. Indeed, the growing ethical stench from the U.S. higher education system is starting to smell like the odor coming off the financial-services sector before all its malfeasance became public knowledge.
Write this one on all the smart boards out there: Private colleges have even evolved a way to garnish the taxpayer money through the Pell Grant program. By 2009-2010, the $36 billion per year Pell Grant program took up half the Department of Education budget. But where does the public money go? The money goes directly from the public coffers to higher education institutions. It looks distinctly like an indirect subsidy to those private colleges that are already cashing in on the privilege of their tax-exempt status.
Meanwhile, cities in upstate New York like Schenectady, Troy and Syracuse with well-endowed private colleges struggle with major budget problems. Union College’s own endowment stands at around $321 million. Skidmore’s isn’t far off at $300 million. And the cost of college for all American families continues to rise at the 2012 rate of 5 percent, slightly more than double the inflation rate.
No trickle down effect
A system that is so transparently unethical will not be able to sustain its contradictions forever despite all the clever PR spin from administrators. On the local level, if we really believe the wild claim that Union College produces several hundred million for the local economy, then I guess we might really also believe that Santa Claus is alive and well and living at the North Pole. Or did Santa — like some other of our so-called “job creator” businesses — already move his operations to China or Mexico?
In reality, if Union generated only half of the local value that is claimed in the college PR, the Schenectady area economy would be booming after all these years of hundreds of millions of dollars of indirect and direct investments. In fact, as Robert Caracciolo noted in his most recent Opinion column last Sunday, Schenectady is burdened by an unemployment rate of 10.1 percent and slow economic growth. Maybe some more of that investment income from Union’s endowment should be directly invested in the Schenectady economy?
Or maybe our local college should consider doing voluntarily what Brown University is doing for Providence. R.I. (Brown is upping its voluntary and tax payments to $7.9 million this year) and finally acknowledging that a college is part of a wider community, not just holy unto itself and to its endowment growth off the public tax books. And no, I do not believe that part-time student volunteer work in the wider community should be used as a cover for rising college costs and endowment hoarding in the midst of our huge public budget woes. Not in Schenectady or Troy or Syracuse or anywhere else.
Now is the time for the public to begin increasing the pressure for greater public accountability from private colleges. The tax-sheltered business activities of colleges have to end. And let’s not even mention the growth of revenue-generating sports programs, or the problem of exploitative online degree programs, or the chronic misallocation of resources into building projects.
Proposing fairer system
Here is a moderate plan to entice private colleges toward more accountable behavior. It is a simple idea: Colleges and universities should use 60 percent of the earned income from their endowments as an addition to the sum each of them are already allocating to financial aid for students and parents. It is a matter of reallocating yearly earned income on already-existing endowments. In the interest of offering a realistic plan, I am not even suggesting that money from existing endowments be tapped — only earned income on whatever sum endowment principal presently is.
Here’s the basic math: The money in hoarded college endowments in 2011 is estimated to be a total of $400 billion. Over the past 20 years the average investment return has been between 9 percent and 11 percent, according to most analyses. The endowment declines of 2008-2009 have been largely recouped. At an average accrual rate of 10 percent, the principal socked away in endowments is earning what amounts to $40 billion per year in added value. If 60 percent of that yearly investment return of $40 billion were to be designated for financial aid for families, then 3 million families could be receiving an average of $8,000 in extra financial aid. Less money for building projects and administrative bloat. More for real people. Fair is fair.
Even so, colleges would be adding $16 billion per year to their already-inflated endowments. And that doesn’t include the added money in gifts and legacies presently being injected into the endowment by means of the relentless fundraising campaigns.
The advantages are obvious for students and parents: No more graduates carrying debt loads. For the U.S. college system itself, it can begin to win back some of its lost credibility by returning to its basic mission of providing quality education. Since so many boards of trustees have fallen more and more into the hands of corporate insiders with few actual humanistic educators in sight —itself an ominous development—other reforms will also be needed.
Plans for saving U.S. higher education — addressing, for instance, how it is functioning as a cartel, how it abuses its tax-exempt status at the public expense, and how it is being taken over by corporate interests — will not earn a shred of support from the insider interests controlling higher education. Serious reform may need to come from the outside. The present system is unethical and deeply flawed.
L.D. Davidson lives in Amsterdam and is a regular contributor to the Sunday Opinion section.