Lawmakers have proposed requiring that about 90 colleges with endowments of $1 billion or more spend about 25 percent of their annual earnings for tuition assistance — or forfeit their tax exemptions.
Suppose that college costs $65,000 at one of these institutions and that half of the 4,000 students receive financial aid. If the college raises the cost to $66,000, then it gains the $2 million from the students not receiving financial aid and owes $2 million more to the students receiving financial aid. Since the numbers offset, no endowment income has to be reallocated, but the college is now $2 million closer to reaching the lawmakers' objective. "Tuition assistance" is necessarily defined relative to a price that the college controls and not everyone faces. Raising it here confers the double bonus of generating more revenue and more credit against the lawmakers' new requirement.
A minor complication is that some students might qualify for financial aid at the higher cost but not at the lower cost. So the college would owe slightly more than $2 million in additional aid. A more important complication is that colleges cannot raise their prices without facing some market competition, in this case from colleges with endowments under $1 billion who are not subject to the new constraints.
I presume that "annual earnings" here would refer to a multiyear average, since the constraint wouldn't be binding in any year that annual earnings were negative or positive but very small. Or maybe the threshold would be specified as a percentage of the value of the endowment, not its annual income. Better than this policy, I think, would be to place more requirements for overall cost containment on any college that accepts federal funds for particular purposes.