Friday, January 15, 2016

If I Wanted To Start the New Year Off by Raising College Tuition, I Would Propose This

From yesterday's New York Times:

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.


Roger Vincent said...

Another question is what do they mean by Income? Is this the annual gain in value (which is mostly non-cash) or only the the cash on securities with a current yield. If the later it might not be meaningful and if the former it could have serious repercussions for the management of (and return on) the endowments assuming the intent is to increase the payout rate and not just redirect the existing level of endowment distributions.

Thomas said...

Arguably donations should also be counted as 'income'. The gift of a library with the donor's name prominently displayed has no charitable function if the poor but able student cannot access the books therein because he cannot afford entry. Currently, the primary purpose served by such gifts is the burnishing of the donor's ego.

Further the suggestion that this proposed law applies to $1bn and up endowments is flawed and possibly easily manipulated. An objective approach would require that a stated percentage of the endowment be disbursed annually for tuition, regardless of the endowment's size.