Question of the Day – Paying for College

From Some Colleges Cut, Eliminate Student Debt ($) in today’s Wall Street Journal comes this question of the day:

Should there be a minimum payout requirement for colleges and university endowments?

The article gives an example:

Amherst College, for instance, spent 4.6% of its $1.34 billion endowment in the fiscal year ended June 30, 2006. That is the average that colleges spent that year, according to a study by the National Association of College and University Business Officers. Still, Amherst’s endowment rose 15.8% in market value in that year compared with the previous year.

Personally, I think the payout should be based on the endowment’s rate of return. Of course, the problem with this is it would make it very difficult to plan expenditures since some years the endowmenet will grow significantly and other years it might actually lose money. I do not think colleges are paying out enough based on the size of some endowments. Harvard now has a $34.9 billion endowment fund (the fund grew 23% for the fiscal year ending June 30, 2007).

According to the article mentioned in the preceding paragraph, Harvard spends around 5% of its endowment each year, while the endowment has grown around 15% per year over the last 10 years. I understand that endowments must be managed for the future, but it does seem to me that colleges could be a little less stingy. Of course, this is just my opinion.

15 thoughts on “Question of the Day – Paying for College”

  1. I think the compromise would be the endowment could spend a minimum (like 5%) and then be required to spend more based off the rate of return for the next year. So if they have an off year they only have to spend the 5%, but on a booming year they should maybe spend 50% of the amount over 5%. This way they are covered for a year where the endowment doesn’t get 5%.

  2. What’s wrong with endowments? It’s very unlike you to advocate restrictions on free market decisions, JLP; the alumni decided to donate stock or cash to the school, for it to manage as it sees fit (assuming we are limiting the discussion to private universities).

  3. on the surface, should an endowment not be frugal? We are now encouraging individuals to take 4% distributions, no matter the return.

  4. Take a look at the rate of returns now for these schools year to date. I would bet that they are down a bit. How would you do this for a string of negative years, and does this lead to bad economy = bad schools?

    Let the school run its own endowment as it sees fit. The school can balance the spend vs invest argument from intro to economics. Regulation would serve no point but to enrich bureaucrats.

  5. An endowment is like a 401k or an IRA, so 4 to 5% seems reasonable. I don’t know enough about these university endowments to know whether they are tax exempt, but would think that if they are just accumulating funds and not spending at least 4-5% then they should lose any tax exemption.

  6. Inflation in college costs is around 10%/yr currently. That means that spending 5% requires a 15% ROR so that the money won’t run out.

    Seems that they are being product.

  7. A few years ago, I contributed some highly appreciated stock to my alma mater and established an endowed merit scholarship for the purpose of attracting highly qualified students into the department I graduated from, with instructions that the university is to manage my scholarship account so that it lasts in perpetuity. To accomplish this, the university invests in a balanced portfolio (approximately 60% stocks and 40% bonds) and pays out 4.5% of the monthly average of the fund balance, rounded to a “nice number.” They have been doing this with other people’s money for a long time, and told me that it works out well. Over the 10 years or so that my fund has been in existence, its value has fallen some years and grown some years, but on average, the scholarship award roughly keeps up with inflation. I’m satisfied that they are fulfilling my purpose for donating the funds and managing it to last a long, long time.

  8. No, I’m not recommending more government regulation. I just think endowments could be less stingy with their payouts – especially when you consider that over the last 10 years, Harvard’s endowment has grown 15% per year and they spent 5% per year.

    Like I said in the post, this is my opinion.

  9. Yeah, that’s pretty good growth relative to the payout. Who knows, maybe they’re trying to build it to the point that anyone who is admitted can go there for free, or something like that.

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