The Real Story on Harvard’s Generosity

By Steven Roy Goodman

The Boston Globe
December 31, 2007

A relative called the other night to make sure I had heard the good news: Harvard announced that it was now going to be more accessible to the middle class.

I smiled – just as I did when I first read the Harvard pronouncement. Sure, Harvard was now going to spend a little more money to make sure that admitted students would be burdened with slightly lower tuition bills. The underlying story, of course, is the university’s effort to make sure that Congress doesn’t mandate that universities spend 5 percent of their endowment funds every year, as private foundations are required to do.

After the 5 percent issue was raised a few weeks ago before the Senate Finance Committee, alarm bells sounded throughout the academic world. Senator Chuck Grassley, the top Republican on the committee, said that Congress should consider requiring schools to spend a minimum amount of what their endowments earn. Failure to do so would bring with it serious consequences: the loss of tax-exempt status on endowment earnings. Hardly Senator Grassley’s soul mate, Senator Hillary Clinton on the campaign trail challenged the wealthiest schools in the United States to “devote substantially more of their endowment to recruiting more low-income and minority students.”

Could Harvard’s announcement be a preemptive move? The numbers tell the real story. Harvard estimates that it may spend an additional $22 million to assist families earning between $60,000 and $180,000 a year. Under the plan, families with incomes of $120,000 to $180,000 will be asked to kick in 10 percent of their income toward tuition. Given that the yearly cost of Harvard is $45,620, some families will still be paying almost $20,000 per year. Even if the initiative does total $22 million, compare this with the figure Harvard could be required to pay if Congress mandated that Harvard and other universities spend 5 percent of their endowment income.

Five percent of $35 billion is $1.75 billion. Harvard’s Alumni Affairs and Development Office reported that the university spent 4.3 percent of the endowment in fiscal year 2006. The difference between 4.3 percent and 5 percent might not seem significant at first glance, but the savings to Harvard was $245 million in one year alone.

Quite a trick. Spend at best a tiny fraction of the endowment, while reducing growing political pressure in Washington and around the country that could potentially cost the university more than 10 times the additional amount of financial aid.

All this talk about the announcement helps Harvard and other universities sidestep the real questions. Why does an institution of higher learning have $35 billion in its back pocket anyway? Why has it become customary for universities to spend only a small fraction of their interest income – and not even the endowment funds themselves – for daily operations? Why do American taxpayers continue to subsidize schools that increasingly operate like for-profit companies – and less like tax-exempt educational foundations that are charged with educating the next generation?

Harvard is not alone. A few months ago, I received a fascinating solicitation letter from another well-known school. As an educational consultant, I get mail from close to 1,000 institutions every year – all of which hope that I will share positive attributes of that college with my students and families. The pitch was eye-opening: Yes, our endowment has doubled in the past 10 years, but we really need your money right now or else we might have no choice but to dip into the $1 billion endowment. So, while bragging about the size of its endowment, the school was simultaneously crying poverty.

Concern about rising college costs has become an issue in the presidential race. Perhaps the 2008 campaign season can help us start a national dialogue about whether or not universities should play by the same rules as other nonprofit entities. It is natural that schools would want to squirrel away money for a rainy day. However, the scope of this squirreling (Harvard’s endowment grew by $5.7 billion last year alone) – and the arms race that it encourages – is such that it might be time for our elected officials to rein in financial benefits for those institutions that can’t manage to spend 5 percent of their tax-exempt wealth.

– Steven Roy Goodman is a Washington-based educational consultant and co-author of “College Admissions Together: It Takes a Family.”

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