Verbum Ultimum: A Business Called College

by THE DARTMOUTH SUMMER EDITORIAL BOARD | 8/20/15 5:29pm

During this hot and busy summer, students inboxes included several emails from the administration requesting that they minimize usage of lights, air conditioners and computers. The email does not state concerns about the environment — like one would expect — but rather, with lowering the College’s “annual cost.” Students, on Yik Yak and in conversation, have overwhelmingly expressed dissatisfaction. With students paying as much as $72,000 a year to attend Dartmouth, the request seems unreasonable.

Victor Fleischer writes in his “The New York Times” column this week that universities are hoarding money instead of keeping tuition costs down or expanding faculty research endowments. In “Stop Universities from Hoarding Money,” Fleisher claims that America’s colleges put a disproportionate amount of their endowments into stocks and other investments rather than using them to improve academics or increase financial assistance to students.

Yale University, for instance, contributed only $1 billion of its $24 billion endowment to the university’s operating budget in the 2014 fiscal year. Of this, only $170 million — or 0.7 percent of Yale University’s total endowment — was designated for tuition assistance, fellowships and prizes.

In contrast, private equity fund managers received almost two percent of the endowment, about $480 million, to manage and invest much of the rest of the university’s money. Similarly, Harvard allocated $242 million for financial aid in 2014 yet paid $362 million in private-equity fees and another $1 billion in investment management fees.

C.J. Hughes wrote in a “Dartmouth Alumni Magazine” article titled “Why is Dartmouth So Expensive?” that the College suffers from a similar money hoarding problem. In the 2014 fiscal year, Dartmouth spent about 20 percent of its $4.5 billion endowment on operations. In contrast, institutions such as Harvard, Yale and Princeton Universities use more than 40 percent. Of this 20 percent, only $128.4 million, which constitutes less than three percent of Dartmouth’s annual endowment, was used for financial aid for both undergraduate and graduate students in 2014. Yet 23.1 percent of Dartmouth’s endowment went toward private equity and venture capital in the 2013 fiscal year.

Clearly, Ivy League institutions like Dartmouth are dedicating a significantly larger portion of their endowments to simply managing and investing their money than to improving the institutions themselves. The administration prioritizes increasing the College’s endowment more than utilizing these funds to increase financial aid among other important educational spending — an issue that, according to Fleischer, afflicts both Ivy League and non-Ivy League institutions alike.

The tendency among colleges to hoard money combined with the steadily increasing cost of a college degree does not bode well. Just this year alone, the College saw a tuition increase of 2.9 percent — with the administration lauding this significant increase as “the lowest [tuition increase] in nearly four decades.”

Hughes wrote in his “Dartmouth Alumni Magazine” article that part of the rising cost of education no doubt has to do with the “virtual arms race” that has developed among colleges as they compete for the best students. This often means focusing funds on aesthetics like unnecessary construction projects, among other money drains.

As the College competes with other elite schools, tuition will almost certainly continue its upward trend. It is for this same reason that institutions like Dartmouth dedicate so much of their endowments to investment projects — the more money an institution invests, the more it can get back in returns, and the more its ranking and apparent prestige can increase.

Rather than dedicating a disproportionate amount of money to private equity fund managers, Dartmouth could become much more competitive by directly putting more of its money towards its students by increasing financial aid or increasing funding for research.

College President Phil Hanlon seems confident that “People will come because Dartmouth is Dartmouth.” But as tuition continues to increase, financial aid remains insufficient, and the budget continues to be allocated to fund managers instead of faculty and students, there may come a day when that reason is simply not enough.

Fleischer recommends that we require universities, under this year’s reauthorization of the Higher Education Act, to spend at least eight percent of their endowment each year just as private foundations are required to spend at least five percent of its assets. Few universities with assets over $100 million fail to net eight percent growth, and this proposal would lead to a halt or even a reversal of increasing tuition costs.

While we understand that the College’s endowment would not be able to grow as much each year if it were to spend more of it instead of investing, that pales in comparison to the benefits the College could reap by putting more of that money to the institution itself through initiatives like research funding or supporting financial aid.

The College is an institution of higher learning, not a business, and it is time that the administration began allocating the College’s money — the students’ money — as such.