Nivarthy: Tax University Endowments

Treating universities as tax-exempt nonprofits prioritizes financial interests over students.

by Kavya Nivarthy | 4/26/22 4:00am

Prestigious universities, such as Dartmouth and its peer institutions, have grown too comfortable with hoarding their billions in endowments as a status symbol, preventing students from benefiting from even the fraction it would take to improve campus facilities and programs. Just last year, the College boasted a 46.5% year-over-year return on its endowment, and instituted a few limited financial changes, including increasing student workers’ hourly minimum wage by $3.75 and eliminating an expected parent contribution in financial aid calculations. While these changes are commendable, institutions like Dartmouth continue to withhold funds from being used more directly for improving the academic and personal lives of their students. It’s past time for the federal government to step in with a stick and tax college endowments. 

As concentrations of immense wealth, university endowments have the potential to better support students. As the Tax Policy Center points out, public and private university endowments in America account for $500 billion, and just 23 universities hold 50% of this. Dartmouth itself ranks number 19 in American university endowments. On top of this, colleges invest their endowments in the stock market, allowing their assets to accrue interest tax-free. 

Currently, college endowments are minimally taxed. As 501(c)(3) nonprofits, most private universities are naturally exempt from paying taxes. Some legislative efforts have attempted to address this oversight, such as the 2017 Tax Cuts and Jobs Act that subjected a small number of wealthy universities within a certain endowment threshold to a 1.4% tax. However, House Democrats are now advocating against the Trump-era policy, aiming to lift the tax on around 40 of the nation’s wealthiest colleges.

Advocates against taxing endowments — including universities themselves — argue that universities are nonprofits that advance a socially beneficial cause, and this fact in itself should leave them exempt from taxation. This point is well noted, but colleges fail in this mission of educating and providing resources for students when they hoard their endowments. In order to best support students, colleges must be incentivized to spend on them. And taxation need not be the only solution — others attentive to the issue of university wealth hoarding have advocated for legislation requiring institutions to spend a certain percentage of their endowments annually. This solution would make the treatment of universities more akin to that of private foundations, as opposed to nonprofits. It also incentivizes a direct transfer of endowment wealth to student-focused programs and initiatives.

Universities are hesitant to spend their endowment funds for several reasons. Centrally, a college’s endowment is less of a “piggy bank” or pool of readily usable funds and more of a fund governed by extensive restrictions and earmarks for specific programs. Institutions also value the long-term growth of their endowments, putting significant financial efforts into how they invest it and withdrawing from these endowments limits their return on these investments. Typically, a college only spends between 4 and 5% percent of its endowment each year. Finally, an unspoken reason for hesitancy to spend endowments is the correlation between university endowments and rankings — in the race among top universities to boost rankings, they likely feel pressure to boast greater endowment figures. All of these perverse incentives can be mitigated with a federal policy on taxing endowments, pushing colleges to spend them on students.

Pushing colleges to spend their endowments may also be a creative way to address economic inequities. As several economic studies have found, blanket student loan forgiveness, like the plan proposed by Senator Elizabeth Warren, is actually a regressive policy, disproportionately benefiting the college-educated upper-middle class. A novel set of education policies — backed by a bipartisan cohort in Congress — includes taxing endowments and actually increases support for meriting students from less privileged backgrounds. 

Giving universities the nudge on their endowments would also mitigate the issue that University of California Irvine professor Victor Fleischer calls “the symbiotic relationship between university endowments and the world of hedge funds and private equity funds.” Ivy League institutions like Yale, Harvard and Princeton dole out hundreds of millions of dollars to private equity fund managers who invest endowment money. For these institutions, their spending on fund managers actually surpasses their spending on programs for students, including “tuition assistance, fellowships and prizes.” Hedge fund and private equity fund managers, in turn, give large donations to these wealthy universities. While taxing endowments or requiring universities to spend a certain share of them would not entirely eliminate university ties to other rich and powerful institutions, it would at least reduce the issue and put students at the forefront. 

As it stands, students miss out on countless academic and personal opportunities as a result of these policies, which undermines the supposed aims of these institutions. It is high time for these universities to be forced to place their greed aside and recommit themselves to their students. In short, it’s time to tax university endowments. 

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