A draft congressional bill is grabbing the attention of America’s massively endowed colleges and universities.
The bill proposes to require schools with endowments of more than $1 billion to use 25% of their annual endowment income toward student financial aid, Bloomberg reported Friday.
The draft bill, sponsored by Rep. Tom Reed (R-New York), also stipulates that schools would lose their nonprofit status if they don’t comply with the requirement for three consecutive years.
Colleges and universities would almost certainly balk at such requirements, as it would put billions of dollars of endowment funds at stake.
Schools utilise the help of in-house private-equity managers to grow their endowments — sometimes by huge margins.
But they are not taxed on their earnings because they’re nonprofit institutions, an extra boost that normal hedge funds and private-equity funds don’t enjoy. It’s a benefit that some higher education experts have argued should be reevaluated.
Tax exemptions provided to private colleges can essentially be thought of as American taxpayers subsidizing private endowment funds, Jordan Weissman argued at Slate in September.
At a simplified level, any exemption in one area increases taxes in another area, ultimately falling on the back of the American taxpayer.
And tax breaks for private universities amount to more money than the federal funding that public universities receive, according to Weissmann. He argued that the gap between federal funding for public universities and the tax breaks private universities enjoy on their endowment income necessitates a tax on private endowments.
The top 10 university endowments by size hold an unbelievable amount of wealth. Harvard University’s endowment had a
5.8% increase in 2015, bringing it to $37.6 billion, and Yale University had an 11.5% increase, bringing it up to $25.6 billion.
Requiring colleges to use their endowment funds for student aid may seem like a logical solution to the problem of ballooning student-loan debt.
But a number of experts argue that it would be detrimental to colleges to do so, especially for schools who require their endowments for a large portion of their operating income.
“It’s a big mistake for Congress to try to fine tune and meddle in these kinds of decisions,” Henry Bienen, the president of Northwestern University from 1995 to 2009, told Bloomberg. “The circumstances of different universities are not the same with regard to their financial aid policies and their spending and the size of their endowments and who holds the endowments.”
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