On Wednesday, University of San Diego Law professor Victor Fleischer wrote an op-ed in The New York Times that tore into Yale University for supposedly paying hedge fund managers excessive fees, while spending a fraction of the amount on students.
Malcolm Gladwell picked up the cause and, in a series of pointed tweets, ridiculed the Ivy League school, implying that money, rather than educating students, was its main concern.
Accusations that colleges are spending their money “inappropriately” generate such visceral reaction because they tap into the fury surrounding crippling college tuition costs. Student loan debt — at $US1.2 trillion dollars — now exceeds car loans and credit card debt figures. Between 2001 and 2012, average sticker price for tuition rose 46%, according to a report by the Federal Reserve Bank of New York, which adjusted its figure for inflation.
Against the background of skyrocketing debt and tuition, Fleischer researched how universities are spending their endowments. (His op-ed was based on that research.)
What Fleischer’s op-ed neglects to mention is that Yale pays those so-called exorbitant fees to managers because their investments generate huge returns, in the billions of dollars, for the endowment.
Dan Primack, at Fortune, made this argument on Thursday.
“Yale’s private equity program currently represents 33% of its endowment, and has generated 15.4% annual returns over the past decade (a better mark than the S&P 500 over the same period),” he wrote.
“Were Yale’s PE portfolio to make that exact return on its current PE portfolio in its current fiscal year, the return in hard dollars would be over $US1.2 billion. Sure, Yale could pay its private equity managers exactly bupkis, and then be $US1.2 billion poorer for its populist pose.”
Primack argues that Fleischer is misguided in his attack on hedge fund fees as the solution for decreasing college tuition costs. But that doesn’t mean Fleisher’s study is based on a false premise. It’s true that that we need to examine why students’ college costs are so high and how to decrease them, as Fleischer’s study suggests.
Perhaps a better way to ask the question is by looking at the percentage of endowment increases compared to operating costs and student tuition levels.
Looking at the last five years, Yale’s endowment has seen tremendous growth, starting at $US16.5 billion for the 2009-2010 school year and growing to $US23.9 billion in the 2013-2014 school year. The average year over year growth for the endowment was 10%.
Operating expenses also grew during that period an average of 4.43%.
Finally, tuition fees also grew during the period for an average of 4.78%.
This means that student tuition is increasing at a steady clip that it is, on average more than the rate increase of operating expenses, all while Yale’s endowment is seeing huge gains.
We asked Yale why students are absorbing increases in tuition, especially at a rate greater than the operating expenses are increasing.
“Yale meets the full demonstrated financial aid need of all students,” a spokesperson for Yale told Business Insider. “Tuition increases are only paid by those who can afford them. If an undergraduate student is on financial aid (more than half of Yale students are), he or she does not pay a tuition increase unless there has been a change in the family’s financial status.”
That’s precisely the problem. Increases on tuition for “those who can afford them” is contributing to the dizzying mountains of student loan debt that students around the US have been experiencing.
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