Rainy-day funds are at the center of a storm front in Congress and the halls of higher education.
Amid all the economic issues being wrestled with on campuses and on Capitol Hill, this funding debate is growing more blustery by the day. It fixes on the laudable goal of making college more affordable to middle- and low-income families.
What's it all about? Endowments, and specifically, whether colleges and universities are hoarding too much of this $400 billion-plus pool of assets instead of helping more families manage tuition costs.
Many congressmen and parents are perplexed at why tuition continues to go up faster than the inflation rate while colleges invest huge sums of money donated by individuals, businesses and organizations.
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But before you pound your fist on the breakfast table and demand accountability from college presidents, keep in mind that tapping these accounts is not the silver bullet to closing the affordability gap.
Endowments already help pay for faculty positions, new buildings and technology and, yes, tuition, room and board. In public schools in particular, the money also is needed to offset cutbacks in state and federal aid. However, there are limits to what colleges can and cannot do with their rainy-day funds, said Peter Mazareas, vice chairman of the College Savings Foundation, a nonprofit organization that promotes educational savings programs.
"Schools have an obligation to provide appropriate financial access," said Mazareas. "But the purpose of most endowment funds is to ensure financial stability for institutions" so they will survive the ups and downs and be viable for years to come.
Several senators, including Charles Grassley, an Iowa Republican, are pushing for a mandated minimum payout on endowments so more families can send their children to college without piling up thousands of dollars of debt. The Senate Finance Committee in January asked the 136 wealthiest colleges for information on student aid, the cost of attendance, tuition increases and endowment spending over the past 10 years.
An annual spending minimum suggested
The senators are urging schools to increase spending from their funds, suggesting a minimum of 5 percent of their assets annually. In their opinion, colleges and universities have an obligation to provide more tuition relief instead of parking billions in the bank. The committee has recommended tying schools' current tax-exempt status to minimum financial aid spending levels, tuition controls and other steps to bolster financial aid.
Under federal laws, most private foundations are required to spend 5 percent of assets each year. But those rules don't apply to school endowments.
According to a recent study by the National Association of College and University Business Officers, endowments at 62 institutions exceeded $1 billion in assets last year.
While I don't think much of legislated mandates regarding endowment spending, the Senate action may at least succeed in beaming the spotlight even brighter on higher education affordability.
Meanwhile, a small but growing number of schools are stepping up to the plate. Yale Univer- sity recently announced it would increase the money it spends on financial aid from its $22.5 billion endowment by 40 percent. Yale now spends $60 million a year on aid for students, with the average annual grant totaling $28,000.
Harvard University said it would reduce tuition costs for students in families earning up to $180,000 a year.
Bowdoin College, the California Institute of Technology, Dartmouth and the University of Pennsylvania are among the other schools with plans to draw on their endowments to provide more "free money" in grants and scholarships in place of loans.
That's good news because every additional dollar helps. Moreover, these financial aid decisions may motivate other schools to do the same.
But the reality is that the vast majority of college students attend schools that do not have deep- pocketed endowments from which to draw. And with the jittery state of the stock markets, institutions may have to deal with poor investment returns on endowments for some time.
So where does this leave families? If you're the parent of a soon-to-be or current college student, ask the financial aid officers about the school's endowment policy and how much is being earmarked for scholarships and grants. I think schools do listen to their customers. If you're donating money to a college, specify that it be applied only for financial aid.
The best thing to do is to set aside every dollar you can for your child's future college expenses.
"One dollar saved now will save you $4 later" in interest payments, Mazareas said.