How the Richest U.S. Colleges Get Richer through Huge Tax Subsidies; Endowment Wealth Is Becoming Concentrated in the Hands of the Few-And Universities Aren't Using It to Reduce Tuition or Widen Enrollment

By Sirota, David; Keefe, Josh | Newsweek, May 19, 2017 | Go to article overview

How the Richest U.S. Colleges Get Richer through Huge Tax Subsidies; Endowment Wealth Is Becoming Concentrated in the Hands of the Few-And Universities Aren't Using It to Reduce Tuition or Widen Enrollment


Sirota, David, Keefe, Josh, Newsweek


Byline: David Sirota and Josh Keefe

During his successful quest to win Pennsylvania's 20 electoral votes, Donald Trump told the state's voters that colleges are fleecing taxpayers and enriching Wall Street.

"What a lot of people don't know is that universities get massive tax breaks for their massive endowments," he told a crowd in suburban Philadelphia. "These huge multibillion-dollar endowments are tax-free, but too many of these universities don't use the money to help with tuition and student debt. Instead, these universities use the money to pay their administrators, or put donors' names on buildings, or just store the money away. In fact, many universities spend more on private equity fund managers than tuition programs."

Trump promised to make universities' tax breaks contingent on schools' willingness to reduce tuition prices--and lawmakers are now considering bills to do just that. New data released in April could fuel those legislative initiatives.

According to a study by Stanford University scholar Charlie Eaton, universities are using their endowments to haul in more than $19 billion in tax subsidies every year. The analysis, which compiled data from 1976 to 2012, found that as the tax expenditures have flowed to college endowments, those endowments have exponentially grown--and have funneled billions to Wall Street money managers who make big fees off the pools of cash.

Despite the tax breaks and the flood of cash to Wall Street, many of the universities that benefit from the subsidies have refused to use their additional endowment resources to expand enrollment, admit more low-income students or lower their tuition rates.

"Private colleges with substantial endowment wealth have increasingly become ivory tower tax havens," wrote Eaton, whose study was published by the University of California, Berkeley's Haas Institute for a Fair and Inclusive Society. "The metaphor encapsulates how exponential endowment growth at these colleges has been supported by large tax expenditures that disproportionately benefit a small elite."

In the face of legislative initiatives to reduce their tax breaks, public and private universities have lobbied in recent years to influence the congressional debate about the policies governing endowments. Donors from the higher education sector have also made campaign contributions of millions of dollars to federal lawmakers. University officials and their trade associations have argued that critics of endowments and endowment-related tax preferences are undermining the key financial pillar of higher education.

"There is renewed pressure to force colleges with sizable endowments to spend more, and increased talk about revoking their tax-exempt status," wrote Pomona College President David Oxtoby in a 2015 editorial for The Chronicle of Higher Education. "These attacks on endowments reveal both an extremely short-term outlook and a fundamental misunderstanding of what they do and how they work. Endowment funds provide scholarship dollars for students and allow colleges to expand student access and diversity. They help ensure that support for faculty teaching and research remains a long-term institutional priority. They support libraries and other facilities, public service, and student success and retention programs."

In the past three decades, college endowments have grown to more than half a trillion dollars, and they reflect the economic inequality that defines America's larger society. According to a 2015 Congressional Research Service report, roughly three-quarters of endowment wealth is now held by just 11 percent of universities.

Eaton's data show that the growth in endowments--and the concentration of wealth at a handful of expensive elite schools with relatively small enrollments--coincided with the expanded use of three federal tax breaks formulated in an era before higher education became a major industry. …

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