Should Congress Dictate How Colleges Spend Their Endowments?

Q. I think that both public and private colleges have a moral obligation to make themselves more affordable without burdening their students with heavy loans. Now I see that some members of Congress want to force colleges to spend more of their endowments on financial aid. Your thoughts, please.

A. I agree with you that colleges should address the twin issues of high tuition and student loan burdens—not just as a matter of fairness, but for the sake of a stronger economy and the civic good of an educated citizenry. They should cut their operating costs by reducing administrative overhead; trim campus amenities that aren’t essential to learning, such as lavish recreational, dining and athletic facilities; and even eliminate less-distinguished or underenrolled academic departments.

I think schools should allocate a large portion of those savings to more financial aid for low- and middle-income students—in the form of grants, not loans. And colleges should motivate their donors to earmark more gifts for that purpose. Fortunately, all of these trends are now under way in higher education, which recognizes that it has an ethical and public-relations problem.

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I do not support attempts by the government to legislate how colleges use their endowments—for example, by forcing them to boost the annual withdrawal and spend it on financial aid. Many colleges saw their endowments shrink in the bear market of 2007–09, so they’re properly wary of boosting the annual drawdown beyond a prudent 5% or so. Besides, charitable institutions with endowments—whether colleges, museums or hospitals—have a legal and moral obligation to honor the wishes of past donors. They can’t divert the annual income from gifts given for one purpose to another purpose, however worthy, without donor consent.

Other ill-advised proposals include changing the tax code to give donors of restricted endowment gifts (say, earmarked for the teaching of biology or art history) a smaller charitable tax deduction than donors would receive if they made gifts to unrestricted endowments or to scholarship funds. Using the tax code to play favorites (a longtime habit of Congress) is a bad idea anytime.

Have a money-and-ethics question you’d like answered in this column? Write to editor in chief Knight Kiplinger at ethics@kiplinger.com.