The Markdown at Harvard

Rich universities feel pressure to share more of their wealth

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Harvard is capping its prices for middle-income families.

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Harvard thrilled middle-class parents last week by capping its tuition for families with incomes of up to $180,000 at 10 percent of their earnings. The move sparked hopes of an "alms race" that could ease the soaring costs of college. Earlier this month, Duke joined a group of schools including Harvard, Princeton, and Stanford that promise free rides to low-income students.

But many point out that these gestures will affect only a few hundred lucky students. The outlays are so comparatively small that they are unlikely to divert pressure for reforms in the ways colleges spend their money—especially the estimated $380 billion of endowment funds stored in tax-free accounts.

"It's an important gesture," College Parents of America President James Boyle says of Harvard. But colleges should do more now with the money they've socked away for a rainy day, he says.

Harvard's plan will require it to pull $22 million extra out of its endowment, which grew 23 percent last year to almost $35 billion. Harvard is drawing out $1.1 billion—a small percentage of last fiscal year's $6.7 billion in annual investment returns—to fund about a third of its operations this year. It plowed the rest into offshore hedge funds or other tax-free investments. Meanwhile, the school raised its sticker price for students by $2,000 per year.

The numbers are smaller, but the story is similar at other colleges. The average endowment has been reaping 10 percent a year on investments since 2004. But colleges spent an average of just 4.6 percent of their endowments last year while raising tuition faster than the rate of inflation.

That troubles folks like Sen. Chuck Grassley, who's pushing Congress to require wealthy colleges to spend at least 5 percent of their endowments every year. "Tax-exempt organizations are supposed to provide public benefit in exchange for their special status," he said. "Helping the next generation afford college is a public benefit."

Prudence. Many college officials, of course, are battling such rule changes. While Harvard, Yale, and Princeton all have more than $1 million worth of endowment per student, half of all colleges have no more than $2,000 per student saved up.

Even high-earning schools say they already are spending as much as they should. Chris Bittman, chief investment officer of the University of Colorado Foundation, racked up almost 23 percent in returns last fiscal year, bringing the school's endowment to nearly $800 million. He supports the school's policy of spending 4.5 percent. Recent big profits can't last forever, he says. Instead, endowments should plan on earning the long-term average of 10 percent. Inflation eats away about 3.5 percent. Managing the fund typically costs another 1 percent. And it's smart investing to add at least 1 percent of the profits back to the principal. That leaves only 4.5 percent a year that can be prudently spent, he says.

Still, pressure appears to be forcing some changes. In June, Stanford announced it would increase its endowment spending to 5.5 percent, or $160 million a year. If every school followed suit, that would free up about $4 billion a year (or $200 per student) to increase aid or keep tuition prices down. Or as Richard Vedder, an Ohio University economist, says, "a small step for mankind."