Washington Takes Aim at College Endowments

The Internal Revenue Service, examining the schools' tax exemption, sent 400 colleges questionnaires.

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As Washington seeks ways to pay for the expensive Wall Street bailout, interest may turn to one big pool of untaxed money—college endowments.

As of June 30, 2007, colleges had stored away more than $400 billion worth of donations and profits and were raking in returns of more than 8 percent—or $33 billion a year. (Reports starting to trickle in indicate those total numbers very likely have fallen since then. Yale, which had averaged astonishing annual returns of nearly 18 percent from 1997 through 2007, earned only 4.5 percent in the fiscal year ending June 30, 2008. Meanwhile, the Oregon University System, the University of Utah, and Wesleyan all reported losses this summer. Like most other investors, endowments have probably suffered significant losses in the past three months.)

The Internal Revenue Service last month launched a study of colleges' tax exemption. The IRS sent 400 colleges long questionnaires to gather information on everything from how much money top officials get paid to the profits colleges make from side businesses like catering. The probe was backed by Sen. Charles Grassley, a Republican from Iowa, who has been questioning why private colleges, especially, should escape taxes. Many of the wealthiest schools educate only a few hundred low-income students apiece and draw out only 3 or 4 percent of their endowments for the benefit of students each year.

Many colleges, including Yale, Harvard, and Stanford, have responded by increasing the amount they draw out of their endowment to about 5 percent and handing out increasingly generous financial aid packages.

The results of the IRS research won't be in until next year. But in the meantime, colleges are lobbying forcefully to keep their tax exemption.