Share the Wealth

Over the last four decades, public esteem and political support for nonprofit higher education have steadily eroded. The fundamental reason is that the wealthiest colleges and universities compete intensely to increase their revenue, wealth and spending, while the earnings growth of most Americans has lagged behind the cost of living, as we explain in our new book. How, then, can that rivalry be curtailed in order to restore public esteem?

The competition for revenue and wealth began 130 years ago among elite colleges and universities that devised now-conventional practices such as annual alumni funds, national fundraising campaigns and aggressive endowment investing. These tactics have proliferated throughout nonprofit, degree-granting colleges and universities in the United States, which number about 3,300 today and invariably feature a “How to Donate” link on their landing pages.

This competition yielded many benefits for higher education and the nation and was widely applauded through the 1970s. But the growth rate of the U.S. economy then slowed, and the earnings of middle- and working-class Americans trailed the cost of living, depreciating the benefits of the long-standing rivalry, particularly as the list price of tuition and student debt grew.

Meanwhile, the competition resulted in stratifying higher education into rigid castes of wealth with a high concentration in the small, uppermost tiers. As of 2020, just one-fifth of the total number of nonprofit colleges and universities owned nearly 99 percent of endowment in higher education; the wealthiest 3 percent owned 80 percent of endowment, and the richest 1 percent owned more than half. This stratification of invested wealth suggests that higher education is inequitable and even exploitative, in view of the rising list price and student debt.

In addition, the financial rivalry distracts from other worthwhile aims of higher education by encouraging the public to view a postsecondary degree as a monetary investment and, therefore, to undervalue liberal arts disciplines that are thought to lead to less lucrative careers. In fact, this view discourages some people from pursuing college at all, reducing the benefits that higher education provides to our democratic polity.

Finally, the competition contributes to student debt, even though the wealthiest institutions do not burden their own students with debt that they cannot repay. Nevertheless, the wealthiest colleges drive increases in the list price of tuition, at least in the private sector, and in the appetite for ancillary programs and amenities throughout higher education, including the public sector. The rivalry among the richest colleges therefore raises costs for less wealthy colleges, driving up their prices and forcing their middle- and working-class students to borrow more.

Government action will not stem the rivalry. Proposed and enacted remedies have been punitive, such as eliminating various tax benefits for higher education and, above all, imposing an excise tax on the endowment income of several dozen of the wealthiest private colleges and universities, as provided in the Tax Cut and Jobs Act (TCJA) of 2017. Such punitive measures infringe the financial autonomy and initiative of these nonprofit colleges, which is a great strength of American higher education. And these measures do not curtail the competition to increase revenue, wealth and spending.

Instead, we propose that trustees and leaders of the wealthiest elite colleges and universities adopt a new financial strategy for higher education, as happened 130 years ago. Rather than incessantly trumpeting endowment gains, launching fundraising drives and hiking tuition, this new strategy would encourage (1) cooperating rather than competing; (2) disavowing the goal of maximizing wealth, revenue and spending; and (3) aiming to strengthen all of higher education, rather than just themselves. In practice, this new cooperative strategy would mean deliberately sharing their wealth advantages and their endowment income.

Is this proposal naïve, even risible? Why would leaders of rich colleges and universities ever refrain from competing and risk their advantageous position? Self-interest will motivate them, we maintain, for the sake of their own institutions and the entire nonprofit sector of higher education.

Rich colleges and universities can share their wealth advantages at virtually no cost, while rebuilding public esteem and political support. For example, wealthy colleges could require that their highly paid portfolio managers provide gratis investment expertise to little-endowed colleges that cannot afford or even access those managers. In this way, cooperation would supplant the competition described by the late David Swensen, the renowned chief investment officer of Yale University: “Short of beating an archrival at football, posting the highest one-year investment result [of endowment] ranks near the top … of institutional aspirations.” In contrast, our proposal for sharing envisions small, little-endowed colleges throughout the nation participating in and rooting for Yale’s investment result, rather than envying it.

Another example is that wealthy colleges and universities could guarantee the bond issues of selected nonwealthy colleges, particularly historically Black colleges and universities, and lower their underwriting costs in bond markets. During the Great Recession of 2008–09, Harvard raised liquid funds by issuing $2.5 billion in bonds, and the university could have earned much goodwill by assisting similar efforts to issue bonds by small, little-endowed colleges struggling in the recession. There are many ways for rich colleges to share their wealth advantages at virtually no cost if they tried.

The wealthiest colleges could also earn goodwill for themselves and all of higher education by sharing minimal (to them) amounts of their annual endowment income.

Consider that, under TCJA, some of the wealthiest private colleges and universities are paying tens of millions of dollars of excise tax annually on their endowment income. These universities could spend these funds much more efficiently and effectively than the federal government, while rebuilding public esteem and political support for themselves and all of higher education.

For example, in 2020, the University of Pennsylvania pledged to contribute $10 million annually for 10 years to renovate aging school buildings in Philadelphia. Penn certainly could have found ways to spend the $100 million on itself. Why would the university choose not to?

The pledge cost Penn relatively little; the market value of its endowment increased by 38 percent, or $5.6 billion, in the following year. Also, the Philadelphia mayor and school board effusively praised the “historic gift” of the university. One searches in vain for public praise of Penn’s payment of the TCJA tax. Furthermore, what economist Howard Bowen called the “equi-marginal return” (often termed “effective altruism” today) from spending $100 million on renovating the school buildings is surely greater than from a wealthy university spending on ancillary programs or amenities or the TCJA excise tax.

Similarly, wealthy colleges and universities often have residual endowment income. Unlike foundations, they are not required to spend 5 percent annually of their endowments. Instead, many wealthy colleges and universities maintain conservative spending rules and add the excess endowment income to their principal, which improves their standing in the race for endowment size. Following this new strategy, these institutions could modestly increase their spending rules and subvent carefully selected, needful colleges or school systems across the nation.

In this way, wealthy elites would be investing to rebuild public esteem and political support for themselves and all of higher education. If only a few of them shifted from competition to cooperation, the rest of the 3,300 nonprofits would gradually follow, due to the well-known “institutional isomorphism” in higher education, which entrenched the financial rivalry over the 20th century. However, if the wealthiest colleges and universities persist in competing, the TCJA tax will likely never be rescinded, but increased, and other punitive measures will follow.

The wealthiest colleges and universities adopted and established a new successful financial strategy for higher education 130 years ago, and they can do it again today.