How Princeton Uses Its Money

Everybody is always trying to spend someone else's money.  This kind of thing would really make me sick, except it is a little funny to see the kind of class warfare and redistributionist economics preached by elite universities come back to bite them:

Dr. Gravelle points out that endowment wealth is concentrated in the
upper ranks, much of it at 62 institutions with endowments larger than
$1 billion. But just three years ago only 39 schools had billion-plus
endowments. That's a 38% increase in just a few years. In 2006, 125
schools had endowments over $500 million"”a third more than in 2002. The
number of schools that can count themselves as endowment-rich or
super-rich is growing rapidly....

What the data shows is that endowment wealth is everywhere"”except in
the hands of the students who need it today. Last year endowments
increased 17.7% on average"”those larger than a billion increased 18.4%.
Yet, despite double-digit increases stretching back a decade or more
"”endowment spending is at a nearly all-time low of 4.2%--down from 5.1%
in 1994, 6.5% in 1982, and 5.2% in 1975....

Tuition has been going up so rapidly for so long it has reached nearly
ungraspable levels. So let me put today's tuition cost in concrete
terms. Senators, what would your constituents say if gasoline cost
$9.15 a gallon? Or if the price of milk was over $15? That is how much
those items would cost if their price had gone up at the same rate that
tuition has since 1980.

I believe that skyrocketing tuition is
undoubtedly the biggest "access" problem in higher education. What can
possibly be more discouraging to a capable student whose parents are
not wealthy than a school with a $45,000 price tag on the door?...

Congress should not hesitate to consider a minimum payout
requirement"”and 5% should be considered a starting point. The 5% number
is a dated one"”even for private foundations. Many schools have been
rolling over so much money for so long that they should easily be able
to accommodate a higher rate of payout. Possibly the most significant
challenge for policymakers will be to make sure that any newly directed
monies actually go toward aid or tuition reduction and don't become
part of a shell game.

Seriously, is there no pocket of private money that socialists won't stick their hand into?  In effect, at the same time Americans get lambasted for saving too little, this guy is going after private universities for saving too much?  And note the implicit assumption about government intervention he holds and expects all of Congress to hold in the third paragraph above:  It is just assumed that if prices go up enough to upset the constituents, then it is Congress's job to act.

Far be it for facts to get in the way of good populism, but I do know what Princeton does with its 2nd or 3rd largest endowment:

  • Every student who gets admitted gets a financial aid package from the University that will allow them to attend, no matter what their finances are.  Yes, the student may have to work his butt off, but if he really wants to go to Princeton he will be able to go.  Princeton's wealth also allows it to be much more friendly in these financial assessments.  For example, many assets like the parent's house are taken off the table when assessing ability to pay
  • If a student graduates normally, then all of her debts are paid off at graduation.  Every student graduates debt-free, giving them far more flexibility in what jobs they choose our of college.  No longer must they eschew non-profit or low-paying jobs due to the burden of debt.
  • Princeton has accepted that applying more money to increasing the educational intensity of its existing 4000 students by an additional 0.1% is not the best use of its investment.  It has committed (in too small of a way for my preferences, but that is another matter) to using its fortunes to increase its size and bring Ivy League education to more people.  This year, it increased its entry class size by 250, which may seem small to those of you from large universities but is about a 20% increase for Princeton.

Since all Princeton students get whatever aid they need and graduate debt-free.  So the tuition number is irrelevent.  And statements like "I believe that skyrocketing tuition is
undoubtedly the biggest "access" problem in higher education" are virtually meaningless. 

  • http://blog.myspace.com/jensfiederer Jens Fiederer

    > Since all Princeton students get whatever aid they need and graduate
    > debt-free. So the tuition number is irrelevent.

    Ummm....if you are POOR enough, I suppose it is. But if the parents can afford to pay, it definitely makes a difference to the parents. It increases the percentage of the parents who have their savings (but, I guess, not their houses or retirement funds) wiped out by their kids education.

  • http://blog.myspace.com/jensfiederer Jens Fiederer

    Oh - to clarify:
    I disagree with "the tuition number is irrelevent(sic)".

    That doesn't mean I think the government should step in, I agree with the overall point.

  • m.jed

    According to this survey (warning - pdf file) of parents of at least one child under the age of 18 who are like to attend college, and with household income of more than $50,000, relative to the amount of savings they set aside for college expenses in a given year:

    • 58% have spent more on eating out or ordering take-out;
    • 49% have spent more on vacations;
    • 38% have spent more on consumer electronics;
    • 31% have put more money toward their children’s allowance in the past year than they have put in their college savings fund.

    Almost three-quarters of parents (74%) admit they could be saving significantly more for their children’s education if they limited money spent on traveling, entertainment, electronics and impulse purchases. Two-thirds acknowledge that by reducing their discretionary spending on items such as toys, clothes and entertainment for their children, they would be able to save much more for their college educations.

  • morgan

    the interesting fact is that the increase in tuition is being primarily driven BY scholarships. the more they give out, the more someone who can actually pay is required to. this is causing a distinct "barbelling" of student populations where only the very rich and very poor can attend. the middle class gets shut out. this has become a significant problem at my high school where tuition has gone from $15k in 1990 when i graduated to $29k now. the same thing is occurring at my college.

    i had the opportunity to speak with the new headmaster of my old HS about the tuition hikes. he was very proud that a higher than ever % of students received financial aid. yet when asked what this was doing to tuition and access, he admitted it was driving 80% of tuition hikes. doubling tuition and giving out more aid (and trust me it's not proportionate) seems ludicrous, no?

  • morgan

    the interesting fact is that the increase in tuition is being primarily driven BY scholarships. the more they give out, the more someone who can actually pay is required to. this is causing a distinct "barbelling" of student populations where only the very rich and very poor can attend. the middle class gets shut out. this has become a significant problem at my high school where tuition has gone from $15k in 1990 when i graduated to $29k now. the same thing is occurring at my college.

    i had the opportunity to speak with the new headmaster of my old HS about the tuition hikes. he was very proud that a higher than ever % of students received financial aid. yet when asked what this was doing to tuition and access, he admitted it was driving 80% of tuition hikes. doubling tuition and giving out more aid (and trust me it's not proportionate) seems ludicrous, no?

  • Tim

    I agree that private money is private the government should keep their grubby paws off it. However, it always annoyed me that the best schools in the US didn’t use their wealth to franchise. I realize that a lot of the brand value comes from exclusivity but one has to wonder, if Harvard, Princeton and Yale are such good schools with such outstanding teaching talent, why not open a satellite school in every one of the 50 states. Teach more people, better, if teaching is your strength.

    I am not naive though. IV league schools are just as much about keeping the wrong people out as they are about getting the right people in. And before you guys jump on me, I am not talking about race, gender, religion yadda yadda. I am talking about intelligence. If they let anyone in and devalued the brand, it wouldn't lead to such high paying jobs afterward.

  • DKH

    To build a little more on Morgan's comment, the University of Arizona has a policy that any tuition increase must be large enough to provide financial aid to cover the increase. That is, some percent must be added to the increase so that enough is collected to pay for the scholarships and grants of the "underprivileged" or those with "need", which then inflates the tuition increase for the other students.

    My college at U of A considered (and approved) a tuition increase specific to the college a couple years ago. They outlined to us how the money would be allotted. Too bad I no longer have the distribution or I could give better numbers.

  • Bearster

    You said, "If a student graduates normally, then all of her debts are paid off at graduation."

    Does Princeton offer the same to its male students?

  • TCO

    I could pick apart your issue analysis, but there's little point, since you won't reply to comments.

  • http://comuse.blogspot.com Allen

    It's too bad state schools can't use their state contributions to build up endowments to keep tuitoin down instead of counting on government contributions in perpetuity.

  • jt

    Hey, how about a college ranking based on the average amount of debt that students owe when they graduate? *That* would open some eyes.

  • Lawrence

    Among private universities with large endowments, Princeton is unusual (probably singular) wrt its forwarding thinking on financial aid. Princeton changed its position a few years ago.

    If other such universities would emulate Princeton's thinking, then the financial stress on students wrestling with such large educational costs would be considerably lessened.

  • http://woodedpaths.blogspot.com/ DWPittelli

    Tim,

    Keeping weaker students out isn't just about snobbery or about maintaining perceived brand "quality". Strong students work harder and smarter when surrounded by other strong students. Also, Harvard professors do not want to move to Kansas, or indeed, to probably at least 45 states. Moving the "Harvard" name, even if it comes with Harvard money, to Kansas would not mean recreating anything like Harvard in Kansas. Potential employers would at the least be asking which Harvard campus one attended, just as they would now want to know if you attended UCLA or UC Berkeley.

    That said, I think a nonprofit which takes its charitable purpose seriously, and which has more money than it needs for its own purposes, should be looking for other ways to spread around some of its money to other, needier nonprofits. Perhaps Harvard could donate $100 million to some impoverished college in an underserved area. (Perhaps most states have such, but my first thought here would be an historically Black college in the Deep South; they might also need to found a prep school to feed into it.)

    One fairly good reason Harvard might have for not doing any such thing: A lot of donors would find themselves agreeing with Harvard that Harvard doesn't need any more of their money.

  • http://woodedpaths.blogspot.com/ DWPittelli

    Warren,

    I do not believe I am any less libertarian than anyone here on such issues. And I think the best solution to a lot of economic and political problems concerning corporate organizations, including nonprofits, would be to eliminate corporate income taxes.

    But we do have corporate income taxes, and we do have rules about what sorts of corporations are to be considered charitable and nontaxable, and able to receive tax-deductible donations. Some minimum payout from their investment accounts (endowment) into their charitable purpose seems reasonable to me. I believe 5% annually is now standard for most foundations and charities, and that 5% would also be reasonable for colleges.

    A few such simple and consistent rules are better and less intrusive than having the government have to pigeon-hole and define what every type of corporation can and cannot do to fall under this or that type of corporate charter. (A museum might teach credit courses; a college might have a museum, etc.; according to Wikipedia: "501(c) is a provision of the U.S. Internal Revenue Code... listing twenty-seven types of non-profit organizations exempt from some Federal income taxes. ")

    All that said, I agree that the argument for payout requirements because of rising tuitions and endowments is a weak one.

  • Mr. Mercy Vetsel

    You are SO wrong on this one. First, it's not government intervention to determine the payout ratio -- they already do that. Schools would be free to drop their non-profit status and adopt a profile that more closely fits the reality -- huge investment pools with minor educational functions attached.

    The stupidest idea is the notion that the huge college income and savings tax doesn't matter because "anyone who gets accepted can attend". Sure, if you don't mind either wiping out your parents life savings or accumulating a huge pile of debt. Just about everyone could afford to pay $30 a day for the newspaper too. So what?

    I was one of those kids in the middle class squeeze and I turned down Penn because of the cost. Someday, I'll get my revenge by forming a elite certification that is only offered to students who 1) score above the median for Harvard on the college boards and 2) finish their undergrad degree with high marks from any accredited school. Half of the students from the top schools wouldn't even be eligible and the educational requirement would weed out smart people who don't have their act together. In short it would allow an end run around what's not a whole lot more than a $160,000 IQ test.

    Another variant would be to certify an offering of admittance from an elite school. That's where the real value-added component of elite schools happens -- selecting students.

    -Mercy

  • CT_Yankee

    A glance at how well the government has handled the Social Security "Trust Fund" should be enough to scare any reasonable person away from letting them "help" manage college endowments.

    In the movie "Dumb and Dumber", idiots delivering a briefcase full of cash end up handing over a pile of IOU's adding up to the missing money. That's exactly how SS money is managed by Congress. I would have prefered that Congress found better role models than the Dumb and Dumber guys.

    On middle class tuition: the FASFA (big federal form to determine "need" for tuition assistance) process punishes those who are better prepared. If you have college savings, you don't have "need", and people who don't save get money. Reward "need", and you get more "need".

    The current FASFA process is also a heavy disincentive to marry any person with children who may end up in college. They count the step parent's money the same as the parents. A divorce does not remove either parent's money from consideration, but it does remove the step parent from the process.

    After tuition assistance, my stepson's college will put me a bit more than a complete year's gross income in debt. That is enough economic strain to damage or destroy plenty of marrages.

    The current negative incentives will create poor results in the future. That's capitolism (follow the money) with some government intervention mixed in.

  • dearieme

    Wouldn't it be in Princeton's interest to open one or more boarding schools to prepare poor youngsters to apply for admission to Princeton? And if such schools were to throw away most of American pedagogy and do a thoroughly successful job, their example might encourage fruitful change elsewhere. Or perhaps left-wing Faculty wouldn't approve?

  • sethstorm

    Unfortunately, it's still one more reason to consider just removing the exclusivity (even by the "merit" or "prestige" euphemisms) altogether and just focus on the education. Additionally, one could just have the university name (or any identifiers) not be allowed to be used towards any decisions in interviews.

    When the hangup is on exclusivity, it only seems to be insanity to keep it in something such as education.