October 29, 2007

Congress should keep out of colleges’ business

Oxford and Cambridge used to be the pinnacle of higher education.

They had the most money, the best professors, and the top students in the world. But ever since the British government decided to keep tuition rates

artificially low, the two have fallen on hard times. They still have top-notch faculties and their students tend to be among the best in England, but they just don’t have the money to compete against the American heavyweights. No less an authority than David Palfreyman, the bursar at New College, Oxford, admits that Oxford and Cambridge are at risk of going from over-performing to overrated.

Across the pond, Americans are freaking out over the rising cost of college. Last week, College Board, the fine organization that brings us the SATs, released its annual report on tuition rates. Turns out they have outpaced inflation. Again. I’m not exactly sure why this is news. It has been true every year for the past few decades, but the public is growing increasingly unsettled by college pricing and investment strategies.

Universities are pouring money into construction and renovation (the U of C has 17 projects underway right now). Most of the funding is coming from record endowment growth from smart investment and multi-billion dollar fundraising campaigns. The U of C just wrapped up its $2-billion Chicago Initiative and two dozen other universities have similarly large fundraising campaigns underway. On top of record fundraising, universities are realizing huge annual returns—around 20 percent—on their bloated endowments.

To the average parent with a couple of kids in middle or high school, this can be disconcerting. Colleges are flush with capital and they are spending big money on construction, yet tuition keeps getting higher and higher.

Of course, whenever soccer moms get upset, D.C. responds. The last week has seen two high-ranking Congressmen from both parties issue dire statements regarding tuition rates and endowments.

Iowa Senator Chuck Grassley, the ranking Republican on the Senate Finance Committee, has received the most attention. He is considering drafting legislation to force colleges with endowments over $500 million to spend at least five percent of their endowment every year. In the same vein, House chairman of the Committee on Education and Labor George Miller (D–California) has pledged to “rein in” tuition increases.

Like it or not (and some people don’t), government-mandated spending requirements and price limits never end well, and they certainly wouldn’t in this case. Forcing colleges to spend their endowments and lower tuition is exactly what proponents of college affordability should be fighting against.

The present tuition structure for top colleges (read: expensive colleges) is astoundingly egalitarian. Are tuition rates high? Yes, but the sticker price isn’t what people actually pay for it. The high sticker price simply means that people pay what they can afford.

Top schools have gone out of their way to make the financial aid process as transparent as possible. Admission is need-blind and grants are at an all-time high. On top of that, most colleges give out education for free to families that make less than a certain amount of money (typically around $45,000 a year, or the median income in the U.S.).

Obviously, once you move down the endowment rankings, financial aid isn’t as generous and admissions not as blind to need. So it’s silly for parents to complain that they aren’t seeing any savings with colleges taking in so much money. Many are, but the ones that don’t need it, don’t get it. I’m not sure why Grassley and Miller think the financial hardship of wealthy American merits action, but that’s essentially their rationale.

But monster endowments are about more than tuition rates. They are also about the long-term financial stability of an institution. With the possible exception of John Travolta, not many people look back on the ’70s fondly. This is particularly true for colleges. Inflation, poor investment choices, and an increasingly competitive market for top students meant that spending was up and endowments were shrinking. And they weren’t shrinking by one or two percent. The total value of Yale’s endowment fell 45 percent from 1970 to 1978. The drop was so drastic that Yale had to cut spending across the board in 1977.

In response, universities have become extremely frugal. Because no one can tell us the financial health of the world economy over the next 100 years, colleges have decided that it’s better to be safe than sorry.

More importantly, huge endowments and big spending at our nation’s universities keep us ahead of the international competition. Every couple of years, we hear how some Asian country has passed the U.S. in some dimension of education. Want to know why this never hurts the U.S.? Because all those top students come to the U.S. for college. Many end up staying.

For decades the U.S. has poached the most talented thinkers in the world by offering them an opportunity to study with the brightest in the world at institutions that have no peers abroad. Oxford and Cambridge used to fit that bill, but as soon as the British government decided what was a fair tuition rate and what wasn’t, those schools began their long, slow decline into ornate irrelevance. England has suffered accordingly.

The U.S. would be gravely mistaken in following England’s example just so that high-income soccer moms can sleep soundly at night.