Almost 100 endowments with assets of more than $1 billion would be required to give that percentage to lower college costs for middle and low-income students, according to a draft congressional bill provided to Bloomberg. If they didn’t comply for three consecutive years, they could lose their nonprofit status.
The bill, aimed at addressing the skyrocketing cost of college, is expected to be introduced during the congressional session that began this month and could undergo changes in the meantime, said Rep. Tom Reed, a New York Republican who is sponsoring the proposal. No co-sponsors are attached to the proposal.
“Potentially billions of dollars are at stake, and that gets people’s attention,” Reed said in an interview. “This is a tool that allows us to bridge the gap between now and the times when these costs are put on a downward trajectory.”
The annual expense for college has exceeded inflation for decades, bringing the average cost this academic year at a four- year private school to almost $48,000, according to the College Board.
Members of Congress, who have heard complaints from their constituents, have taken notice. Reed, who discussed the idea for a bill in a House Ways and Means subcommittee hearing last year, said he is concerned about rising costs while the institutions enjoy fiscal benefits such as tax-free investments and tax deductions for donors to the schools.
Endowments already contribute to their schools’ operating budgets that include financial aid, with an average spending rate of 4.4 percent among 832 schools that participated in one national survey. Many of these funds in recent years have reached record values — Harvard University is the largest in the U.S. at $37.6 billion — surpassing their pre-financial crisis assets under management.
The intent of the proposal is to defray college costs for students whose family income is between 100 percent and 600 percent of the poverty line, up to almost $150,000, as a condition of the schools’ tax-free status.
The proposal would affect 92 colleges with the largest endowments, according to data compiled by the National Association of College and University Business Officers and Commonfund Institute for the year ended June 2014, the most recent available. The value of 832 endowments in the data was $516 billion, with an average return of 15.5 percent after fees for the fiscal year.
If returns from endowments were currently taxed at 35 percent, the revenue would be an estimated $16.2 billion, according to a December study from the Congressional Research Service.
Reed said his office has received feedback from several schools, including those in his district, and college trade associations after the planned bill was discussed in the October subcommittee hearing. He said he expects lobbying efforts to magnify.
“The initial response has been very aggressive,” Reed said. “I anticipate the conversation to get louder and louder. The issue isn’t going away.”
Endowments have a long-term investment horizon, said MaryFrances McCourt, chief financial officer of Indiana University.
“By design, you don’t want to maximize for the next few years to the detriment of generations to come,” McCourt said in an interview.
The grant pool for students would come from the difference between two years in investment income, defined as the aggregate fair market value of the endowment minus any gifts to the school and not including what is paid out.
If a school’s earnings are greater than the cost of attendance for working families, then the earnings would go to low-income students, who are already covered by some grants such as Pell.
The aggregate fair market value may be tricky to determine for endowments that invest in illiquid assets like timber farms, said Brian Galle, a law professor at Georgetown University whose specialty includes taxation and nonprofit organizations.
“It’s an encouraging first step,” Galle said. “I’m supportive of the effort to find ways to get universities to turn some of that money to more urgent, present needs.”
The bill imposes penalties for failure to comply: a 30 percent tax on the undistributed required payout in the first year and a 100 percent tax in the second year.
Schools rely on their endowments to operate, with some more than others. Endowments at Amherst College, Grinnell College and Princeton University contribute to about half of their operating budgets.
Some wealthy schools already give large grants to students. Princeton budgeted $140 million for undergraduate financial aid for the current school year, a 7.4 percent increase over the previous year.
Amherst, which is spending $52 million in fiscal 2016 on financial aid, pays out 4 percent to 5 percent annually from its endowment. If it spent 8 percent, the fund would be 60 percent smaller after 25 years, the school said in a September report.
“It’s a big mistake for Congress to try to fine tune and meddle in these kinds of decisions,” said Henry Bienen, president of Northwestern University from 1995 to 2009. “The circumstances of different universities are not the same with regard to their financial aid policies and their spending and the size of their endowments and who holds the endowments.”
Less-wealthy colleges with endowments that hover around $1 billion might have trouble meeting the bill’s mandate.
“Schools that have been traditionally under some fiscal strain, even as they’ve maintained a relatively large endowments, are probably the ones who haven’t been as generous with financial aid and therefore are going to feel the pinch of it more,” Galle said.