By Richard Vedder
On several occasions, I have argued that schools like Harvard have such a large endowment that they could literally eliminate tuition without any serious financial implications. Harvard literally does not know what to do with all its money (it would deny that of course), spending only around 3.5 percent of its principal each year, such a paltry percentage that it would be forced to pay taxes if it were a non-university form of charity.
Well, today's Wall Street Journal tells us that some alums are catching on, realizing that their alma mater is extremely wealthy and that the law of diminishing returns is at work. A dollar given to the poorer local university will have much greater impact than the dollar given to the rich school attended perhaps 40 or 50 years ago. Moreover, the donor who is a big fish in a little pond is more likely to get major recognition relative to the one who is a little fish in a big pond. Slippery Rock will name a building after you for $3 million, whereas it might take $25 million for that to happen at Harvard.
I hope this trend continues, as it is a step toward reducing the huge inequality in resources between schools. I still give a few bucks annually to the wealthy private school I attended (Northwestern), but also give larger amounts to poorer schools, including Ohio University where I teach, since they feel the impact of the money more greatly.
Speaking of Ohio University, we do something here with students and our endowment that has been truly win-win for students and the university alike. A few years ago, I urged our Vice President for Finance to turn a little bit of the endowment over to finance students in our business school to invest. Our professional investors and amateur alumni investment committee were doing a mediocre job, and I felt the students would likely do just as well, while gaining genuine real world experience. The idea was implemented. Now, several years later, the student portfolio management group has outperformed the professionals nearly every year and the university has increased the funds given to them (albeit, not enough). One byproduct: graduates of the university from the student investor group have gotten excellent jobs, some with New York financial giants. It is a case where financial theory is blended with financial practice, making the study of corporate finance and investing more interesting. The students receive no pay, so the university saves expensive investment fees. Only the best and brightest kids get selected, and they work their hearts out, showing an enthusiasm rarely seen in conventional classes. Some other schools are doing this too --a wonderful idea.