Tuesday, August 28, 2007

Alums , Students and College Wealth Inequality

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.


DC observer said...

While some schools, like Harvard, could eliminate tuition, the problem is the cascading effect it would have on other institutions. Princeton has long been able to follow such a strategy but hasn't, most likely because it would force its peers to match the policy or lose access to the most talented students. While this is not necessarily a bad deal for a small number of the elite, wealthy privates institutions, it would be problematic for say Brown, as a fringe Ivy competitor to pursue the same course. Now, supposing Brown DID choose to do this, in all likelihood this would pressure Brown's peers (who are not all likely to be endowment-rich Harvards and Yales) into following the same tactic because, again, if they didn't it would simply afford Brown a competitive advantage in securing the level of talent that typically attends that peer-group block. The next thing you know, UVA and Michigan are pressed into it, which turn requires Ohio State and perhaps eventually even places like Ohio University or Central Michigan University to do it.

The current higher education arms race creates a large degree of inequality amongst schools, but the type of arms race fostered by pressuring institutions into eliminating tuition would be far more damaging. Instead of pressuring institutions to hoard wealth, it would pressure them to spend funds that an overwhelmingly large number simply do not have.

F said...

Why would this be a bad idea? So only a few schools could do this, and it would make them more attractive, especially to poorer students. It would generally make elite college more attractive to good, but poor students.

Yes, most colleges would not be able to afford this, and so would be less able to compete, and would have more pressures keeping tution in check. But why is this bad? Unless, you believe there is some advantage to spreading out good students across more schools.