Last year was a good one for David Swensen GRD ’80, the University’s chief investment officer. Under his watch, the Yale endowment rose to $22.5 billion, nearly four times where it stood just a decade earlier. In one year alone, the investment income produced by the endowment amounted to $5 billion, more than the entire endowments of Brown and Dartmouth.
It also amounted to enough money to allow, at today’s tuition rate, every undergraduate to attend Yale for free this year, next year, and, beyond that, for 19 more years.
Kissed by two decades of financial prosperity that lasted until just a few weeks ago, Yale and some of its gilded peers have amassed pools of money unimaginable to Elis a generation ago who lived in drafty dorm rooms and went to class in crumbling classroom buildings. But now those dorm rooms and classroom buildings have been renovated, others have been built and there are still billions upon billions left over.
Yet Yale still charges $46,000 annually for tuition, room and board. Though last year’s investment gains surpassed the gross domestic production of Laos, Niger and 51 other nations, the University still asks for an amount just a hair under this country’s median household income from the families of the 51 percent of undergraduates who do not receive financial aid.
Which raises the question: Can Yale be free? And, if so, should it?
Some economists conclude Yale could waive all student fees without breaking a sweat. But for Yale administrators, it’s not an issue of whether Yale could be free. It’s a matter of whether Yale should. And they’re not sure about that.
So much money, so little time
In January, on the eve of the long-awaited debut of improvements to Yale’s financial aid policy, University President Richard Levin was not resting for his big day. Instead, he was packing his suitcase. He would soon board a train and head to Washington, and not for any getaway. Nay, Levin was on a mission.
The next day, just as staffers in the Office of Public Affairs were preparing to e-mail reporters a lengthy press release about the aid initiative, Levin and his chief flack, Helaine Klasky, sat before the editorial board of the Washington Post. A few hours later, across the Potomac River, education writers at USA Today stared down the president and his aide.
Levin had a point to drive home. The University, he said, was committed to ensuring potential students are not driven away because of concerns over high tuition and that Yale was not merely hoarding its endowment riches.
“We wanted to get the message across to Washington, and particularly those in Congress,” Klasky later recalled.
In other words, they wanted the ear of Sen. Chuck Grassley of Iowa, the ranking member of the Senate Finance Committee.
Since the Finance Committee held a hearing on the matter last September, quiet suspicions have percolated in some corners of Congress about whether wealthy schools like Yale are spending enough for their colossal endowments, or if they should tap deeper into their funds — accumulated through untaxed investment income and the receipt of tax-exempt donations — to curtail rising tuition and better promote college affordability. Grassley and others (most recently and most forcefully, Rep. Peter Welch of Vermont) have mused about introducing legislation that would mandate universities behave as not-for-profit foundations do when it comes to endowments — that is, disburse at least 5 percent of their assets annually.
Levin and other college presidents have been sharply critical of Grassley’s threats. And that’s why they have been so forceful in reminding people just how generous they are when it comes to financial aid.
But the staggering amount of wealth Yale and other schools have accumulated nonetheless raises questions about what exactly it needs all that money for. The Yale endowment, as of June 30, stands at $22.9 billion, the second most of any school in the country and approximately $2 million for every student enrolled here.
At a roundtable in Washington last month on the subject of endowment spending, Grassley raised a provocative question. “If an institution could educate all of its undergraduate students, regardless of need, free of charge with a payout of just 1 percent of its assets, is its endowment an unreasonable accumulation of taxpayer-subsidized funds?”
Grassley didn’t name names. But Yale, it is clear, is one of the schools that could do exactly that.
In fact, according to a News analysis of last year’s budget, by increasing spending from its endowment by eight-tenths of one percentage point, the University could make Yale College free — no tuition, no room and board, no anything — for every undergraduate.
From 30 shillings to $46k
Part of the reason Yale could waive tuition without stretching its endowment too thin is a reflection of the changing shape of finances at a modern research university.
Just how much does Yale actually need revenue from students to balance its budget? The answer today is much different from the answer in 1701.
At Yale’s founding, the 30 shillings per year each pupil paid in tuition comprised the majority of Yale’s annual budget. In 1831, for instance, when the first printed Treasurer’s Report was produced, more than three-quarters of Yale’s annual revenue came from tuition. That year, of Yale College’s $19,674.87 in revenue, nearly $17,000 came from student term bills. At that time, the Yale endowment — at $30,856 — was only one-and-a-half times the school’s operating budget.
But over time, that endowment would grow, and Yale’s dependency on tuition would diminish. By the end of the Civil War, term receipts provided little more than a third of the College’s annual revenue. The $670,000 endowment, meanwhile, dwarfed the College’s $85,500 annual operating budget.
That proportion would stay about the same through World War I, when tuition, room and board accounted for about a third of the University’s net income. By the end of World War II, it was down to a mere quarter. Today, tuition, room and board — though higher, when adjusted for inflation, than ever before — account for only 17 percent of Yale’s overall revenue across the University, according to budget documents obtained by the News. (The documents are accurate as of June 2007, when financial details were last available.)
Can Yale be free?
Yale’s endowment has boomed in recent decades. Meanwhile, its reliance on tuition as a source of revenue has, on the whole, declined.
In Yale College, for instance, the University projected $230.2 million in revenue in the fiscal year ending June 30 from tuition, room and board paid by undergraduates; it also projected $62 million in expenditures on financial aid.
Of course, the $168.2 million in net revenue given by student fees paled in comparison to the $843 million the Yale endowment contributed to the University’s operating budget last year. That spending represented a payout of barely more than 3.7 percent of Yale’s then-$22.5 billion. To eliminate all fees for undergraduates, the University would have needed to raise its endowment spending to about $1 billion, which represents a payout rate of 4.5 percent.
Given that, could Yale simply stop charging tuition, room and board? The News asked three leading economists who specialize in the finances of higher education to analyze University financial projections to answer that question.
Their conclusion: “It could do it if it wanted to,” as Ronald G. Ehrenberg, the director of the Cornell Higher Education Research Institute, put it this week.
“They could forgo that tuition revenue and still provide a quality education,” concluded Sandy Baum, a professor of economics at Skidmore College and senior policy analyst for the College Board. “They could raise their takeout rate a bit. They could do it.”
Indeed, that hypothetical takeout rate of 4.5 percent would not turn heads. The average spending rate of universities last year, according to a survey by National Association of College and University Business Officers, was 4.6 percent.
“A 4.5 percent takeout rate is very reasonable,” said Roger Kaufman, a professor of economics at Smith College who has studied endowment spending.
Yale administrators are quick to point out several caveats. As much as the Yale endowment has boomed during Swensen’s tenure, they say people often forget that from 1968 to 1982, the market value of Yale’s fund (in 2007 dollars) actually fell, to $2.1 billon from $4.1 billion, as a result of weak investment performance and aggressive payout policies.
Also, giving free tuition would be more complicated than just boosting endowment spending by a certain percentage; after all, the endowment is essentially a pool of thousands of separate funds, all of which have their own terms and conditions. A full three-quarters of the endowment funds are restricted by the intent of the donors. That complicates matters: The riches in the fund put aside by a donor in 1923 for a professorship in railroad engineering, for example, couldn’t be used to make Yale free.
“We don’t have an endowment, we have 8,000 endowments,” J. Lloyd Suttle, the deputy provost for undergraduate and graduate programs, said last year when Grassley first began making waves. “The money is not interchangeable.”
But the broader point stands: Yale has enough money to ditch undergraduate tuition. And its decision to drastically increase endowment spending for the fiscal year ending June 30, 2009, proves it.
Beginning this year, the University has implemented a mandatory spending floor of at least 4.5 percent annually. In fiscal year 2009, it is projected to spend 5.1 percent of its endowment, or $1.16 billion.
Part of that new spending will go toward defraying the $24-million additional cost of Yale’s expanded financial aid program. But much of it will go to matters such as the addition of two residential colleges to Yale College (which administrators offer as an example of their commitment to expanding access to a Yale education), the University’s ongoing digitization initiatives and the launch of research at the West Campus.
In essence, the question of whether Yale should abolish undergraduate tuition is a matter of priorities. “It’s clear that after all these good years, we could certainly make undergraduate tuition free,” said Deputy Provost Charles Long. “But, unless we invaded the endowment, you have to stop doing something else. So what do you do? Do you say, well, buying the West Campus is a good idea, it would really build Yale’s sciences … but we would rather make Yale College tuition free?”
The argument for a free Yale
In January, the Chronicle of Higher Education asked a potent question. “Who Is Lynne Munson?” a headline read. “And why is she saying such harsh things about wealthy colleges?”
Munson, the former deputy chairman of the National Endowment for the Humanities and an adjunct fellow at the Center for College Affordability and Productivity, helped bring this past year’s discussion about university spending to the fore with sharply critical testimony at the Senate Finance Committee’s hearing last fall. Munson said universities need to loosen their purse strings and stop hoarding wealth, as she puts it.
More specifically, Munson thinks Yale should be free.
“I think it’s really only a matter of time … until people come to the realization that, ‘Gosh, this is really the only thing that makes sense,’ ” she said. “How much do you need to start spending some?”
Universities, she points out, have billions (in Yale’s case, $3.6 billion) in restricted endowment funds earmarked for financial aid and only financial aid. Her question: Why not use them?
Munson pointed out several benefits that could come from free tuition. For one, students from low-income families would not be put off by the sticker shock of a school like Yale. It would, she said, level the playing field even further, and promote diversity, too.
Wick Sloane SOM ’84, the former chief financial officer of the University of Hawaii and a columnist for the higher education Web site Inside Higher Ed, agreed.
“Who wouldn’t want to give a Yale education to as many people as you possibly could?” he said. “I think the fundamental question for the Yale Corporation and the trustees in places like Williams and Yale is, ‘Are they creating an expanding resource for more people, or are they spray-painting gold leaf onto luxury goods?’ ”
That excess, to some extent, is what prompted this whole discussion in the first place.
“It looks like they take the approach that they’re a storehouse for money, and they obviously should not be,” Grassley said in an interview last month. “Money serves a purpose, and the purpose of a university is the education of kids, so we ought to get the resources where the kids are.”
‘A gift for the rich’
Yale officials are eager to discuss their new financial aid offerings, which now allow for students from families earning less than $60,000 to attend Yale for no charge. But they certainly do not seem eager to extend that benefit to all undergraduates.
Dean of Admissions Jeff Brenzel and University Director of Student Financial Services Caesar Storlazzi declined to comment, referring the question to Levin and the Yale Corporation. Roland Betts ’68, the Corporation’s senior fellow, said it would be presumptuous for him to comment on a matter the board has not discussed.
But Levin did not hold back. In an e-mail message, he suggested concerns about the idea of a free Yale.
“The only Yale College families receiving no financial aid today have incomes in the top 5 or 10 percent of the income distribution,” Levin said. “If one were to consider making Yale College tuition-free, one would have to ask the question: is relief for families with the highest incomes the best use of the university’s resources?”
The president was not alone in that argument.
“At the deepest philosophical level, the goal should not be free tuition for everybody but affordable tuition for everybody who is smart enough and resourceful enough and promising enough to come to Yale,” Long said. Another senior official phrased it this way: “Given our very generous financial assistance, a ‘free Yale’ is a gift to those who actually can afford to pay at least some tuition, room, and/or board.”
Munson, for her part, said the free tuition for rich kids would be an acceptable price to pay for the benefits she said a free Yale would bring. But others in higher education joined Levin in expressing doubts.
Anthony Marx ’81, the president of Amherst College, said at the roundtable last month that he believes a 5-percent mandated spending rate might make the wealthiest institutions feel pressed to not charge tuition at all.
Marx, whose school has an endowment of about $1.7 billion and an enrollment of 1,683 undergraduates, said his administration had assessed whether his $1-million-per-student endowment could enable Amherst go tuition-free, only to conclude that its endowment would need to be nearly twice as large to do it and that, regardless, the idea might be a bad one.
“If the make-up of an entering class didn’t change very much, then the policy would provide no greater access at great expense, and that seems a regressive use of resources,” he wrote in an e-mail Thursday. “While our students would be fortunate, imagine the further stress for applicants to get in to a great ‘free’ college versus one that cannot afford to be free. All of this doesn’t end the debate, of course, but it does give some pause.”
Marx is not alone in his concern. The past two Harvard presidents, Derek Bok and Lawrence Summers, both have spoken publicly against the suggestion that their school go tuition-free. “Should we allow the really wealthiest families in America to send their children to Harvard for free? I think even those families wouldn’t agree with that,” Bok told The Harvard Crimson last year.
Said Summers to the Harvard Crimson: “I don’t think the best use of university resources, with all the social problems, with all the research that needs to be done and with all disadvantaged students who want to receive a Harvard education, is to reduce tuition to zero for students from very wealthy families.”
Even the economists who analyzed Yale’s financial data and concluded that Yale could easily be free said they did not believe it should. Rather, they said, the University could make a better contribution to society by spending those endowment dollars on everything from more scientific research to funding internships for students to setting up a pool of money to encourage graduates to go into public service.
Several admissions experts agreed. A free Yale would effectively amount to giving scholarships to the children of the wealthy, said Christopher Avery, a professor of public policy and management at the Kennedy School of Government at Harvard and the co-author of the 2003 book “The Early Admissions Game.”
Avery said he did not think such a move would have much impact on recruiting low-income students, either.
“Most of them have figured out, by one way or another, that they if they can get in, they’re going to be able to afford to go,” he said.
There are other problems, too. Realistically, there appear to be four research universities — Yale, Harvard, Princeton and Stanford — as well as a handful of small liberal arts colleges that could afford at least to consider going tuition-free. If they did, the most competitive colleges would become even more stratified, said William G. Bowen, the president of Princeton from 1972 to 1988 and the co-author of the 2005 book “Equity and Excellence in American Higher Education.”
Plus, Bowen said, there is the simple fact that education, as he put it, “is a wonderful investment.”
“There is the labor theory of value — it goes back to Hume — in which the only way you ever really value anything is when you mix your own effort … and it’s not just given to you,” he said recently by telephone. “I believe that. I think it’s a privilege to be able to contribute yourself in some way to your own education, and you will value it more if you do.”
Welch and Grassley, for their part, said in interviews this fall that while they are concerned that wealth universities are not spending enough of their endowments, they are not calling on Yale or any of its peers to go tuition-free.
“Frankly, I’d like to see students have access to schools and everybody be paying a fair share,” Welch said. “I don’t really want a very wealthy kid who’s able to get into Yale to get a free ride just because that institution is wealthy.”
That means that, for the foreseeable future, children of the wealthy — who, by any reasonable definition, make up more than half of the Yale College student body — will continue to pay full price. And no amount of money David Swensen can add to the University’s coffers will change that.