• Freedom
  • Innovation
  • Growth

University Endowments Should Be the Primary Source of Student Loans

The Hill

Here’s a modest proposal: Colleges and universities should draw from their own endowments to provide student loans before that obligation is foisted off on taxpayers.

When President Obama federalized student loans in 2010, he promised the move would save the taxpayers $68 billion. That didn’t happen.

If President Joe Biden’s unilateral decision to cancel student debt passes constitutional challenges, which is doubtful, taxpayers could be on the hook for more than $500 billion.

But while the federal government hands out billions of dollars in student loans, many colleges and universities are sitting on endowments also worth billions.

College and university endowment officers invest their funds in a range of ways. So how about “investing” that money in students, in essence, becoming the student-loaner of first resort rather than the government?

First some facts. According to the National Center for Education Statistics, a federal agency, “At the end of fiscal year 2020, the market value of the endowment funds of colleges and universities was $691 billion.”

Harvard’s endowment leads the pack, with nearly $42 billion. Yale comes in second with $31.2 billion. And while both of those are private universities, the University of Texas system, a public university system, comes in third at $30.5 billion.

And it’s not just a few colleges and universities. At the end of 2018, about 75 percent of public and private universities had more than $10 million in their endowments.

How do the universities invest that money? The American Council on Education (ACE) says that in 2020:

  • 71.8 percent was invested in traditional stocks, bonds and cash;
  • 21 percent was invested in private equity, such as hedge funds; and
  • 7.2 percent was invested in natural resources and other “real” assets.

But don’t university endowments use some of those funds for student aid? Yes, but that money generally comes from the endowment’s earnings, not the principle.

Suppose Congress were to require colleges and universities with significant endowments to use some portion of those endowment funds – say, up to 75 percent – to provide student loans. Once the endowment had reached whatever cap was set, the federal student loan program would step in as a backup.

Colleges and universities invest their endowment funds to make a profit. Under this plan, student loan repayments would provide much of that profit.

Several benefits could accrue from this policy. First, the ones who benefit most from student loans – the universities that receive the money and the students getting the education – would bear the cost and risk, not taxpayers. Of course, the federal student loan program would still be available if a university hit its endowment cap or if the institution has little or no endowment money.

Second, colleges and universities would have a financial interest in ensuring their students get good educations, and degrees, in areas that are likely to allow them to get a good job and pay back the money. That change might also lead to a number of constructive changes in the less-useful courses and degree plans currently offered.

Third, the change might encourage colleges and universities to better control their tuition costs.

Complaints about rampant college tuition increases, much higher than the rate of inflation, are ubiquitous. But under the current federal student loan program, millions of students are largely insulated from the actual costs they’re incurring. It almost seems like free money, and maybe it will be if Biden’s student debt cancellation survives.

That cost insulation is a major factor in students’ willingness to borrow and spend thousands of dollars on a college degree. If colleges and universities had to turn to their endowments as the first line of student loans, they might decide to get their costs under control.

University endowments aim to make 7.0 percent to 7.5 percent on their endowment funds. Could they make that much loaning to students? Probably not, but it may not be that far off.

Here’s what Nerd Wallet says: “The interest rates for all new federal direct undergraduate student loans are 4.99%, up from 3.73% in 2021-22. Unsubsidized direct graduate student loan rates are 6.54%, up from 5.28%. Rates for PLUS loans, which are for graduate students and parents, are 7.54%, up from 6.28%.”

The best way to provide student loans is through private sector financial institutions. But Obama probably closed that door for good. The next best way is to let those who benefit bear the cost and risk. That’s what would happen if endowments became the student-loaner of first resort.