Thursday, March 13, 2008

The Priorities of Rich Private Universities: Student Aid or Great Faculty

Like everybody else, universities face tradeoffs and must prioritize their goals. This article below from Columbia University's student newspaper highlights the issue. Columbia wants to be Harvard. To "catch" Harvard, Columbia will continue to hire impressive guys like Jeff Sachs but apparently this costs real money. This money comes from the Endowment. The Endowment is the cumulative "profits" plus interest that Columbia has collected over the years. Now, Columbia has caved into peer pressure from the richer schools to lower tuition to middle class parents. While this redistribution is good for these parents, this isn't a free lunch. Ambitious private schools such as Columbia and Tufts will have a slower endowment growth than in the absence of this financial aid rebate. Slower endowment growth will affect such schools' ability to recruit and retain the best faculty. So, what makes a great university? A great faculty or happy middle class students?

Now there is one story where I am wrong. Suppose that I'm a Columbia Graduate from 1977 and I'm a billionaire. If I read this article in the Columbia newspaper and I'm so proud of my school's commitment to the middle class that I vastly raise my donations to the school to offset the rebates the school is now making; Columbia's endowment could rise because of this financial aid policy. I'm not convinced that I believe in this reverse laffer curve but it is possible.

Aid Reforms Raise Concern for Fiscal Future
By Joy Resmovits

Created 03/12/2008 - 4:02am
In Tuesday’s announcement, Columbia University seems to incorporate aspects of each of the other recent Ivy League financial-aid reforms into its own, charting an ambitious—and expensive—path forward.

The announcement comes on the heels of a slew of similar aid makeovers at peer universities including Stanford, Harvard, Yale, Dartmouth, and Brown. Among these schools, Harvard, Yale, and Dartmouth have plans that aim to ease the burden on middle-class families, while Brown eliminated the tuition burden outright for lower-class families.

Columbia’s reforms touch upon each end of the spectrum. Need-based loans will be substituted with grants for families from all income brackets, and families making below $60,000 per year will not be expected contribute to tuition, room, or board.

“This seems primarily focused on the lowest-income students, but again, what we’re doing at the same time is spreading ... the resources that we’ve made available for this across the full set of incomes that qualify for financial aid,” Vice President for Arts and Sciences Nicholas Dirks said in an interview on Monday. “We’re doing this because we recognize, along with all of our peers, that the cost of college education has just been going up so fast.”

The announcement comes soon after statements from key administrators seemed to suggest that Columbia could not afford to make the financial-aid reforms of its peer institutions. Although the value of Columbia’s endowment ranks among the top 10 in the country, it pales in comparison to that of Harvard, Yale, and Stanford.

At a December University Senate meeting, University President Lee Bollinger noted that Columbia’s endowment trails significantly behind those of its peers, making it difficult to implement similarly large-scale changes. “We don’t have the existing resources ... to maintain the financial aid presently offered,” he said. “At the moment, we are stretched to the limit in doing all the things we do.” Bollinger said that current policy—updated when the University announced September 2006 it would substitute grants with loans for families with incomes below $50,000—stretched Columbia’s spending.

So why is the University making changes now?

Chief Administrative Officer of Arts and Sciences Scott Norum said that the need to increase financial aid now surpasses standard financial barriers. “We’re so behind on our endowment campaign that one of our goals of our Capital Campaign is to raise endowment,” he said. “But this [aid reform] is so important that we’re actually going to eat into principal compared to what our normal spending rule would dictate in order to do this now instead of later.”

Columbia seeks to raise over $400 million for undergraduate financial aid. Last year, John Kluge, CC ’37, pledged $400 million to the University and earmarked more than half of his gift for Columbia College aid specifically. Once Kluge’s gift comes in, the University will use the donation to finance the College’s aid enhancement.

Dirks said the challenge for Columbia is to build a bridge between current financial aid expenditures and Tuesday’s commitments.

The bridge, Norum said, will come from increasing the payout rate on aid endowments by an average of about 1 percent annually. “The 1 percent increase in the payout rate was provided by the funds that will ultimately be John Kluge’s gift,” he said. “By increasing the rate [of expenditure] now, we’re able to fund the enhancement before we actually get that principal into the endowment.”

The spending plan, as approved by Columbia’s trustees, is a setback as Columbia strives to increase its endowment across the board. “It comes at a cost—we’ll be giving up all the investment returns on the extra money they’re spending,” Norum said. “The lost gain on the endowment is a reasonable price to pay in order to do these things now instead of having to wait for the actual gifts to come in, and especially because it’s a solid pledge for a very specific purpose.”

The regular payout rate is about 5 percent. Dirks said such a plan sets a precedent for the way Columbia uses its endowment. As such, it had to be scrutinized by multiple parties, in a process Bollinger said was “more consultative” in a phone interview on Monday.

“Once we did it, we had to figure out how much money it’s going to bring in, that the bridge was adequate to do the things we wanted, and ... be at a place where we can continue what we’re doing, and not having to renege on commitments,” Dirks said.

Norum added that while the School of Engineering and Applied Science cannot benefit from Kluge’s gift, it is employing the same spending techniques to finance the enhancements. Dirks stressed the importance of keeping SEAS and CC financial-aid policies analogous.

Since financial-aid policy at the School of General Studies is “diametrically opposite” to that of CC, as Norum put it, the new plan will affect about half of GS students currently receiving aid. GS financial aid is currently chiefly merit-based, but next year the distribution of the additional $1 million will be determined by demonstrated need, actual loan burden, and academic standing.

More than gifts or annual funds, unrestricted endowments pay for GS financial aid. “GS doesn’t have the same endowment and the annual giving to be able to increase on an unrestricted base the amount of aid they are able to award,” Norum said. “That’s why the endowment component of their Capital Campaign goals is important. If they raise all that money, then they’ll be able to approach the College’s level of fund-raising and financial aid budget.”

“We’re excited about this,” Dirks said. “You do one set of things and there are lots of other groups that are concerned about what we’re doing for them. We’re thinking about the need to increase financial-aid support across the University.”


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