Last Thursday, the Senate Finance Committee heard testimony from a panel of experts who recommended forcing universities to spend at least 5 percent of their endowments, with the intention of making college more affordable.
At first glance, it seems like a fantastic idea.
You don't have to be an Econ major to understand that tuition is rising at an alarmingly faster rate than inflation.
Indeed, this page hasn't hesitated to criticize Student Financial Services for its relatively small budget per capita and its dismissal of the strains placed on middle-class and upper-middle class families. With colleges sitting on their massive endowments, it would seem that the dollars are going to waste.
But the proposed spending requirement is shortsighted and intrusive.
In the fall of 2002, Penn's endowment was $3.4 billion. Now it's a whopping $6.6 billion, nearly double what it was five years ago. One of the primary reasons why the endowment has grown so rapidly is that Penn allows the vast majority of it - 96 percent to be exact - to be reinvested and accrue interest each year. A penny saved is a penny earned and all that.
It's pretty simple. There is an optimal level of saving and spending. Clearly, spending 100 percent of our endowment would have its benefits. Everyone could attend Penn for free, we could fire Aramark and hire Emeril . who knows, maybe we could even fix the high-rise elevators! There's just one catch: The University would be bankrupt in five years tops.
How much to spend and how much to save should be approached on a case-by-case basis, taking into account potential for endowment growth, current needs and the size of the student body. We might not know whether Penn is spending enough of its endowment, but we do know Congress doesn't have the faintest clue.
A one-percent increase in endowment spending for Penn may not seem like a lot, but it sets a dangerous precedent of government intervention and shows a basic misunderstanding of economics.
We're sure the Senate Finance Committee has good intentions. The road to hell is paved with them.
