As part of the reauthorization of the Higher Education Act expected later this year, Congress should require universities with endowments in excess of $100 million to spend at least 8 percent of the endowment each year. Universities could avoid this rule by shrinking assets to $99 million, but only by spending the endowment on educational purposes, which is exactly the goal.
Eight percent is not as scary as it might sound. Remember that endowments benefit from new gifts as well as investment returns. The average endowment, small or large, has grown by 9.2 percent per year over the last 20 years, even after accounting for annual spending of about 4 percent. Last year, only 14 of the 447 university endowments with assets over $100 million failed to net at least 8 percent growth.
Under my proposal, endowments would grow, only at a slower pace. They would shrink when markets crash, but recover, and then some, when the market rebounds.
Think about it this way. In 1990, Yale’s endowment was worth about $3 billion. If my suggested spending rule had been in place, it would be worth about $10 billion today, instead of $24 billion.
But under my proposal, the sky-high tuition increases would stop, and maybe even reverse themselves. Faculty members would benefit from greater research support. University libraries, museums, hospitals and laboratories would have better facilities. Donors would see the tangible benefits of philanthropy. Only fund managers would be worse off.