Merchandise is displayed for sale at a bookstore near Harvard University in Cambridge, Massachusetts, U.S. (Photographer: Victor J. Blue/Bloomberg)

Rich Colleges’ Endowments Targeted by Trump Backer in House

(Bloomberg) -- Wealthy U.S. colleges must spend more of their endowment gains on aid for middle-class families or lose their prized tax-exempt status, a Republican U.S. House member and a vice chair of President-elect Donald Trump’s transition team proposed Monday.

Rich schools have long been a target of Congressional Republicans who accuse them of skewed spending priorities that are bankrupting families with frivolous amenities while enriching administrators. In little-noticed remarks during the campaign, Trump himself endorsed this view.

Along with new endowment spending rules, U.S. Representative Tom Reed’s proposal would also require all universities receiving federal aid to provide more disclosure about administrative salaries and perks. In addition, colleges would have to file “cost-containment plans” to keep tuition increases below the inflation rate. The federal government would take money away from those who fail to curb costs -- and give it to those who do.

“It’s time to disrupt this area and really put the attention necessary to it to get the costs going in the right direction, and that is down,” said Reed, who is the youngest of 12 children and wrapped his own $110,000 in college and law school debt into a mortgage. “We truly are entering the crisis phase.”

For years, colleges have beaten back similar proposals, saying their endowments have limited legal flexibility to spend money from gifts because of donor restrictions. Elite schools say they are already providing tuition breaks to low-income and middle-class families, making their $60,000-plus sticker prices seem more daunting than reality. On its website, Harvard, the richest U.S. college, says families earning as much as $200,000 a year are eligible for aid -- and, in some cases, even more.

Rich Colleges’ Endowments Targeted by Trump Backer in House

College trade groups have successfully fought government cost-containment measures tied to inflation as closet “price controls.” But, this time, Republicans, who control both houses of Congress, have a powerful ally in Trump. 

Reed was an early Trump backer who represents the western New York region. Congressional Republicans, including Reed, held two hearings since October 2015 on endowment spending and launched a joint House-Senate inquiry.

In a September rally in Pennsylvania, Trump echoed Reed’s language: “I’m going to work with Congress on reforms to make sure that if universities want access to all these special federal tax breaks and tax dollars, paid for by you, that they are going to make good faith efforts to reduce the cost of college and student debt, and to spend their endowments on their students rather than other things that don’t matter.”

Trump officials didn’t return messages asking about Reed’s plan. A member of the House Ways and Means Committee, Reed plans to introduce the measures in January, possibly as part of a Republican tax overhaul.

His rules would apply to roughly 100 schools with endowments of more than $1 billion or more, ranging from Harvard University, with $35.7 billion, to the University of Georgia, with just over $1 billion, including related foundations.

Stiff Penalties

To circumvent the issue of donor restrictions, spending requirements would apply only to new gifts. Twenty-five percent of the gains on those endowment donations would have to be spent on student aid for middle and working-class families who now don’t qualify because their incomes are too high for many scholarships. Along with losing tax exemptions, those who fail to comply could have to pay taxes on earnings from 30 percent to 100 percent.

Donors who don’t want to direct a quarter of their gift to aid for middle-income students wouldn’t get a full tax deduction, while donors who do could get a bigger tax break.

Barry Toiv, a spokesman for the Association of American Universities, which represents major research universities, including members of the Ivy League, said his group was working to educate Congress about the ways colleges benefit society.

“They do research that helps save lives and that drives the economy,” said Toiv, who was interviewed before Reed made his proposal. “They educate students from all walks of life. We’ll keep pointing that out.”