Those of us buried under rising tuition and huge piles of student debt may wonder: What in the world made college so expensive? And how is it that donor- and taxpayer-funded endowments aren't bearing more of the burden?
Part of the answer lies in investments made by college and university trustees, which resulted in huge losses after the 2008 financial crisis, with average one-year losses totaling 20.5% among schools with endowments higher than $1 billion, according to InsideHigherEd.com.
What led trustees to make these investments?
Some stakeholders think part of the answer lies in self-dealing among trustees, who direct schools' investments into their own funds or those in which they have some other interest.
Conflicts of interest
Reuters reports that colleges and universities including Dartmouth, Brown, Northwestern, and Stanford, just to name a few, have disclosed investments in funds linked to their trustees.
Because trustees are responsible for investing a school's money, institutions have worked to recruit people with significant expertise in asset management. As a result, many boards are populated with trustees who work at investing firms -- trustees who are in a position to benefit from directing the institution's money into the funds they manage.
And worries about self-dealing don't end with investments in trustees' firms. In a 2010 survey of tax returns filed by 618 private colleges, The Chronicle of Higher Education found that about 25% of the schools examined disclosed financial connections to real estate businesses, construction companies, and other service providers associated with their trustees.
We're not self-dealing... trust us!
To examine the effect that such conflicts of interest can have on a school's investments, InsideHigherEd.com's Kevin Kiley took a look at the relationship between Dartmouth's trustees and the school's investments in funds linked with those trustees:
Amount Invested 2008-2010
Stephen F. Mandel Jr.
Founder, Lone Pine Capital
Leon D. Black
Founding Partner, Apollo Management
R. Bradford Evans
Senior Advisor, Morgan Stanley
Russell Lloyd Carson
General Partner, Welsh, Carson, Anderson & Stowe
William W. Helman IV
Partner, Greylock Partners
Justin Anderson, Dartmouth's assistant vice president for media relations, offers two defenses for these investments.
First, he claims that these investments are in the best interest of the school, telling InsideHigherEd, "To forgo investments with a firm simply because a board member has some interest in the firm would be contrary to the best interest of the college."
Second, he claims that the trustees complied with federal and state (New Hampshire) restrictions meant to prevent conflicts of interest, as well as Dartmouth's own regulations. Among other things, notes Kiley, the New Hampshire regulations require that:
Those with a financial interest in the transaction cannot be present during the vote.
At least two-thirds of the voting board members must approve each investment.
A notice of the investment must be published in a "newspaper of general circulation in the community in which the charitable trust's principal New Hampshire office is located."
But it's not clear that these safeguards are sufficient to prevent quid-pro-quo dealings among trustees, who may be willing to approve investment decisions that benefit other trustees in hopes of getting similar favors down the road.
Lack of transparency
InsideHigherEd notes that while Dartmouth is open about its investments in these firms, stakeholders are complaining that the board has stonewalled them in the face of questions about the fees associated with its investments. In addition, stakeholders say that the school fails to offer online archives of investment notices, and so it is difficult to get a full and accurate picture of the amounts invested in trustees' firms or of how well these investments have performed. This lack of disclosure does not help justify Dartmouth's claims that these investments are in the best interests of the school.
Kiplinger's 10 Top Private Colleges With the Lowest Sticker Price
Are Some College Trustees Abusing Their Trust for Profit?
Total annual cost: $17,280
Cost after need-based-aid: $11,789
Average need-based-aid: $5,491
Average non-need-based aid: $3,436
Average debt at graduation: $13,354
This 136-year-old institution is open to members of the Church of Jesus Christ of Latter-day Saints (LDS) as well as non-members. In fact, BYU's total cost of $17,280, the lowest on Kiplinger's private-school list, applies to students who are not LDS church members; members pay about half the tuition. BYU attracts academically gifted students: 91% of incoming freshman scored 24 or higher on the ACT standardized test.
Wesleyan earns plaudits as Kiplinger's lowest-cost liberal arts college. Founded in 1836, Wesleyan was the first college in the world to grant degrees to women. Today, Wesleyan has 31 major and 26 minor academic programs, as well as eight pre-professional programs, including engineering, medicine and law.
In the foothills of the Blue Ridge Mountains, overlooking the Shenandoah River, this Catholic liberal arts college, founded in 1977, attracts its 400-plus students from 45 states and seven countries. Undergraduates are required to take a core curriculum that covers literature, history, natural sciences and theology.
With a focus on global education through its numerous study-abroad programs, Drury provides the opportunity to explore diverse cultures and international issues firsthand. Its Global Perspectives 21 program includes such subjects as Asian ethics, Russian cultures (with travel to St. Petersburg, Russia) and Mediterranean cultures (via travel to Volos, Greece).
This private Catholic university, founded more than 60 years ago, attracts a high-achieving student body (65% of incoming freshman scored in the top tier of the ACT) and keeps them coming back. The freshman retention rate is a solid 88%. The university offers 42 undergraduate majors and 32 minors, plus seven graduate programs.
Established in 1920 as Marion College, Indiana Wesleyan is one of the fastest-growing Christian colleges in the country. The school’s main Marion campus has 3,200 students, and more than 12,000 adult students attend classes at regional campuses in Indiana, Kentucky and Ohio.
Hillsdale’s campus stretches over 200 acres in southern Michigan. The liberal arts college prides itself on offering high-quality academics without accepting federal or state taxpayer subsidies. An impressive 90% of incoming freshmen scored in the top tier of the ACT, and a low student-faculty ratio (10-to-1) helps keep students engaged with professors.
Only 355 students are enrolled at this Catholic liberal arts college, and the 11-to-1 student-faculty ratio helps keep class sizes small. Founded in 1971 and located 65 miles northwest of Los Angeles, Thomas Aquinas provides grants and loans through its financial aid program, but it accepts no government or archdiocesan subsidies.
Located near Boise, the College of Idaho stresses the importance of off-campus experiences, from internships and community service to study-abroad programs. Students are also encouraged to become leaders, through the college’s leadership program. Under this hands-on, freshman-to-senior program, students develop skills in communication, problem solving, decision-making and team development, enabling them to become mentors to younger classmates by the time they graduate.
This liberal arts university, less than 50 miles southeast of Topeka, offers more than 40 fields of study and more than 70 extracurricular and co-curricular activities, from honor societies to varsity athletics. Fewer than 1,000 undergraduates attend the school, whose alumni include four Rhodes Scholars and a Pulitzer Prize winner.
When trustees make irresponsible investments and purchasing decisions, students and their families are not the only ones who pay. The burden of these costs is also passed on to taxpayers who help finance the public schools and to donors who help finance the private ones.
And without increased disclosure requirements, these stakeholders are in a poor position to evaluate or challenge these decisions.