On the subject of the poor use of taxpayer dollars, Jorge Klor de Alva is hardly in a position to criticize. His former employer, the for-profit University of Phoenix, where he served as president for nearly 6 years, financed its vast mistreatment of students almost entirely with federal financial aid, including the GI Bill. The institution, according to a U.S. Senate investigation of 2009 expenditures, spent only $892 per student on instruction, while allocating $2,418 in profits to shareholders, and $2,150 on marketing. Graduation rates some years have been in the single digits; in several majors, student loan defaulters outnumbered graduates by as much as ten to one.
So it is not without some high degree of irony that Klor de Alva, who now runs a center funded by Phoenix’s parent company, is complaining about the the tax benefits enjoyed by university endowments. Not that more shouldn’t be expected from elite colleges in exchange for their tax benefits—after all, the purpose of nonprofit status is to encourage and reward good behavior, and Congress can and does occasionally change the definition of what counts as good enough. But the source of the criticism—and its recent echo in Slate (which is owned by the parent company of for-profit Kaplan University)—invites a closer look at how such corporate windfalls compare to university endowments, and how all of that taxpayer money that went to for-profit colleges could have been used differently.
The Role of Endowments
Endowments are basically savings accounts. Universities use them to ensure their continued operation—to make capital improvements when needed, to invest in new programs and expand faculty, and to provide financial aid and other enticements to attract deserving students to their campuses. And just like basic financial literacy teaches us, building up savings requires spending less than you are taking in—which is exactly what universities do when planning for the future. Some universities seem to be almost too good at putting money away for a rainy day (I’m looking at you, Harvard), but overall most people see the rationale for the existence of endowments.
The fundamental rule that sets nonprofit management of endowments apart from, say, the profit-taking of other corporations, is that their endowments must be set aside for the future benefit of the charities they serve. That is, the extra money (“profits”) that builds up cannot be taken by executives and (nonexistent) shareholders. Nonprofits grow reserves in part because that’s what they are supposed to do with money they don’t spend; a nonprofit’s trustees simply can’t take net revenues for themselves.
For-Profit Figures as Endowments
So let’s conduct a little thought experiment here. What if one of the big for-profit universities had operated like a nonprofit, and built up an endowment? And what could Klor de Alva’s former school have done if it had operated like a nonprofit university, instead of a for-profit company?
I compiled a back-of-the-envelope estimated endowment that the University of Phoenix’s taxpayer-funded profits would have created, if it didn’t simply put that money into shareholders’ pockets. By multiplying the U.S. Senate investigation’s profit figures by the number of students from 2000 to 2013, and then applying “endowment” earnings and losses each year based on the S&P 500 index, a nonprofit version of Phoenix would by now have the third-largest endowment of any university. And if both profit and marketing expenses were placed into the endowment, Phoenix’s fourteen years of savings would rival the $32 billion endowment built by Harvard over a period of 140 years. (Similar calculations show that Slate’s sister company, Kaplan, would have upwards of $2 billion, more than Amherst and Williams.)
Of course, eliminating profit-taking at Phoenix might change behavior of the college leadership in other ways, too. The trustees—now unpaid—would have no financial incentive to charge poor students far too much for a low-quality experience. Instead, relieved of the shareholder pressure to minimize costs and maximize revenue, the nonprofit version of the university might offer more grant aid to low-income students, reducing their need to borrow and lowering their loan defaults. They might spend more on instruction, leading to better student outcomes and stronger interest from a wider range of students, not just those lured in by the promise of federal aid. Enrollment might grow at a more responsible pace.
A Business Model for Serving Society
Last year, I wrote a paper that explained that public and other nonprofit colleges are less inclined toward reckless, predatory behavior because they replace shareholder control—too obsessed with only one goal, their own financial stake in the institution—with uncompensated trustees who can balance various goals. In a response that Klor de Alva framed as a counterpoint, he actually managed to prove the opposite, by acknowledging “questionable practices” at for-profits, and blaming “short-term investor interests” that generated “pressure to make poor choices.” His solution? A business model “organized to serve society” with a focus on “long-term goals that reflect a positive social impact.” In other words, he is calling for precisely what nonprofit and public institutions are designed to be.
There will always be debates about whether particular nonprofit universities are doing what’s best for society. The benefit of the nonprofit business model (yes, it is a business) is that the boards—serving as trustees rather than as owners concerned about stock prices and dividends—can, without a conflict of interest, consider the question of the college’s societal role. So, when Jorge Klor de Alva complains about Harvard’s and Yale’s endowments, keep in mind the reason University of Phoenix doesn’t have one: the owners, his friends, took the money for themselves.