higher education

A Rich University's Mad Dash to Get Richer

Sam Pizzigati — Sun, 01 Nov 2009 09:38:32 -0800

Investing recklessness at Harvard is making 'the best and the brightest' look awfully silly — almost as silly as a nation that lets staggering quantities of wealth continue to concentrate.

Wild chases after vast riches, last fall’s global meltdown reminded the world, can destroy economies — and corrupt entire societies. Great universities, in theory at least, can serve to slow these chases. They offer a refuge from marketplace passions, a place where sober scholars can reflect thoughtfully on the damage frenzied speculation can do and how that damage can be undone.

America’s greatest university — Harvard — hasn’t enabled much of that reflection lately. The reason? Harvard has been too busy chasing riches.

Now that chasing has left Harvard, the world’s wealthiest university, enveloped in an embarrassing financial debacle that has cost hundreds of university employees their jobs, frozen the salaries of many others, and stopped campus development projects dead in their tracks.

“Harvard's investment managers played some of the same reckless games as the big banks,” says historian David Kaiser, a Harvard alumnus. “The difference is that Harvard isn’t eligible for a bailout.”

Kaiser and other Harvard grads from the class of 1969 have been critiquing Harvard investment practices since they learned six years ago that officials in the Harvard Management Co., the university office that invests Harvard’s endowment, were pulling in enormous Wall Street-style bonuses. In 2002, just six of these investment managers pocketed a combined $107.5 million.

To go about grabbing those millions, Harvard’s financial managers were investing university endowment dollars in exotic “derivatives” that promised high, double-digit annual returns. The higher the returns, the higher the rewards for the investment managers — and the greater the incentive to keep plowing endowment dollars into even shakier investments.

But the risk taking went beyond endowment dollars. Harvard actually began investing general operating funds in the same risky investments, in the process, observed the Boston Globe, violating “one of the most basic rules of corporate or family finance: Don’t gamble with the money you need to pay the daily bills.”

And what were Harvard’s grown-ups doing while all this was happening? They were looking the other way. In May 2002, a staffer at Harvard Management wrote then Harvard president Lawrence Summers a confidential letter to warn about the investing recklessness she saw all around her. Nothing changed. Two months later, she was fired for making “baseless allegations.”

Summers, a controversial figure at the university in his own right, would leave Harvard in 2006. He resurfaced, after last November, as the director of the new Obama administration's National Economic Council.

By that time, the global financial industry had collapsed. In the wake of that tumble, Harvard’s celebrated endowment — worth $36.9 billion at its peak two years ago — lost nearly $11 billion in just a year. The Harvard general operating fund lost another $1.8 billion.

More bad news came earlier this month. Harvard officials revealed they had shelled out just under $500 million, in the university’s last fiscal year, to a host of big Wall Street banks to cover a “failed bet that interest rates would rise.”

University officials, notes the Class of 1969 Ad Hoc Committee on Harvard’s Endowment, have responded to some alumni complaints. The university, for instance, significantly increased student financial aid several years ago. But Harvard, alumni critics charge, is still refusing to “acknowledge any fundamental mistakes.”

These alumni now want the university to cap investment manager earnings.

“We continue to believe,” the Class of 1969 committee related in a recent letter to Harvard president Drew Faust, “that no Harvard employee should earn more annually than the president of the university and that multi-million dollar bonuses are inappropriate in nonprofit institutions.”

The alumni critics also want Harvard to report how many university dollars have gone to the outside investment firms that have, in recent years, managed as much as two-thirds of the university’s endowment investing.

Outside investment managers typically receive a flat 2 percent annual fee on the billions they invest and a 20 percent cut of the profits they make buying and selling invested assets.

Absolutely “no one,” adds the alumni letter to Harvard’s president, “should be compensated on such an enormous scale for managing nonprofit funds.”

But the angry alumni are seeking an even broader change. They want Harvard to start acting as a great university should.

The reckless investment moves that have cost the university so dearly, the alumni note, essentially mirror “the practices that in the same period brought down most of our major financial institutions, with enormous short-, medium and long-term costs to the United States and the entire world economy.”

“Surely Harvard,” they note, “can find the intellectual, moral, and financial capital to face this fact squarely and begin a public discussion of the weaknesses of our financial practices, not only for the sake of the institution, but to help the society which it serves.”

In the end, the Harvard financial fiasco helps make clear, financial maneuvers that pump up endowment jackpots — and rewards for endowment investment managers — don’t contribute to academic greatness. They undermine it.

Indeed, the staggering concentration of wealth in the Harvard endowment — from $4.7 billion in 1990 to $36.9 billion in 2007 — has taken place over years that have witnessed the overall deterioration of American higher education.

The public colleges and universities that deliver most of that education have been steadily cutting academic services and raising tuition beyond the means of average working families, in no small part because tax cuts for America’s wealthy — the same wealthy who donate so prodigiously to their elite alma maters — have helped drive down state budget support for higher education.

The total average annual cost of attending a public four-year college, the College Board reported earlier this month, has now hit $15,213.

“The level of debt we’re asking people to undertake,” agonizes Patrick Callan of the National Center for Public Policy and Higher Education, “is unsustainable.”

The lesson in all this? In both academe and society at large, as the most learned Sir Francis Bacon pointed out over four centuries ago, wealth — like manure — only does good when you spread it around.

Sam Pizzigati edits Too Much, the online weekly on excess and inequality.

Higher Ed Slashed, Left Dripping in Red

Armand Biroonak — Sat, 31 Oct 2009 08:51:12 -0700

The Chronicle of Higher Education released a survey of chief financial officers at four-year universities across the country and it is no treat; their outlook for this budget year (FY 2010) was gloomy, by next year? Even scarier. According to universities surveyed, 62% of officials expect the worst of financial pressures are still to come, with higher education budgets dripping in red ink, bitten by the recession looking forward.

This is despite the fact that universities have already slashed budgets, passed hair-raising tuition hikes, and in some cases chopped enrollment. At least 34 states already took the ax to public colleges and universities, reducing faculty and staff, coupled with steep tuition increases for the upcoming year.

And fiscal year 2011 looks equally sour, a total of 39 states expect to face or have already addressed shortfalls, amounting to an estimated $80 billion or 14 percent of state budgets. Although no real specifics, these fiscal challenges will surely trickle down to effect higher education spending even further.

To make up at least some of the difference, universities are spooking students with truly frightening tuition rates. On average the past year, tuition rose by nearly 10 percent for public four-year institutions. This comes after students were tormented with tuition increases of over 60 percent adjusted for inflation since 2000.

Meanwhile, enrollment and aid cuts are furthering the pain for students in a number of states. The California State University system plans to cut enrollment by 40,000 students. In Illinois, about 140,000 undergraduates (a quarter of all Illinois college students) will likely lose financial aid from the state. Ohio cut its top grant program in half, by $224 million.

And it is not just universities, weak state budgets are haunting community colleges equally. The majority of community college administrators predict that they will have mid-year budget cuts next year. While students can expect tuition to rise more than double the rate of inflation, as 46 states predict tuition increases at their community colleges.

And community colleges are feeling the effects of this recession in another way, as throngs of returning workers seek skills or job retraining. But the timing could not be worse. By a margin of 3:1 states report stress on their institutions to accommodate growing enrollment amid classroom cuts. In fact, in many cases, community colleges are so overextended that they now offer classes well into the graveyard shift to meet demand.

So what can be done to alleviate the skeletal state of higher education? A good start will be if the Senate passes the Student Aid and Fiscal Responsibility Act that expands Pell Grants and invests in community colleges. But that will not stop the bleeding alone. A second stimulus to help bridge state budget gaps for the upcoming year is critical until the economy shows signs of life again. While also, greater student aid and the creation of a ‘micro-Pell grant’ for workers to help pay for non-degree training can improve accessibility and affordability. While looking outward, we must start considering a way to better finance our education system, so it no longer resembles a sugar high and low.

Back to School, Students Turn to Loans for Help

Armand Biroonak — Fri, 04 Sep 2009 13:54:41 -0700

Students are borrowing more than ever to pay for college. As reported in the Wall Street Journal, for the 2008-09 academic year, students borrowed nearly 25 percent more than the previous year to pay for school, borrowing a total of over $75 billion. But as the economy worsens and states continue to slash higher education spending, this upcoming year will certainly be worse.

Why?

To begin with, the bad economy translates to fewer jobs available for students. Job openings that students traditionally apply for either are filled by more experienced workers or have vanished completely. This has helped push the current unemployment rate for 16 to 24 year olds over 18 percent. And considering how nearly half of full-time students and over 80 percent of part-time college students rely on jobs while in school –the dismal job market thus pressures them to borrow more. I of course neglect the impact of parents losing jobs, but its effect is easy to predict.

A second, more important reason is cash strapped states are cutting student aid and hiking tuition. Already 32 states have announced such measures, leaving students to foot the bill. In Michigan, the state has frozen merit awards to nearly 97,000 students. In Illinois, 145,000 need-based students have been told that their aid will be cut in half. And to highlight this trend once more, Pennsylvania is slashing aid for over 170,000 of its students.

These cuts will be extremely painful when considering in prior years nearly two-thirds of students nationwide received some form of financial aid.

Meanwhile, with states’ belt-tightening they are jacking up tuition. Tuition hikes of course are sadly, nothing new –the average tuition at a public four-year university has already increased 29% between 2000 and 2007. But by next year, states warn they will raise tuition again, and quite dramatically. For example, Cal State, California’s largest post-secondary system, announced a 20 percent increase for 2010 and Florida’s public universities tell of a 15 percent increase.

These radical actions are sure to leave students and parents in a vulnerable position. The unpredictability of next semester's costs and dwindling aid packages lead to a scramble for money by individuals, and as we can see by the latest data, a turn to borrowing.

Moreover, with state budgets appearing increasingly gloomy for 2010, college affordability will only grow worse. Already, the Obama administration has shown a commitment to higher education, with a historic increase in Pell Grants. Now is the time though for further action to be taken. Obama must make clear that states can no longer privatize the education system by slashing aid and hiking tuition, resulting in more students taking on loans. The solution is for the administration to incentivize and reward ‘good state’ behavior (that avoids harmful cost cutting) by offering stop-gap measures to plug the hole in states’ budgets. But Obama must act quickly as state finances are disappearing by the day.

America's Student Debt Now!

Armand Biroonak — Thu, 11 Jun 2009 13:42:29 -0700

Attending the “Degrees of College Debt” panel at the America’s Future Now! conference last week, it was astonishing to hear dozens of graduates describe the mountains of debt they are climbing; $10,000! $50,000! $120,000 of debt! attendees shouted, when asked by the panel how much debt they had. The experiences shared in the session are not unusual. They are faced by graduates across America. Sadly, a diploma has become a financial albatross, rather than a ticket to a better financial future.

Certainly, young people today are facing an unprecedented challenge to pay for schooling — a result of skyrocketing tuition and the boom in private lending. As Tamara Draut of Demos noted, “graduates are entering today’s battered job market with an average student loan debt of close to $20,000 — but that’s only an average.” One-fourth of all students borrow $25,000 or more.

The nation’s “student debt clock” is over $580 billion and ticks higher as I write. Those billions in debt threaten the economic mobility and security of an entire generation. Carmen Berkley of the U.S. Students Association described jarringly how one in five students dropout of college — never completing a degree and leaving with the debt accumulated while in school. Add to that, the estimated 1.7 to 3.2 million qualified students that will skip college over the next decade because of the cost.

Delinquency on repayments is on the rise too, with graduates defaulting at a rate not seen in more than a decade — only accelerated by recession. That’s no shock however, when most private student loans carry a crushing interest rate of 10 to 14 percent. As Rev. Jesse Jackson of the Rainbow Push Coalition explained, attending college today is “guaranteed debt without a guaranteed job.”

Beyond jeopardizing a graduate’s future, college affordability threatens America's future. American global competitiveness has dropped. Older generations of Americans ranked number one in the world in college achievement, today the U.S. ranks nearly last among OECD countries.

Obama Administration Providing Some Relief

Robert Shireman of the U.S. Department of Education explained the steps moving forward by the Obama administration to address college affordability:

Income-based repayment – In effect July 1, 2009, this program provides a new payment option for federal student loan borrowers with repayment based on income and family size, with debt forgiveness after 25 years of payment.
Pell grant increases – Obama’s FY 2010 budget increases the Pell grant maximum to $5500 this fall; thereafter, Pell will be indexed to the consumer price index plus 1 percent to adjust for inflation.
Eliminating bank subsides – By ending the Federal Family Education Loan program that excessively subsidizes banks, in favor of the government's Direct Loan program, the move will save $47 billion over five years. The Obama budget then redirects the savings to students.
“American Opportunity” tax credit - Partially refundable, it provides middle and working class families additional help for postsecondary education costs with a maximum credit of $2,500 a year.

Demand MORE!

Recent steps taken by the Obama administration should be applauded, however, progressives must demand and push for more: restoring the Pell grant to cover the majority of tuition and fees like it has in the past; reinvestment in higher education — including community colleges — to cap tuition rates and improve quality; lastly, lower interest rates and greater bankruptcy protections to ensure higher education is no longer a huge financial risk.

Additional Resources:

.A good guide to the Income-Based Repayment program by the Project on Student Debt.

Action alerts and info: Campaign for College Affordability

Campaign for America’s Future and U.S. Public Interest Research Group, “Obama's Budget: Supporting Students, Not Banks" report.

The Obama Budget: A Stick In The Eye For Banks

Eric Lotke — Thu, 26 Mar 2009 03:00:00 -0700

With all the fuss over Wall Street bailouts and AIG bonuses, one banking breakthrough is going unnoticed. Obama's proposed budget completely eliminates an unnecessary, obsolete bank subsidy: College student loans – where the subsidy goes to the bank, not the student. It’s a stick in the eye of the banking industry, and the banks aren’t taking it lightly.

Today we publish a new report that shows how the loss for the banks is a gain for the students. We present the newest data on how college costs continue to rise (5% last year, compared to 3% inflation) even as wages stagnate and savings tank. We talk about students priced out of college (1.7 to 3.2 million over ten years) and graduating with crippling levels of debt. We talk about the lost value of the Pell Grant (half the buying power of thirty years ago) and the Obama plan to restore its value.

We need to hear all of that – again and again. But the best part is about the banks. The report describes the history of bank involvement in student loans, and government management of the banks. It explains where Obama’s move comes from and how it puts us on the right side of history.

Uncle Sam gets it started

When the program began, students looked like poor financial risks. Young in age, with little credit history and few personal assets, students were not attractive candidates for private-sector lending – certainly not for the large sums needed to finance a college education.

In 1966, the federal government helped solve the problem by creating incentives for banks to lend. The Federal Family Education Loan Program (FFELP) guarantees lenders a higher interest rate than the base market rate, ensuring a healthy profit on monies loaned. On top of that, Uncle Sam guaranteed payment of principle and interest in case of default. For the banks, it was a win-win proposition: higher interest rates with no real risk. The Student Loan Marketing Association (Sallie Mae) was created to manage the money, and the program helped millions of Americans reach their college dreams.

Now the market is mature. Well-educated, high-earning college graduates have proven to be excellent credit risks. Student lending has grown into a highly profitable industry. Dozens of new banks and lending institutions have entered the field. Sallie Mae herself has spun off and privatized into SLM Corporation, whose stock can be bought and sold on the New York Stock Exchange.

Clintonian Reinvention

While “reinventing government” in the 1990s, President Bill Clinton reexamined whether subsidies were still needed to encourage banks to lend to students. Indeed, Clinton questioned whether the bank middleman was necessary at all. In 1993, the Department of Education created a Federal Direct Loan (FDL) program that loaned money to students at low rates available only to the U.S. Treasury. Such loans reduced payments for students and did not increase the government’s risk because the old system already used the government to guarantee defaults.

Students flocked to the new program. By 1997, direct loans had grown to 33% of student borrowing, nearly $11 billion.

Experience showed that direct lending works. The administrative costs are lower, the design is simpler and it eliminates subsidies to the private loan industry. The General Accounting Office found that the Direct Loan program cost the federal government $1.70 for every $100 of loans, compared to $9.20 per $100 of loans through the FFEL program, with bank intermediaries. In other words, taxpayers save $7.50 for every $100 loaned. Thus, the direct loan program wasn’t just better for students; it was better for taxpayers too. Clinton’s question of whether the government should administer the loans directly had been answered: Yes.

The Bush Hiatus

But President Bush didn’t like the direct lending program. His loyalty was to the banks. He staffed the Department of Education with bankers and bank sympathizers, including the former CEO of the lenders’ trade association, who had sued to limit the direct lending program. He didn’t eliminate the direct lending program, but it withered from malnutrition.

History Resumes

Now Barack Obama is starting where Clinton left off. He is eliminating the FFEL program that subsidizes banks to lend to students. He is relying entirely on the FDL program that lends money directly to students from the U.S. treasury. It has lower interest rates and no middleman. The 2010 budget projects a savings of $5 billion, and intends to redirect those funds towards students.

To estimate the benefit that such redirection could have for students, we estimated the impact on the Pell Grant program, the nation’s preeminent means of providing need-based financial assistance. In 2007, 5.4 million American students nationwide received a Pell grant.

Our new report estimates how many students in each state would benefit if the full $5 billion taken from the banks were redirected to the Pell Grant program. We estimate how the average Pell Grant would grow for each student ($121 nationally) and how many new students could enroll (260,000). In short, we show the direct benefit to Pell recipients if this budget passes. The key is to move the money from banks to students.

• National increase in Pell grant: $121
• National new Pell Grant recipients: 260,000.

Now a $121 increase in grant aid doesn't solve all the problems -- but it's much better than a stick in the eye. It also shows how our government can help when it takes our side. Read the report to learn the full benefit in every state.

Remembering "The Father of Pell Grants"

Alex Carter — Tue, 06 Jan 2009 12:58:59 -0800

On January 1, 2009, former Senator Claiborne Pell (D-RI) died at the age of 90. Known as the “father of Pell Grants,” Senator Pell was instrumental in helping low and moderate income students attend college, with the creation of Basic Educational Opportunity Grants in 1972, which were renamed “Pell Grants” in 1980.

The Federal Pell Grant Program provides need-based grants to low-income undergraduate and certain post-baccalaureate students to promote access to post-secondary education. In 2006-07, the Pell Grant was provided to over 5.1 million needy students and is estimated to increase to 5.4 million needy students in 2007-08. Since its creation, the Pell Grant Program is credited with helping over 54 million students attend college.

But Pell's legacy is endangered by today's economic realities. The creation of the Pell Grant was key to college affordability. During its early years, the Pell Grant covered 72% of the total cost of a public year-year institution. Today it only covers about 34%. Strides are being made, though. In 2007, the College Cost Reduction and Access Act passed, mandating Pell Grant Increases through 2017. President-Elect Barack Obama has vowed expand Pell Grants for low-income students and ensure that Pell Grants keep pace with the rising cost of college.

As we remember Senator Pell, and the strides he made to make college more affordable and accessible to low and moderate income students and families, let us also honor him by making sure that the Pell Grant will continue to make higher education accessible to all.

Senator Pell's legacy was and is a great investment in America’s future, and one that shouldn't be forgotten as we work towards economic recovery.

Gender Wage Gap Begins After Higher Education

Armand Biroonak — Wed, 08 Oct 2008 21:00:00 -0700

A longitudinal study of male and female professionals found that the gender pay gap begins immediately after college, when women take first jobs that pay only 80 percent as much as men’s first jobs do, and continues throughout women’s lives--even though women earn higher college GPAs, are more likely to complete graduate work or advanced training, and spend about as much time at work as men do.

Making Sense of the Rising Cost of College

Alex Carter — Thu, 29 May 2008 09:45:39 -0700

As college students celebrate graduation this May, their joy is combined with the harsh reality they face post-graduation--many of these students will graduate with unmanageable levels of loan debt that they can not afford basic necessities. Conservatives will tell you they are dedicated to expanding educational opportunities and in the same breath let the banking and student loan industry know, “I have all of you in my two trusted hands.”

The basics are clear:

- When Bush took office in January 2001, the cost of tuition at a public four year institution was $3,501. The cost of tuition in 2006-07 was $5,685 —an increase of 39%; even at the same time median household income has decreased 2% .
- The social safety nets are failing under Bush’s watch: over 400,000 qualified high school graduates can not attend college each year because of its burdensome cost, the Pell Grant only covers 33% of a student’s annual college costs (in 1975, the Pell Grant covered 84%) , and he stripped over $12 billion from the federal student loan program to fund his tax cuts for the wealthy.

The connections are clear as well; President Bush and conservatives did everything to fatten the pockets of the bank and loan industry while ignoring the plight of qualified high school graduates obtaining a college education. Conservatives did nothing to help promote college affordability and accessibility for years. Pell Grants remained at the same level, affordability was not addressed, and state-tuition levels continued to skyrocket. Bush’s yearly budgets contained massive cuts in higher education funding and favorable policies to the $85 billion private student loan industry.

However, Bush and conservatives made sure the bank and loan industry was taken care of. The private student loan industry’s cozy relationship with Republicans and their “Raid on Student Aid” was of no coincidence. During the tenure of former Chairman of the Committee on Education and Workforce Rep. Job Boehner (R-OH) told the Consumer Bankers Association,

“Relax. Stay calm…at the end of the day, I believe you’ll be at least satisfied, or even perhaps happy….
Know that I have all of you in my two trusted hands.”

It just so happened, the student loan industry contributed over $290,000 to Boehner’s PAC and the private student loan goliath Sallie Mae was the number one contributor to his campaign in the 2003-04 election cycle.

We must continue to connect the dots; Bush and conservatives in Congress do not care about college accessibility and affordability; however, they place the banking and loan industry in their “two trusted hands.”

For more about the college aid issue, click here (www.ourfuture.org/makingsense2008)

House panel OKs higher limits for student loans

Alex Carter — Fri, 11 Apr 2008 07:58:21 -0700

Students may increase their borrowing for college by $2,000 a year and private lenders could sell the debt to the government for a profit under legislation approved by a House panel yesterday. The measure, passed by the House Education and Labor Committee on a voice vote, is intended to ensure that turmoil in the credit markets doesn't prevent students from financing their educations, sponsors said.

Higher Education Employees Storm Statehouse

Alex Carter — Fri, 11 Apr 2008 07:53:38 -0700

Higher education employees from throughout Illinois came to Springfield Wednesday to urge legislators to reverse policies of neglect and, instead, invest in public colleges and universities.