The business model of modern universities

I’m seeing people attacking universities, particularly private universities, for accumulating large endowments while allowing their graduates to accrue education loans that saddle them with debt for years or decades and cannot normally be discharged by bankruptcy. Why aren’t these universities the lenders?

Setting aside the question of whether it is in the national interest to assure that all citizens reach their maximum potential, universities *already* subsidize tuition. Costs are heavily discounted at most or all private universities, except for foreign students.*

Beyond that, endowments subsidize other things besides tuition. When people talk about sending their child to a “good school,” likely as not, they’re referring to the reputation as a research university. Most undergrads will never do research, and the most accomplished research-active faculty are excused from teaching undergrad courses. It’s all about branding. 

Research is a cost center for universities. But the reputational value of being a research university is a positive externality that helps recruit top students and top faculty. The cost is subsidized by three mechanisms: tuition, philanthropy and licensing*. 

Finally, it is the board of trustees who dictate the spend on the endowment. These are almost always businessmen, not academics. The usual policy is to allow 4-5% of earnings to be spent without touching the corpus of the endowment.

It's certainly fashionable these days to make academia the whipping boy of higher education economics. And I’m certainly not gonna defend private universities—I attended state schools as a student, although I was a faculty for 37 years at a Jesuit Catholic university. But those bleating about how universities are fattening themselves on federal and private education loans need to explain to the businessmen who lead those universities why they should change the business model.

*full disclosure: my daughter got $40K in scholarships 15 years ago as an out-of-state student because she was a National Merit Scholar finalist—they use the number of such students in their recruiting materials and pay for them.

**at universities with medical schools, a fourth mechanism is the margin on the practice.