HIGHER EDUCATION REFORM: For University Endowments, There’s No Time like the Present.

During his presidential campaign, Donald Trump argued that requiring wealthy universities to spend more of their endowment funds on tuition aid would reduce students’ financial burdens.

Whether implementing that idea—which has floated around Congress since 2008—would lower college costs on the whole is doubtful. And, in my view, the federal government is already meddling too much in university policies.

Nevertheless, Trump raised an important issue when he discussed endowment spending at a campaign stop in September. Universities, by hoarding their donations, may not be serving the best interests of students and benefactors.

To unpack this issue, I would like to ask a fundamental question: why do universities have endowments, anyway?

A few years ago Vance Fried, an Oklahoma State University professor of entrepreneurship, addressed that question and found few satisfactory answers.

He concluded that there are just two legitimate reasons for a university endowment—a school needs a “rainy day” fund (within reason; not a fund worth billions of dollars), and sometimes donors want their gifts to produce income in perpetuity.

But otherwise an endowment, which spends only a small percentage of its income each year, accomplishes less for a university’s mission than would making investments in education today—through scholarships, tuition reductions, research, or hiring professors. Currently, many endowments hold back millions—and at some elite schools, billions—of dollars for the future. . . .

President-elect Trump and analysts such as Fried are not alone in their belief that endowments should provide more immediate payoffs. Earlier this year, Senator Orrin Hatch and U.S. Representatives Kevin Brady and Peter J. Roskam, citing the apparent disconnect between schools’ having large endowments and tuition increases “far in excess of inflation,” asked 56 well-off colleges for details about their endowments. The responses, while often elaborate, revealed only vague justifications for them.

There are a lot of potential reforms here. Cap university presidents’ pay at the level of a Supreme Court Justice, cap tuition at schools receiving federal aid, require schools to spend at least 5% of their endowment per year on student assistance, limit the ratio of administrators to full-time teaching faculty: The possibilities are mind-boggling.