Donors are Fueling, but Can Slow, the Student “Debt Spiral”

Inside Philanthropy
Jan 21, 2020

As the student debt crisis approaches $1.6 trillion, tuition increases continue to outpace inflation and healthcare costs. The perfect storm of drivers includes misdirected federal student financial aid policies, runaway administrative expenses, an inherently costly residential model, ballooning retiree benefits and pension commitments, and a drop in state funding for public universities.

But another huge cost driver—and one that donors, knowingly or unknowingly, help to perpetuate—is administrators’ infatuation with capital projects and dubious amenities. The main reason for the sharp rise in tuition, according to James V. Koch, author of “The Impoverishment of the American College Student” and president emeritus at Old Dominion University, is that officials haven’t been able to say no to expensive stuff that they and the faculty want. The same, in many cases, can be said for donors.

None of this is news to Michael Poliakoff, president of the Washington, D.C.-based American Council of Trustees and Alumni (ACTA), whose mission is “to support liberal arts education, uphold high academic standards, safeguard the free exchange of ideas on campus, and ensure that the next generation receives a philosophically rich, high-quality college education at an affordable price.”

I looked at ACTA three years ago, after it expanded its Fund for Academic Renewal (FAR). The fund provides higher ed donors with a vehicle to make “meaningful donations that will have a beneficial impact on U.S. colleges and universities.” There is demand for what the council is offering: While donors gave $46.73 billion to U.S. universities during the 2017–2018 academic year, only 42 percent of wealthy donors “believe their giving is having the impact they intended,” according to U.S. Trust.

Poliakoff has been sounding the alarm around the “unconscionable” cost of higher education for his entire professional career. I had the opportunity to speak with him about how capital projects contribute to rising tuition, how affluent mega-donors are supplanting “middle of the pyramid” alumni, and ways development officers can nudge alumni toward initiatives that do not perpetuate what he calls the “debt spiral.”

“Growing Relevance”

ACTA was established in 1995 as the National Alumni Forum. Its founders included Lynne V. Cheney, former Colorado Governor Richard Lamm, Nobel Laureate Saul Bellow, and Joe Lieberman. In 1996, the organization changed its name to the American Council of Trustees and Alumni.

Poliakoff joined the American Council of Trustees and Alumni in March 2010 as the vice president of policy and became ACTA’s third president on July 1, 2016. He previously served as vice president for academic affairs and research at the University of Colorado and held senior roles at the National Endowment for the Humanities, the National Council on Teacher Quality, the American Academy for Liberal Education, and the Pennsylvania Department of Education.

The ACTA is an associate member of the conservative State Policy Network, which the liberal Center for Media and Democracy (CMD) has argued is pushing the agenda of right-wing groups with funding from Koch brothers-affiliated organizations. (The CMD has received funds from an organization linked to George Soros.) The ACTA has received funding from the Charles G. Koch Charitable Foundation, the Bradley Foundation and Donors Capital Fund.

Jack Stripling, writing in the Chronicle of Higher Education in 2016, called the ACTA a “polarizing force” that has “achieved growing relevance in core debates.” Much of the polarization stems from the council’s promotion of free expression on campus. Writing in Inside Higher Ed, Steven Bahls argued that the council’s report, “Building a Culture of Free Expression on the American College Campus: Challenges and Solutions,” “cheapens the argument for freedom of expression by appealing to politically fueled stereotypes of faculty members and administrators.”

But the College Fix’s Greg Piper argues that criticism of the council is also rooted in the fact that college professionals “don’t want anyone telling them how to spend money, which is often provided by the ‘deep-pocketed donors’ who are chosen as trustees.” To that end, we’ll focus on the council’s work in tackling higher ed costs and questioning donor-supported capital projects that deepen the student debt crisis.

Boosting Cost Transparency

The council works to reduce higher ed costs by providing tools, research and reports aimed at bringing greater transparency to how colleges spend money. In theory, colleges should be doing this themselves, but as we’ve seen, it’s always better to “trust but verify.” For instance, Matt Taibbi reported that universities frequently accumulate hidden reserve funds distinct from endowment funds. (The University of Virginia went so far as to hide its slush fund from the prying eyes of state legislators—while simultaneously boosting tuition.)

A 2017 report courtesy of ACTA’s Institute for Effective Governance titled “Bold Leadership, Real Reform 2.0: Improving Efficiency, Cutting Costs, and Expanding College Opportunity” provides examples boards encouraging the adoption of innovative practices, including online consortia, curricular consolidation and institutional analytics.

The council’s “How Colleges Spend Money” tool looks at what Poliakoff calls “the unconscionable burgeoning of administrative expenses.” The tool pulls data from the U.S. Department of Education’s Integrated Postsecondary Education Data System to calculate a university’s “administrative cost per student,” defined as “expenditures per student for day-to-day executive operations,” not including student services or academic management.

And the council’s “10 Questions Trustees Should Ask” includes prompts about administrative salaries, building utilization, and faculty teaching loads. Rick Trachok, who chairs the Nevada System of Higher Education’s Board of Regents, said the questions helped the system save more than $475,000 a year through layoffs and shared services.

Questioning Capital Projects and Amenities

At this point, it’s important to underscore the limited influence of donors across certain dimensions of the cost equation. Alumni are, relatively speaking, powerless to alter the misaligned federal student loan system or compel legislatures to ramp up funding for public universities. (Acknowledging “there’s no magic bullet here,” Poliakoff was sympathetic to the idea that universities should have more “skin in the game” by holding them partially responsible for student defaults.)

Moreover, operational concerns like cost transparency, reducing administrative overhead, and squeezing out operational efficiencies fall within the purview of trustees. Donors concerned about student debt typically steer clear of tackling these cost drivers and instead cut checks for scholarships and financial aid, an approach that Poliakoff wholeheartedly endorses. For example, he called Home Depot co-founder Kenneth Langone’s $100 million in support to cover tuition for New York University’s School of Medicine students “visionary.”

But donors can only move the affordability needle so much as long as tuition continues to rise. Where else can alumni donors make a meaningful difference? The answer is by dialing back their support for capital projects and amenities that don’t, to quote Poliakoff, “increase the cognitive skills” of students. Think more Shakespeare and less “lazy rivers.”

Capital projects and gaudy amenities are problematic for two reasons. The first, naturally, is cost. An institution can expect to pay twice the initial cost of a new building to maintain it. It’s not uncommon for donors to pay for the debt a school has accrued to pay for the construction of a building.

The second reason is that new buildings generate a dismal return on investment. In a 2019 Forbes piece titled “Why The Campus Building Boom May Turn Out To Be A Bust,” Poliakoff argued that classrooms, museums and labs are used, at best, only 50 percent of the time. Moreover, trustees, Poliakoff told me, often “don't have good data about classroom utilization before they approve a new building.” In many cases, existing buildings can do the job just fine.

“There is a Euphoria That Sets In”

New capital projects may become even harder to justify going forward. According to a May report by the National Student Clearinghouse Research Center, college enrollment in the U.S. decreased for the eighth consecutive year. Of course, enrollment figures vary by university, but in many cases, Poliakoff argues, trustees sign off on new buildings without a clear picture of future demand. To paraphrase an old saying: What if they built a STEM classroom and nobody came?

“Is the need for more space real,” Poliakoff wrote, “or are we experiencing an ‘academic building boom’ as a result of what Alan Greenspan would call ‘irrational exuberance’ on the part of too many giddy or inattentive college presidents, chancellors, trustees and donors? As irrational exuberance led to the stock market bubble bursting in 2001, a disaster just as painful could be in store for our nation’s colleges and universities.”

The Atlantic’s Jon Marcus alluded to this dynamic a few years ago when schools were racking up debt to fund new buildings to attract new students while simultaneously facing a $30 billion shortfall for “deferred maintenance” to existing deteriorating buildings. “All of this complicates even the most innovative attempts to reduce the price of college,” Marcus wrote.

To Marcus’ point, fundraisers and donors—particularly those at small colleges facing lagging enrollment—can be blinded by the idea that “if only we build this elaborate new building, we’ll be OK,” Poliakoff told me. “There is a euphoria that sets in with leadership and donors, without recognizing maintenance costs and the reality that the fees will persist for decades and tax future students.”

Alumni Double Down on Capital Projects

Recent data from the Council for Advancement and Support Education (CASE) underscores the startling extent of this euphoria. The CASE study found that American universities raised over $19 billion for capital purposes in 2018, an 8.6 percent increase over the previous year. “Much of the growth in alumni giving,” the report concluded, “has been in the form of capital-purpose gifts.”

Moreover, while universities raised $27.4 billion for “current operations,” alumni donors preferred gifts earmarked for “academic divisions” (25.3 percent) and “athletics” (24 percent) over “student financial aid” (16.7 percent). CASE’s findings point to a fundraising landscape in which alumni are ramping up support for projects that drive up tuition while failing to help students paying for rising tuition. Given this dynamic, it’s easy to see why Michael Bloomberg, upon announcing his $1.8 billion gift to Johns Hopkins in 2018, said, “We need more graduates to direct their alumni giving to financial aid.”

Unfortunately, old habits die hard. Administrators instinctively turn to capital projects because, according to conventional wisdom, they help to attract a shrinking pool of high-quality applicants. And as we’ve seen, alumni have no qualms reaching for their checkbooks to support a new engineering building, a glittering football stadium, or expensive residential dorms to replace “ugly” towers that look like “they were built by the Soviet Union.”

If the development team makes a compelling case that the university needs a new data science center to equip students with critical next-generation skills, loyal and trusting alumni will sign on without fully understanding the long-term financial consequences. Poliakoff readily acknowledges this genuine desire to help—and donors’ “starry-eyed impulse” to see their name on a building. “If it’s an important building for teaching and research, that can be good,” he said. But even then, donors should ask their college’s CFO for a building utilization report and “fulfill their fiduciary duty by carefully scrutinizing any proposal for capital projects.”

The Rise of the Mega-Donors

Other capital projects can be an even harder sell, like Clemson University’s $55 million football complex. “One has to ask if this is the best thing to do for the people of South Carolina,” Poliakoff said. He cited another example out of Berkeley, where UC’s state-of-the-art football stadium, completed in 2012, is $314 million in the hole. Administrators are considering having the campus assume the debt on the seismic portion of the project, prompting faculty to criticize the proposal as it comes during a period of cost-cutting.

It would be somewhat comforting if developments out of South Carolina and Northern California were anomalies across the larger higher ed landscape. But consider the 2018 CASE data, which found that alumni donors preferred gifts earmarked for “athletics” over “student financial aid.”

Some donors with a penchant for athletics understand why critics may object to their funding priorities. Roughly six months after the University of Kansas bumped up tuition by 2.5 percent, billionaire David Booth gave $50 million to kickstart a $350 million plan to, among other things, overhaul the school’s football stadium. “I'm familiar with the argument as to why you might not want to have a serious athletic program,” Booth said. “I get the arguments. I don’t agree with them. I’m on the other side.”

Fair enough, but that’s of little consequence to middle-class Kansas students facing a tuition increase—and that’s the crux of the problem. One of the big trends across the higher ed fundraising landscape is the decline of “middle of the pyramid” giving from alumni who are plagued by stagnant wages and rising healthcare and housing costs. “We’re seeing the same thing,” Poliakoff told me, noting that the typical alumnus’ “interest in higher ed philanthropy is eroding.” Expect this trend to continue as a growing number of debt-saddled graduates enter the workforce only to find they lack the disposable income to donate to their alma maters.

Nature abhors a fundraising vacuum, however, and the David Booths of the world have happily stepped in to keep the wheels turning. As a result, mega-donor priorities, however quixotic, fiscally irresponsible, or marginally impactful, jump to the front of the queue, in some cases to the detriment of the average student.

Poliakoff told me that a disproportionate reliance on mega-donors coupled with a growing number of dissatisfied “middle of the pyramid” alumni donors can adversely affect a university’s reputation. I found this a bit counter-intuitive, at first. After all, if a university hits its fundraising goal, what’s it matter if mega-donors carry a brunt of the load? The answer has to do with the all-important U.S. News and World Report rankings, which factor in a variety of metrics, including “alumni support.” If a growing body of debt-riddled alumni, gripped by what Poliakoff calls “buyer’s remorse,” ultimately vote with their pocketbooks, the university’s rankings could suffer.

Avoiding the Donor-Driven “Debt Spiral”

Poliakoff argues that development teams can reset the agenda and lead alumni toward initiatives that avoid the “debt spiral”—one obvious example being efforts to provide more scholarships and student aid. “Right now, a building may not be the best gift,” Poliakoff said. “It’s the gift that keeps on taking. What this generation of students desperately needs is financial support. I know donors who give named scholarship programs and they feel very good about that.”

This sounds like a no-brainer, but given donors’ tepid support for financial aid, it’s worth repeating. Or consider this real-world case study: On the heels of Bloomberg’s massive financial aid gift to Johns Hopkins, its president, Ronald Joel Daniels, said that the school’s financial aid endowment “was simply too small.” This was by design: While Hopkins’ “Rising to the Challenge” capital campaign raised $6.015 billion, only $610 million went to student financial aid.

Poliakoff and ACTA also offer up a list of ways that donors can support students’ academic development, as well as improve civic discourse. While many of these suggestions track with the ACTA’s conservative leanings, a larger point here is that campus fundraisers can do much more to get donors excited about investing in higher ed’s core missions of learning and nurturing better citizens.

Meanwhile, Poliakoff believes donors should be helping schools prepare for the lean times that lie ahead. Harvard Business School Professor Clayton Christensen has argued that half of colleges could close in a decade. Poliakoff concurs with this assessment, noting that small colleges will be hit particularly hard, as they don’t have the economies of scale to properly manage administrative costs. Contraction isn’t preordained, however, and alumni can prepare universities’ pivot to a more virtual future. (For a rare example of a gift earmarked for online learning, check out our take on Larry Gies and his wife Beth’s $150 million commitment to the University of Illinois.)

Coincidentally enough, the very same day I spoke with Poliakoff, the Lilly Endowment announced a $108 million initiative to help Indiana colleges and universities develop strategies aimed at strengthening their relevance and sustainability. The endowment will encourage higher education leaders to explore collaborative strategies like expanding “less expensive online learning opportunities.”

Tying together some of the threads of ACTA’s work, Poliakoff said that “university development offices should be the agency to help donors make informed and valuable decisions.” But he added that meaningful change must start at the top. As long as administrators and trustees continue to embrace expensive capital projects and amenities, donors will follow their lead, and the result will be more of the same: escalating costs, higher tuition and more debt.

“One of the sea changes that’s happening now is that students are becoming more aware of the debt crisis and they are more cautious,” Poliakoff said. “But is university leadership cautious? No. I’m afraid the belief among administrators won’t change. The status quo will persist. And donors should never be the guardians of the status quo.”

This article by Mike Scutari was originally published January 21, 2020 in Inside Philanthropy. For the original article, click here.

The Fund for Academic Renewal is a program of the American Council of Trustees and Alumni, a not-for-profit, tax-exempt organization as defined by Section 501(c)(3) of the Internal Revenue Code. All contributions to FAR are fully tax-deductible to the maximum extent provided by law.