The Perils of “Easy Money.” Philanthropy's Role in Amplifying—and Fixing—the Student Debt Crisis

Purdue University alumnus John Krenicki Jr. and his wife Donna recently gave the school a $5 million gift earmarked for a business analytics center in the Krannert School of Management. The gift, which will be used to generate an additional $5 million in support by corporate partners for the consulting services of the center, finds yet another alumnus giving big for the burgeoning field of data analytics and data science.

But context is everything in higher education fundraising. A week after Purdue announced the Krenicki gift, Robert Smith pledged to pay off the loans of Morehouse College’s graduating class, underscoring the broadening scope of the student loan crisis. Student debt now exceeds $1.5 trillion. Recipients with bachelor’s degrees graduating in 2016 left school owing $30,301, according to federal data.

While a number of critics knocked Smith’s pledge as a one-off effort that won’t do much good in the face of failed public policies, other commentators applauded his generosity. Undiscussed in the wake of Smith’s gift, however, were a set of larger questions about the relationship between higher ed donors, rising tuition costs, and a student debt crisis that’s become a national scandal.

As we’ve often discussed, few top campus donors have sought to exercise their influence to rein in the underlying drivers of tuition increases. Instead, by often backing expensive capital projects, many have exacerbated the problem. Even donors ostensibly concerned about making college more affordable and accessible remain curiously silent about escalating costs. Given the passivity of these deep-pocketed stakeholders about soaring tuition, it’s not surprising that universities haven’t felt much urgency to change their ways.

Yet the institution on the receiving end of John and Donna Krenicki’s gift suggests that not all universities are dropping the ball on cost issues. When Mitch Daniels assumed the role of president of Purdue University, a public school, he surveyed the school’s operating model and told officials, “‘The market won’t stand for this, and at some point, the public is going to start demanding that universities lower costs. So let’s not be last.’” Six years later, Daniels has frozen tuition, upped enrollment, and provided low-wage workers with bonuses.

The Purdue case study underscores three key questions. First, how did Daniels pull it off? Second, what if donors, inspired by Daniels’ example, decided to exert their considerable leverage to incentivize administrators to cut costs, thereby reducing the student loan burden? And third, can “Mitchonomics” point to a future in which philanthropy is part of the solution to the student debt crisis, rather than the solution?

“Buildings and Bureaucrats”

When former Indiana governor Mitch Daniels took the reins at Purdue back in 2013, the Society for an Open and Accountable Purdue protested the inauguration, questioning the university's decision to appoint as its president an ex-governor who signed off on $150 million in funding cuts to the state's postsecondary education system in 2009. The Purdue Exponent called the hire “a travesty and insult to academics.”

Undeterred, Daniels, nicknamed “The Blade” for his cost-cutting prowess as director of the U.S. Office of Management and Budget under George W. Bush, swiftly implemented a series of comprehensive reforms aimed at reducing attendance costs.

“The unfortunate truth is that while most college presidents care deeply about their institution’s success, an important part of their job is to shake free more resources. They seldom initiate serious campaigns to contain costs,” said James V. Koch, a member of the board of Partners for College Affordability and Public Trust.

On one hand, this seems like an unfair characterization. Universities understand that high tuition is bad for everyone—students, family, the school’s brand, and future fundraising success. Administrators all over the country continue to make difficult and disruptive decisions in an effort to keep tuition increases at a reasonable level. Yet in many ways, a president’s primary responsibility is to increase costs, primarily through capital projects and lavish amenities, in an effort to attract high-performing students and build the school’s brand.

By this barometer, they are succeeding beyond their wildest dreams—thanks to donors. According to a recent study by the Council for Aid to Education, 41 percent of the $43.6 billion raised by universities in 2017—$17.8 billion—funded capital expenses, representing a 12.3 percent increase over 2016. Fundraising budgets during capital campaigns increased by an average of 65 percent, according to the Council for the Advancement and Support of Education.

In other words, donors have no qualms with funding a gold-plated college education that drives up costs, and with it, tuition. This is why Michael Bloomberg, who clearly understands the machinations of market economics, implored donors to lay off tuition-busting capital gifts and instead focus on financial aid when he made his (in)famous mega-gift to Johns Hopkins University. It’s also why St. John’s College, which has campuses in Santa Fe and Annapolis, launched a $300 million campaign that contains no calls for new buildings or lavish student amenities. Rather, its primary goal is to reduce annual tuition costs for students by as much as 50 percent.

The other big cost driver here is administrative sprawl. “The interesting thing about the administrative bloat in higher education is, literally, nobody knows who all these people are, or what they’re doing,” said George Mason University law professor Todd Zywicki. Earlier this year, dozens of Rutgers University professors signed a petition criticizing president Robert L. Barchi’s lack of financial support for diversity and inclusion efforts. The petition noted that 244 Rutgers administrators are paid more than $250,000 a year, and 38 of them are paid more than $500,000.

Or consider recent developments out of Oregon. In October of 2017, UO students, citing escalating tuition, staged a protest at an event celebrating a $50 million anonymous gift. The protest came five months after the Oregon university system asked the state to approve an increase of in-state tuition by 10.6 percent—even as UO reeled in record levels of private support. Phil and Penny Knight gave the university a $500 million donation in 2016. In September of 2018, the school, flush with donor dollars, tacked on another $1 billion to its $2 billion fundraising campaign. Meanwhile, president Michael Schill earns $798,400 a year, making him one of the highest paid university presidents according to the Chronicle of Higher Education’s salary rankings.

Misaligned Incentives

Most analysts agree about why tuition keeps rising. Some of these cost drivers, like guaranteed student loans, fall outside of the purview of university administrators. Yet, as Partners for College Affordability and Public Trust’s James V. Koch said, administrators haven’t shown much interest in tackling the areas where they can bend the cost curve, like buildings and bureaucrats. Why?

In a 2014 interview with the Chicago Tribune, Daniels provides the obvious answer. “When money is easy, when you can dial up tuition or fees, people tend to postpone even the most basic efficiencies.”

Daniels is right. Administrators sleep soundly knowing that students can nearly always borrow enough to cover their tuition costs. They sleep even better knowing a concerned alumnus is only a phone call away. American colleges and universities raised a record $46.7 billion in 2018. This is “easy money.” Why would a university renovate “ugly” student housing when it can launch a $600 million capital project to build new “innovative residential colleges,” knowing full well that donors will pick up the tab?

Administrators at public universities counter by saying that they’ve been battered by diminished state funding. They have to raise tuition, especially in order to keep up with deep-pocketed private schools beholden to the “prestige pricing” financial model. This argument has merit—to a point.

Tom Lindsay, writing in Forbes, found that between 2000 and 2010, state funding for Texas universities dropped approximately 16 percent on an inflation-adjusted, per-fulltime-pupil basis. But during this same period, average Texas public university tuition and fees collected increased by approximately 75 percent. “How does a 16 percent funding cut warrant a 75 percent tuition increase?” Lindsay asked. “The higher education establishment has yet to answer this question.”

The answer, again, is self-evident. Flush with an endless flow of “easy money,” universities have no incentives to cut costs—beyond, of course, the moral imperative to do everything humanly possible to mitigate graduates’ debt burden.

“We See No Good Reason to Charge Students More”

All of which brings me to Daniels’ priorities. He requested a base salary of $420,000—$130,000 lower than his predecessor’s, with a 30 percent performance-based bonus tied to fundraising, graduation rates, and maintaining affordability for students. He cut $8 million from the school’s operating budget, slashed the cost of room and board by 5 percent, trimmed the fat from the campus dining program to reduce prices by 10 percent, struck a deal with Amazon that saved students 30 percent on textbooks, sold off redundant property, reduced the size and cost of rental storage by half, and mended office furniture rather buying new replacements. Oh, and he eliminated a $10 gym fee.

In 2016, Daniels introduced income-share agreements (ISAs) in which students who exhaust federal loans can fund their education with an agreement to sign over a share of their future income. Critics called the idea a form of indentured servitude. Daniels disagreed, saying, “If you want indentured servitude, it’s the student loan program. With ISAs, the risk shifts entirely to the lender,” since graduates who don’t work are not required to pay. Daniels also implemented a plan to let undergraduates graduate in three years.

Thanks to Daniels’ approach, according to Purdue, families have saved over $57 million, and student borrowing has fallen by 23 percent. The loan default rate three years past graduation for Purdue borrowers who graduate is 0.8 percent compared with 2.5 percent in 2011. The total in-state cost of attendance is just shy of $23,000. Throw in financial aid and scholarships, and many students pay less than that amount. Purdue costs $4,000 less per year for out-of-state students than it did when Daniels took over in 2013.

In February, Purdue announced it will hold tuition at 2012 levels for an eighth consecutive year, and will provide a one-time $500 “appreciation payment” to all West Lafayette campus staff who make $75,000 or less and who were employed as of December 31, 2018. The university will also offer a 2.5 percent merit raise pool for West Lafayette faculty and staff for the fiscal year that will begin July 1, the fifth consecutive year for a merit increase. Under Daniels’ watch, Purdue also allocated $64 million for faculty and staff base salary and benefit increases.

“As long as we are balancing our operating budget, growing our faculty, investing in necessary capital projects, and increasing compensation competitively, we see no good reason to charge our students more,” Daniels said earlier this year. “Our commitment to affordability has helped save families millions of dollars and, coupled with prioritizing our investments, we continue to believe that Purdue is delivering higher education at the highest proven value.”

Daniel’s strategy has its critics. David Sanders, an associate professor of biology and immediate past chair of Purdue’s University Senate, told Inside Higher Ed’s Greg Toppo that the freeze has contributed to tightened revenue for instruction, pitting department against department. “It’s become a less collegial place,” he said. Cuts have also pressured instructors to eliminate small classes that hew closely to students’ interests.

Purdue’s rise in enrollment has affected student life, Sanders said, forcing resident assistants to share rooms, a move that “compromises student privacy and makes fraught conversations with troubled students more difficult.” The cuts have also forced the school to admit more out-of-state students who pay a higher price tag. (Out-of-state tuition, however, has also been frozen since 2013.)

David H. Feldman, an economics professor at the College of William & Mary, told Toppo that Daniels’s tuition freeze is “clearly not a parlor trick. The question is whether this is truly sustainable, and there are predictable consequences five years from now.”

Upending Conventional Wisdom

Daniels’ strategy upended three big pieces of conventional wisdom in the field of higher ed, and with it higher ed fundraising. First, it obliterated the utility of “prestige pricing.” If students are inherently drawn to more “valuable” (i.e., expensive) schools, then logic would dictate that students would be inclined to avoid a university like Purdue, which held its tuition flat. Purdue officials shared this concern with Daniels, warning him that a tuition freeze would suggest the school “lost confidence in our product.” Yet Purdue has seen an increase in student applications and enrollment. Its incoming freshman class in fall 2018 was the largest ever at 8,357.

In fact, Purdue admissions officers now use the tuition freeze to its advantage. The university has “fallen into the position that every marketer wants: differentiation,” Daniels told Bloomberg’s Romesh Ratnesar. “When anybody talks about us, somewhere up front they mention that we’re the school that’s held tuition constant.”

Daniels also proved that, a least so far, a university can invest in “necessary capital projects” so long as it trims the fat elsewhere. Purdue University recently broke ground on a 30-year, $1 billion plan to create what it called a “work-live-play” district to meet “pent-up housing demand for students and non-students alike.” Non-recurring investments also include $64 million for new biology and chemistry labs and $35 million for a veterinary medicine teaching hospital.

The third area involves those ever-critical U.S. News and World Report rankings. We’ve seen fundraisers deploy them to great effect. The pitch is simple: An alumni’s donation will elevate their beloved alma mater to the top of the rankings, burnishing the school’s brand and enabling it to attract the world’s best and brightest students. But what if the inverse holds true? What if the influential and faceless rankers equate frozen tuition with diminished academic excellence?

Last September, U.S. News and World Report released its 2018 rankings of America’s best colleges. Purdue came in at No. 18 for best public university, up from the previous year’s 20th placement, dispelling the notion advanced by legislators and administrators that a tuition freeze will adversely affect a university’s academic rankings.

Passing “The Pajama Test”

Daniels went against the higher ed grain in another, albeit still unproven, way. Despite professing an interest in affordability, alumni have yet to embrace online learning as a cost-effective alternative to the expensive residential experience. There are a few exceptions, like financier Larry Gies’ $150 million gift to the University of Illinois, aimed at using "technology to democratize education,” but when faced with a growing student loan crisis, many donors have actually doubled down on the costly residential model.

Daniels, however, is bullish on online education. Last year, Purdue acquired the for-profit, largely online Kaplan University from former Washington Post owner Graham Holdings Co. for $1. Daniels, according to the Chronicle of Higher Education, framed the arrangement as an opportunity for Purdue to ramp up its online presence while expanding its land-grant mission by serving new pools of students, many of them older and working. As a result, Purdue boosted its enrollment by 30,000 Kaplan students—most of whom are female, between the ages of 30 and 60, and the first in their families to go to college. These students have been integrated into the newly named Purdue Global University.

Faculty members protested, claiming they weren’t properly apprised of the details of the arrangement. Others expressed concerns that the arrangement with the much-maligned Kaplan would tarnish the school’s brand. “The faculty is overwhelmingly opposed to it,” said Sanders. “The purpose of Purdue is learning, research and engagement. The purpose of Kaplan is to make money.”

Daniels brushed off the criticism, telling Bloomberg’s Ratnesar, “We’ve got to pass the ‘pajama test.’ There are a lot of people who think residential higher education is on borrowed time. There are a lot of smart people, backed by a lot of big money, using dazzling technologies, who are saying to prospective students, ‘Why would you pick up and move somewhere and pay rent for four years when I can bring the best education available to you while you sit in your pajamas?’ ”

Alumni Donors Approve

A common theme across our higher ed coverage involves donors’ unwillingness to stand up to administrators who pass on excessive costs to students and their families rather than make tough spending decisions. In turn, few administrators tout plans to make cuts as they woo donors. It’s usually the opposite—a school provides a laundry list of new initiatives and capital projects to donors to entice them to provide students with a world-class education.

The Purdue case study, however, lays out an alternative option for fundraisers looking to engage donors. The school exhibited a good-faith effort to address the controllable drivers behind escalating student debt, and donors responded enthusiastically.

Giving to Purdue was a record $451.5 million in fiscal 2018, the first time that donors contributed more than $400 million to the university in one year with gifts targeted to student support, buildings and capital projects, endowments for faculty and research, among other initiatives. The total includes a record $88.2 million for student support and boosts Ever True: The Campaign for Purdue University to $1.964 billion toward its $2.019 billion goal. 2018 marked the fifth consecutive year the number of donors has increased, and the sixth straight year that the total raised for student support has increased.

Fundraisers will be wise to keep the affordability issue front and center. Old-line donors with a penchant for capital projects are ceding the stage to younger alumni, many of whom view giving through the lens of social impact or are saddled with debt themselves. University of Oregon alumni, for example, have a right to ask why Purdue, a state school, has kept tuition flat since 2012, while UO is facing a $12.9 million budget shortfall next year despite recent tuition and fee increases.

In March, UO president Michael Schill outlined plans for $11 million in budget cuts, suggesting that Daniels’ prediction that “the market” will force universities to cut costs is finally coming to pass. The demographics suggest it may be inevitable. Falling U.S. fertility rates have led to shrinking numbers of college-ready children for most of the next two decades. Even elite private institutions in the Northeast and mid-Atlantic regions are facing enrollment shortfalls. And as Daniels noted, “smart people, backed by a lot of big money” are working to develop far more affordable online learning platforms.

That being said, the existing U.S. higher education system isn’t a purely competitive market. The unabated flow of easy money from Uncle Sam and well-intentioned alumni incentivizes universities to spend more and raise tuition, thereby exacerbating the student loan crisis. Despite their professed concern about this crisis, it’s far easier for administrators to keep the spigot open and the fundraising machine humming than to embark on a disruptive cost-cutting crusade.

This is unfortunate, and to a certain extent, tragic, since students prefer a more affordable education and less debt. Purdue’s Sanders told Inside Higher Ed’s Toppo that the tuition freeze has been popular with students and their families. “I speak with a lot of them,” he said. “They’re very happy. They’ve saved thousands of dollars.”