You probably shouldn't give your money to an elite university

Alumni contributions play an outsized role in America's class divisions.

Photo by Zhanhui Li on Unsplash

You probably thought this was going to be a post about the controversy over the university presidents who recently gave disastrous Congressional testimony about antisemitism on campus, and the big donors who have been trying to get them fired. Well, sorry to disappoint you, but it’s not really about that — or at least, only tangentially. I will admit that the fracas over antisemitism is what made me think of this topic, but the problem of elite university donations is something that has been rattling around in my head for a while.

Decades, actually. I went to an elite college (Stanford), and we were always being reminded of how important donations were to the institution. Gifts from alumni, foundations, and various other individuals were what fed the university endowment, and returns on that endowment were a huge source of cash. In 2019, Harvard’s CFO claimed that 45% of that school’s annual revenue could be attributed to current or past donations. A look at the national statistics shows that Harvard is not that much an outlier; among nonprofit 4-year universities, about a third of revenue comes from gifts or endowment returns.

Source: NCES via Ithaka S+R

Once you realize how important donations are to elite private universities, a lot of things about how these schools are run begin to make sense. Elite school admissions heavily favor rich kids, through legacy admissions and athletic programs focused on sports that only rich people play. This is because the kids of the rich are highly likely to be rich themselves — and thus to be big donors.

And big donors are getting ever more important. Over the years, the number of alumni who give money to their alma mater has actually gone way down, but total donations have gone way up. This is partly because of foundations and donations from random individuals, but a lot of it is because super-rich donors are giving really big gifts. Harvard alumnus Ken Griffin recently gave the school $300 million; Harvard Business School graduate Hansjörg Wyss gave $350 million, and so on. (By comparison, Bill Ackman, who led the charge against the university presidents who testified to Congress, gave Harvard only a comparatively paltry $26 million.)

Elite schools and liberal arts colleges are famous for giving their students a carefully curated four-year life experience. Part of this is to attract tuition dollars, but part of the reason is to foster a sense of personal attachment to the school, in order to encourage donations later in life¹. The explosion in administrative spending is undoubtedly tied to this strategy, since much of that administration deals with student life and student services.

The cultural trend toward “safe spaces” on campus, and various other ways that universities have catered to students’ political desires, are almost certainly also related to the need to make alumni love and donate to their alma mater. One reason the university presidents gave such despicably wishy-washy answers about antisemitism, I suspect, was that they were afraid of upsetting their lefty students — i.e., their future donors.

So there’s a cycle here. Money gets spent on student services, students graduate and give the university more money, which gets spent on more student services. Administrators try to maximize this throughput — partly because it pays their salaries, but really because universities try to maximize prestige. Prestige also feeds the cycle, of course, since it attracts donations from foundations and other individuals outside the alumni network.

Eventually this self-reinforcing effect widens the gulf between the haves and the have-nots in the University system. The richest endowment belongs to the University of Texas (which owns a lot of oil-producing land), but most of the top spots go to small elite private universities like Stanford, Harvard, Yale, MIT, and so on. The returns on those highly unequal endowments generate highly unequal amounts of revenue; the fancy schools get a lot, while state schools have to go begging.

That has a number of negative effects on U.S. higher education. Harvard and Stanford and the other fancy schools serve only a very small slice of the population; most of the uplifting of the American middle class is done by state schools, especially by lower-ranked institutions like Cal State and SUNY. Here’s what I wrote in a post a few years ago:

[T]op private schools are educating less than half a percent of Americans. The entire Harvard undergrad student body could fit into the University of Michigan football stadium more than 15 times over…

The Equality of Opportunity Project calculates social mobility scores for colleges, based on how many low-income kids they admit (“access”) and how likely low-income kids are to become high-income adults after graduating from that school (“success rate”). The winners are mostly a bunch of state schools that educate working-class locals. No Ivy or pseudo-Ivy appears on the list.

Source: Equality of Opportunity Project

More than half of Stony Brook students from the bottom 20% of the income distribution make it to the top 20%! That’s amazing!

U.S. News has its own ranking that takes [other outcome measures] into account, and their top performers are a bunch of public colleges and HBCUs that tend to educate a bunch of Hispanic and Black kids. CollegeNET has yet another ranking, and it’s dominated by Cal State and CUNY. No elite private schools are ranked highly on any of these lists.

In other words, donations to elite universities are sending money to where it’s needed least — to lavish yet more dollars on a very small number of kids who already have the best dorms, the best professors, the best student services, and so on. It’s not like they’re going to grow up to start better companies or do better research or become better leaders because their college increased its endowment from $50.4 billion to $50.7 billion. And remember, quite a number of research papers have found that the educational benefit of these elite colleges, when compared to more modestly-ranked schools, is slim at best — they’re mostly just places to network.

Meanwhile, the state schools that offer huge upward mobility boosts to the working-class and middle-class masses — and which will train the high-tech manufacturing workforce that America will badly need in the coming years — are starving for funding. College enrollment rates plateaued years ago, and the total population age 15-24 is lower now than it was in 2012. This is a double whammy for higher education demand. And as you’d expect, lower demand is putting major downward pressure on tuition:

Source: College Board

Harvard and Stanford will, of course, be fine; they might have to cut back a little bit on a few services, but their acceptance rates are so low that they’ll never see actual enrollment drops, and their endowments are so huge that they’ll never be in danger of running out of money.

Lower-ranked state schools, however, could be in big trouble. As the chart at the top of this post shows, private schools depend much less on tuition than state schools do. So if tuition falls, that will disproportionately hurt the Cal States and SUNYs of the world rather than the Harvards and Stanfords. Unlike the fancy private schools, the humble state schools are also likely to have their enrollment hurt as a result of falling demand. Their students are more marginal to begin with, and their acceptance rates tend to be quite high. The Cal State system is grappling with “unprecedented” drops in enrollment.

If you’re a rich person who wants to give money to a university, this is the choice you’re facing. It might be nicer to get your name on the side of a building at Harvard than at SUNY Binghamton, but it’s the latter where your dollar would go the farthest, by far.

Note that this may be true for research as well as education. Schools get much of their research money from grants, but they use revenue from donations and endowments to build new research facilities and pay researchers’ salaries. Obviously, top schools do the best research, because they can afford to hire the top professors in each field. But in terms of cost-effectiveness, they may not be the best place to give money. Wahls (2018) and Lauer et al. (2017) both found that smaller university labs are underfunded because too much money goes to big famous labs; if this result is right, more equal funding would lead to more overall scientific discovery, at least up to a point.

I’m sure the Bill Ackmans of the world get a feeling of power and importance from being able to use their Harvard donations as a stick to push the administrators in the directions the donors want (though this can easily backfire, too). And yes, I understand that it’s probably cooler to get your name on a Harvard building than one at Cal State Los Angeles. But if they want to create a higher education system that’s both more effective and more equal, they should consider giving their money to the Cal State system or the SUNY system instead. The congealing of American society into a class hierarchy, with a cozy club of elite school graduates at the top, is something to be resisted rather than encouraged.

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1. Here’s a funny little anecdote: One time while I was waiting in the parking lot of my friend’s co-op at Stanford, a guy in a fancy suit drove up in a Lamborghini and started talking on his phone. After he finished, he looked at me, pointed up to a second-floor balcony, and said “I lost my virginity in that room.” I immediately reflected that Stanford’s policy of having students live on campus for all four years might be advantageous in prompting alumni to associate their romantic youthful experiences with the college itself.