Robert Wright devotes a Martin Center column to problems associated with university investments.
Nearly all American institutions of higher education raise money they put into endowments—money that is kept invested in securities. At the same time, many of their students borrow money from the federal government so they can afford to attend.
As I will explain, this system is fraught with problems. It would be far better if colleges and universities would raise money to lend to students who need it to attend. I see several reasons why they should do so.
First and foremost, lending to students gives schools “skin in the game.”
Warren Buffett’s billions stand testament to the wisdom of ensuring that people and institutions stand to lose if they don’t deliver as promised. Alas, misaligned incentives plague higher education because major players have little skin in the game.
Most professors and administrators are good people, but that means little at schools that need student tuition payments in order to survive. The existential imperative at many American universities is to get—and this is a direct quotation I have heard more than once in my quarter century in higher ed—“asses in classes.” What happens to students once they leave is of little concern. Whether they pay back their federal loans or not doesn’t matter because the school has gotten its money. If the student flounders, that doesn’t hurt the school.
Universities know more about their students than banks or federal bureaucrats ever could. They are therefore in the best position to make loan decisions. In the securities market, by contrast, universities hold no advantages.
