On cue, we all chuckled and wistfully rued for the days in the past when college tuition was inexpensive enough to be made free. None of us even considered the feasibility of attempting to live up to Stanford’s founding wish in the modern world, where college tuition prices have skyrocketed dramatically in the last few decades.
But I think we must re-evaluate our kneejerk instinct to dismiss the apparently absurd notion of completely eliminating student tuition. What if Stanford’s desires were found to be economically feasible under current fiscal circumstances? Wouldn’t the University be under a moral obligation to meet the wishes of its founder? And imagine the statement that the University would be making if it could offer the best education in the world absolutely free!
At the very least, it would delay what seems to be the inevitable specter of over-reaching government that seems to be sweeping America; how would those who falsely pretend to defend social justice respond to a corporate educational institution providing its services for free? The effects, in short, would be revolutionary, and I call on the University to do its most to achieve such an honorable state of affairs.
But is it possible? And if so, is it sustainable? I believe that both these questions must be answered in the affirmative. Stanford’s total expenditure for the 2011-2012 fiscal year was $4.1 billion. However, only 18% of that expenditure was paid by student tuition. More than half of the cost was paid for by sponsored research and investment returns on the endowment and other University-owned capital. Therefore, if student tuition were completely eliminated for the 2012-2013 year, the University could expect to run a deficit of approximately $735 million, or 18% of 4.1 billion. How could the university make up this deficit?
First, we should look towards the University endowment. Currently, the market return that the University collects on its endowment and other capital assets pays for about 24% of total University expenditures, or $984 million. If we eliminated student tuition completely and transferred the cost to the endowment, it would need to produce approximately $1.72 billion. Can the endowment afford to sustainably contribute that much money to the University?
The Stanford Management Company (SMC) is the organization that manages the financial investments of the University. They manage a total of $19.5 billion, $16.5 billion of which is the endowment, and $3 billion of which is not technically or legally termed endowment but which serves the same purpose. If we conservatively assume that the $19.5 billion total can be invested in the market with a 9.3% return per year (the average investment portfolio has averaged a return of 11.1% per year since the Great Depression, but the University’s assets have averaged a 9.3% return in the last 10 years, mostly due to the recession in 2008), then the University can collect approximately $1.81 billion from investment alone, which is enough to cover the $1.72 billion that would be required if investment returns alone were to cover the absence of tuition. Not only that, but it would leave a surplus of nearly $100 million to be reinvested in the market.
However, that is assuming a 9.3% return on investment, which may not be a very good predictor of future trends. The returns for the 2009-10 and 2010-11 fiscal years were far greater at 14.4% and 22.4%, respectively. The reason for the comparatively low average of 9.3% over the last 10 years is the loss of 25.9% of the fund’s value during the 2008 economic downturn. However, most economists do not foresee such a dramatic economic downturn occurring again in the near future, and so it may be safe to assume that a 9.3% return is a low-end estimate, and that the true return will be even greater.
Some may argue that this would threaten the long-term growth of the University’s endowment. After all, they say, it is important to invest more money in the market than Princeton, if only for the sake of appearances. All things considered, I still opine that the fundamental purpose of the endowment is to serve the benefit of the students and faculty of the University. If the endowment can be used to eliminate tuition, which I have demonstrated is a viable possibility, then I can think of no better use for these funds, and I think that few students would object to this use.
I also believe that the net effect from a Public Relations perspective would be overwhelmingly positive. Stanford would be portrayed as a moral crusader, using its excessive wealth to provide an extremely valuable social good to the most talented and promising members of the United States and the world, irrespective of income, and at no cost. It would certainly be keeping with Stanford’s founding desire to create an institution that would, as described in the University’s founding grant, “promote the public welfare by exercising an influence in behalf of humanity and civilization.”
Some argue that education is a human right, which is why many Western nations have nationalized higher education. How enthusiastically, then, would Stanford be praised if it adopted a cost-free structure of its own volition and under no societal compulsion!
The move would not be without other benefits to the Institution itself. I would conjecture that very few people would attend any other institution if they were given the choice between paying the other institution’s tuition and a free education at Stanford. Therefore, Stanford’s yield rate for accepted applicants would go up dramatically, as would, I believe, the number of applicants generally. This would help the University attain the highest quality of students possible.
Not only that, but I believe that this new cost structure would actually aid the University in raising funds. In fact, I have spoken to certain alumni who, bitterly remembering the loans that they took out to fund their education, told me that they would donate double as much money to Stanford if this policy were implemented.
And if there are still some who doubt the feasibility of the policy that I propose, I would direct their attention to an economic factor that I have not yet spoken of in great detail: namely, donations to the University. As many know people are aware, the University has raised over $6 billion in donations since the beginning of the Stanford Challenge five years ago. But even before that, from fiscal years 2001 to 2005, the University averaged about $500 million in donations per year.
Therefore, though the cost of tuition could feasibly be covered purely from the market returns on Stanford’s investment funds, there are also other sources of income, including donations (which I believe would increase in support of this measure) that can also contribute to the required cost of eliminating tuition.
This initiative would require careful financial planning to achieve, but would be truly revolutionary in its repercussions, and would demonstrate that Stanford is truly an innovative force for social good in the world. In this spirit, I challenge the University to live up to the ideals of its founding vision.
Mat Tappert ’15 is a staff writer for the Stanford Review. He can be reached at [email protected]