The Best Education Money Can’t Buy

By David Kretzmann

This summer, Malcolm Gladwell brought a discussion about higher education in the U.S. to the forefront. In the first season of his Revisionist History podcast, Gladwell — the best-selling author behind books like David and Goliath and Outliers — explored the concept of the “capitalization rate,” or how effectively a society enables people in any group (rich or poor) to reach their full potential. In terms of higher education, in other words, are there attainable opportunities for smart-but-poor students to succeed and thrive in America?

There is clearly room for improvement. Institutions with large endowments — which are composed of the financial assets donated to a college — have a poor track record when it comes to reaching lower-income students. A recent study from The Education Trust found that of the few wealthy institutions with endowments of at least $500 million, almost half of them “enroll so few Pell Grant recipients that they are in the bottom 5 percent nationally.”

Put another way, the wealthiest institutions are largely ineffective at serving the poorest students in the U.S.

Philanthropy and Endowments

The issue becomes further complicated considering most financial donations in higher education go to the wealthiest institutions. Of the $40.3 billion raised by U.S. colleges in 2015, almost 29% went to 20 colleges alone. Stanford — which has raised the most money among U.S. colleges for 10 of the 11 past years — topped the list with $1.63 billion this past year, followed by Harvard at $1.05 billion.

Huge financial gifts have a way of drifting to the elite names, not colleges that appeal to lower-income students and families. Earlier this year, Nike cofounder Phil Knight gave Stanford its biggest gift yet of $400 million to create a new graduate-level leadership program that will serve 100 masters students every year; the elite of the elite.

Even as these endowments grow at what seems to be a perpetual pace, it’s typical for income from the endowment to cover less than half of an institution’s annual operating expenses (everything ranging from salaries to financial aid). A few quick examples: At Vassar, the endowment pays for about 31.5% of annual operating costs. For Bowdoin, the number drops a bit to 29%. It’s 35% at Harvard, 21% at Stanford, and a comparatively respectable 48% at Princeton.

For every dollar of a college’s operating budget that isn’t covered by the endowment, that’s one more dollar that needs to be raised from another source. This gap in the budget tends to be filled, in part, with student tuition and fees. At Harvard, 20% of its budget is covered by “student income” — the second-biggest contributor to the annual budget behind the endowment. At Vassar, student tuition and fees are the biggest revenue source for the college, making up more than half of budgeted revenue.

This predicament compounds when a college looks to serve more lower-income students — as Vassar has done — which both increases financial aid costs and lowers tuition revenue in one swoop.

There Is Another Way

Institutional trade-offs will be made if serving lower-income students is seen as a cost while higher-income students are viewed as a revenue source. We’re seeing this play out right in front of our eyes.

Statista notes that college fees have increased 80% over the past 15 years, at the same time the median household income in the U.S. dropped 7%. The average graduate of the Class of 2016 has $37,172 in student loan debt, and the median monthly student loan payment for those between the ages of 20 and 30 is $203. Students are footing the bill for an increasingly expensive education experience, and lower-income students still aren’t being reached.

There is a better way.

Berea College is a notable exception to what has seemingly become the status quo for higher education. Berea College only accepts lower-income students. The median family income for a Berea student is $29,043, compared to the national median of $74,000, according to a 2007 study from UCLA. But what is especially noteworthy is that every student accepted to Berea receives a full-tuition scholarship for four years, worth nearly $100,000.

I’ll say that again. No student at Berea pays for tuition. Now you’ll understand why people on campus call Berea “the best education money can’t buy.”

The Berea Way

Founded in 1855 by an abolitionist minister in the foothills of central Kentucky, Berea was the first interracial and coeducational school in the South. Educating blacks and whites and men and women alongside each other five years before the Civil War turned a few heads — and also raised some pitchforks.

The College’s ability to provide such significant financial aid to low-income students is primarily due to the unique management of its endowment. In 1920, Berea’s board of trustees implemented a policy where any unrestricted bequests given to the College would automatically be placed into the endowment. (In other words, if someone died and left money to Berea in their will with no stipulations as to how the money should be used, those funds would go straight to the endowment.) Instead of taking unrestricted bequests and using them in its annual operating budget, Berea took a long-term perspective by saving and investing those funds within the endowment.

In 1980, income from the endowment covered 55% of Berea’s annual budget. Today, that number has grown to 75%. Instead of treating the endowment as merely a supplement to the annual budget (as most institutions do), the endowment is increasingly Berea’s primary revenue source. Berea’s endowment totals $1.1 billion today — a large number for a school serving 1,600 students — but the largest individual gift ever given to Berea’s endowment was only $10.7 million, a fraction of the number donated to the wealthiest institutions every year.

The unrestricted bequests given to the College since that policy shift in 1920 now account for 45% of the total endowment. Put in other words, without that simple policy change from the board of trustees in 1920, the College would be nearly half the size it is today. Berea has amassed and saved thousands of relatively small financial gifts from donors over more than 90 years, and as a result its endowment has grown to a level where it can increasingly cover the College’s operating costs every year.

It may not sound like a big deal, but it’s an important deviation from the norm in higher education. And it enables Berea to serve the low-income students that even the wealthiest of institutions struggle to reach despite raising hundreds of millions of dollars every year.

More to Consider

Berea is also one of only seven work colleges in the U.S. Every student at Berea holds a labor position, working at least 10 hours every week in numerous departments on campus, ranging from tending to the farm, preparing food in the dining hall, or making brooms and other crafts. The labor program is another way the school manages to minimize some costs and help stretch every operating dollar to go as far as possible.

The College also isn’t trying to compete for students with fancy food, luxurious buildings, or other flashy perks. “We are really quite utilitarian,” Berea’s president Lyle Roelofs told Business Insider, “and a student who can afford to pay for college probably on grounds of amenities and facilities wouldn’t choose Berea College.”

A third of Berea’s students graduate with no debt whatsoever. Some students do still have to pay for a portion of room and board costs or international trips, but even the students who take out a loan to help cover these costs graduate with significantly less debt than the national average. Of the students who do graduate with debt, the average debt is just $7,928, nearly a fifth of the national average.

Learning From Berea

More than half of the graduates from Berea College are the first in their families to obtain a college degree. Berea’s unconventional approach to its endowment has enabled the institution to affordably serve low-income students on a scale unprecedented in higher education. Berea’s emphasis on working toward a self-sufficient budget funded largely by endowment income should be the norm in higher education, not the exception.

There are lessons each stakeholder group can learn from Berea:

If you’re an institution, utilize your endowment as a primary revenue source, not merely supplemental income to the annual budget. Set aside certain financial gifts to only go to the endowment. Whether you’re a large or small institution, this practice positions your institution for long-term sustainability rather than using most gifts to fund an ever-expanding array of new projects and subsidize current expenses.

Because of its large endowment, Berea’s annual gift appeal only covers 10% of the College’s operating expenses. That’s down from 25% in 1980. The College has grown less dependent on fundraising even as it’s grown as an institution. The more you can allocate to the endowment, the more sustainable income your institution will have over the long term — minimizing the need for future fundraising or higher student tuition and fees to cover annual operating costs. More financial gifts should go toward the endowment rather than straight to the annual operating budget.

If you’re a donor, think two or three or four times before donating to institutions that already have massive endowments. Your gift will have a longer-lasting impact in the world of higher education if it’s given to the endowment of an institution with a proven track record of serving lower-income students. Otherwise, your gift is merely perpetuating a broken system where students foot the bulk of the bill and lower-income students are neglected.

If you’re a mid- to high-income student, recognize that you are a revenue source for your college or university. What do you want that revenue to go toward? Fancier food, buildings, and amenities, or financial aid to students who come from less privileged backgrounds? If you lean toward answering “yes” to the latter question, research prospective colleges and try to attend one that is going out of its way to recruit and retain lower-income students. Your tuition matters. Make sure it’s going to a good cause.

If you’re a low-income student, there are affordable ways to attain a college degree. Berea College is one of them. You can also start with community college or other in-state options that will cost much less than attending a college out of state. And more institutions, like Vassar, are prioritizing giving financial aid to students who otherwise couldn’t afford going to college. Although the options are still few and far between, there are alternatives.

Moving Forward

Tuition fees and student loan debt should not continue to rise above the rate of inflation at the same time many college endowments and donations are hitting all-time highs. As endowments grow, institutions in higher education should become more self sufficient, less dependent on generating revenue via student tuition, and better able to reach and serve lower-income students. Like Berea.

Berea College might just be the best-kept secret in higher education. It’s time for that to change.