United States Education System – Mandatory Endowments

Background – Education in the Unites States

The education system in the United States is in large part messed up. Consider this the cost of education is skyrocketing. Teachers complain about low salary (when I see some PhD professors making $50,000 or less a year in a STEM (Science Technology Environment Mathematics) field. Student debt is at an all time high. There is hope and in this Sunday’s Big Problems article I will describe what I consider to be the best solution. This like all of my solutions is an idea I developed after observation and reading. I believe it is an original idea because I have not heard anyone else promoting the idea. However I also have not looked extensively to see if there is something similar.

The Problem – Academic Funding is Dismal

I’m not entirely sure where all the money goes that flows into the academic system but it sure disappears fast and the problem seems to get worse rather than better. Some industries are experiencing problems in keeping staffed so they increase pay to attract employees to keep doing business (I’m thinking of nursing but there are other fields also). This results in the private industry being desperate for workers and paying them exceptionally well (economics 101: supply and demand). This makes already dismal academic salaries even more so when compared to their equally academically trained counterparts. Now consider if a nurse can make 50-150k per year with as little as an associates degree, but a PhD in academia might make only 50-100k then where is the incentive to teach?

Snowball effect….teachers are less qualified, students are less trained, salaries go up, fewer people want to teach because of the pay difference….ugh oh industry needs more than academia can teach…mean while the U.S. ranking internationally in education is falling (wonder why?). I am sure the fault is not entirely on the funding aspect but I think everyone can agree that funding has an impact on education either directly or indirectly.

The Solution – More money, where from?

The big picture solution is easy, more money. However, the best way to accomplish this is where real improvements can be accomplished. Most arguments I have heard involve more tax money to supplement the system…and a few years later it is more tax money to supplement the system. This never ending perpetual cycle of more money needed more tax dollars spent. The question then becomes, what can we do to change this cycle and make this country once again the best education system in the world.

The solution to this is actually quite simple though it will take 20 to 30 years of higher expenses and another 20-30 years beyond that before the real benefits begin to be seen. The answer lies in compound interest. First, congress should give university endowments a 50 year break on the required spending to remain nonprofits this will allow them to reinvest funding in order to build wealth more rapidly initially. Second, for the next 20-30 years all public universities should be required to deposit 30% of their annual budget (this will probably require 30% extra funding for 20-30 years).

After that initial investment period the universities may withdraw up to 15% of the annual increase from interest to be added to the university general fund. An additional 15% of the interest earned will be deposited into a liquid asset fund for use during years that the economy is not profitable. The remaining 70% of interest earned will be reinvested in the fund to compensate for inflation and to grow the fund. After 50-60 years these funds will pay for a substantial portion of public education expense and into the future they will fund an ever increasing percent of our education bill.

I, if you haven’t noticed yet, am a fan of excel spreadsheets. So, I made one. There are some assumptions we will make in our model.

  1. Average long term return on investment per year is 9% (market index over 100 years is about 10% and Harvard’s endowment average from 1991-2011 which included two recessions was 12.9%)
  2. We do 30 years and 60 years of tax breaks
  3. 30% of annual operating budget as annual investment
  4. Our university expenses increase by 5% a year
  5. We cap student entry into university’s based on funding (yes there may be competition for spots unless the student pays) this is to keep university cost at a constant growth rate of 5%.
  6. We will assume that our starting university budget is $1,000

After 30 years the fund had $73,000 in its assets. The university budget was $4,116. The interest for the endowment was just over $6,000. In the 31’st year the endowment was able to pay for 22.8% of the universities annual operating budget. At 60 years this had grown to 32.6% of the universities annual budget. At 100 years the fund paid for 53.4% of the budget. At the 150 year mark these endowments would be paying for 98.84% of their institutes annual operating budget. Finally, at the 151st year the public universities required 0 external funding. Not only is the tax burden decreased by 20% (30 years from now) eventually it is completely eliminated. Sure it means spending an extra 30% on the education budget for 30 years.

Conclusion – Action Now Can Help

Sure it is a burdon now and for 30 years. I’ll let the economists and financial people determine the dollars and cents. The fact is your descendants (possibly in your life time) see immense benefit in educational funding. The future could be filled with self funded education systems where all students attend completely free. They do no have to deal with debt and university professors could be one of the highest paid and most respected occupations. Creating a highly competitive applicant list ensuring that our nation has the absolute best educators and as a result the most qualified workforce in the world.


School spreadsheet


P.S. The thesis is still killing me, so again no photos etc.. Until I finish it.