With Donors Helping, These Schools Are Tackling Student Loan Debt

photo: Osugi/shutterstock

In a recent post, I wrote about alumni Larry Gies and his wife Beth giving $150 million to the University of Illinois, which aims to use technology to "democratize education" by offering a less expensive online MBA. This represents a novel phenomenon in higher ed philanthropy. We see surprisingly few initiatives backed by mega-donors that have anything to do with cutting costs.

This isn't a huge surprise. It's difficult to cut costs on campus—logistically, financially and politically—and many donors, quite understandably, don't want to go there. So what's a donor concerned about the ever-growing student debt crisis to do, beyond funding scholarships?

Developments at schools located 5,000 miles apart provide two intriguing alternatives.

The first, at the University of Hawaii, finds a donor leveraging his real estate holdings to make the school tuition-free. The second finds Brown University turning to donors to do away with student loans entirely.

Leveraging Real Estate Assets

Jay H. Shidler, the managing partner of the Shidler Group, a national real-estate investment organization, gave the Shidler College of Business at the University of Hawai'i at Mānoa $117 million in cash and real estate ground leases after delivering the final installment of the $111 million gift he announced in 2014. In total, Mr. Shidler has given $228 million to the school, which represents the largest individual donation in the university's 110-year history.

The gift came around the same time that the A. James & Alice B. Clark Foundation awarded a $219 million gift to the University of Maryland, further underscoring the growing influence of private dollars in public education in an era when legislatures have cut back support for state university systems. 

According to the University of Hawai'i, Shilder's $117 million donation will "further fuel the pace of improvements and expansion facilitated by Mr. Shidler's earlier donations, while providing a level of steady funding that could be used to make the college tuition-free within 40 years, if there is a need or desire to do so at some future time."

The university further elaborates:

Centered upon the donation of land underlying 11 significant office buildings in the commercial business districts (CBD) of major mainland cities—Seattle, Denver, Chicago, Tampa, Nashville, Louisville, Mount Vernon, Charlotte and Columbus—this gift of land and attendant ground leases is projected to produce highly certain, management-free cash flow that historically increases faster than inflation.

It's an interesting gift that underscores another trend we're tracking: the gifting of complex business assets and properties to universities with an eye on maximizing an institution's gain over the long term—sometimes decades.  

Shidler's big gift comes with a big caveat, however. The college will receive full ownership of the related office buildings, which, together with the land, will be worth an estimated $5.1 billion at the end of their 99-year terms. Patience is a virtue, and in this case, a lucrative one: In total, the gift of land and commercial buildings will yield a minimum of $7.2 billion during the life of the current leases.

Shidler graduated from the University of Hawai'i in 1968. He credits the college with preparing him for a successful career in business and his lifelong love of the state, where he has resided since 1964. He's an avid art collector and the chairman of the board of trustees of the Shidler Family Foundation, a trust focused on education and the arts in Honolulu.

Mr. Shidler's giving to his alma mater dates back to 2006 with an initial gift of $25 million pledge, which prompted the university to change the name of its business school to the Shidler College of Business. This was followed by several additional gifts over the next few years, including a $69 million gift in 2014, which brought the total to $111 million.

His recent gift comes on the heels of another mega-donor asking his alma mater to be patient. Earlier this month, Kenneth Ricci's $100 million commitment to the University of Notre Dame stipulated that the school will receive beneficial rights to a limited partnership interest and become the partnership’s successor general partner upon Ricci's passing.

Banishing Loans, and With it, Debt

Meanwhile, Brown University also has its eye on doing away with the debt-for-degree model of higher education. 

In September, the school launched a $120 million campaign, dubbed the Brown Promise, to drop all loans from financial aid packages awarded to their undergraduates. By doing so, Brown will become the 16th U.S. institution—and the sixth in the Ivy League (excluding Cornell and Dartmouth)—to offer all of its undergraduates a loan-free education.

The plan replaces financial aid packages with grants that do not have to be repaid. All students—domestic and international—will be eligible.

"If we're successful in raising one quarter of the total amount—$30 million—by December, Brown will eliminate loans in financial aid awards for all current and incoming students starting with the 2018-19 academic year," President Christina Paxson said in a statement.

This seems do-able for an Ivy League school boasting donors like Goldman Sachs vet Richard Friedman and Richard Ressler, who, along with his wife Alison, has given Brown at least $9 million since 2009.

And let us not forget the power of the fundraising pitch. A donor's gift will ensure that students, especially those too "affluent" for financial aid, yet lacking (to quote Brown), "the full resources to cover the cost of attending college," won't be trapped in the costly and shady student loan vortex. That's a compelling message.

"Not only will the Brown Promise attract more of the best and brightest students to campus," the press releases states, "it will create more freedom for them to pursue fulfilling, high-impact lives and careers rather than ones designed to repay loans."

A Subtle Shift in the Conversation

All things being equal, these two strategies represent simple and pragmatic options for donors concerned about student debt but unwilling to drift into a politically charged, cost-cutting minefield. They also have drawbacks.

The full potential of Shidler's gift won't be felt for many years. And the school isn't making any bold promises. As noted, the gift could make the school tuition-free if there is a "need or desire to do so at some future time." 

The press release's guarded language notwithstanding, the usage of the term "free tuition" is nonetheless newsworthy. Our higher ed coverage focuses on scholarships, capital expenses, new football stadiums—the whole gamut. But despite escalating tuition and the metastasizing student loan crisis, few donors seem willing to utter the phrase "free tuition."

Shidler's gift, however back-loaded, represents a subtle change in the larger conversation. The same can be said for Brown's anti-loan plan, paid for by donors.

Brown's approach certainly seems more exportable, so it's only natural to wonder if other universities will follow its lead. Mark Kantrowitz, publisher and vice president of strategy at Cappex.com, is leery. "One of the reasons Ivy League schools can do these programs is not only because they have large endowments, but also because they have very few low-income students. Longer term, I would expect to see more focus on free tuition, as opposed to no loans."

Which brings me to my final point.

In his book The Innovative University, Harvard Business School professor Clayton Christensen and co-author Henry Eyring conclude that online education will become a more cost-effective way for students to receive an education, effectively undermining the business models of traditional institutions and driving them out of business.

In a speech last month to the Innovation + Disruption Symposium in Higher Education in May, Christensen predicted that "50 percent of the 4,000 colleges and universities in the U.S. will be bankrupt in 10 to 15 years."

That sounds like a stretch. We're not talking about yellow taxis, here. Still, there's no question that the crunch on higher ed is growing, fueled by higher costs and competing models. It's within this environment that donors will be looked upon to make the tuition-free dream a reality or do away with student loans. Yet their contributions won't be as impactful unless schools cut costs, lower or freeze tuition, or drive efficiencies.

Free tuition gives universities cover to temporarily paper over complicated and messy structural challenges, and if Kantrowitz is correct in predicting more schools will offer free tuition, and Christensen is correct that online education may threaten schools' very existence, then donors need to brace themselves for the coming deluge.

Think universities are reliant on donors now? Just you wait.