Colleges Use Cheap Loans to Lure Stars to Faculty

Critics question whether the practice is a wise use of money

House by Rick Friedman; violin courtesy Pittsburgh Symphony Orchestra

Tax forms show universities have given loans to faculty members to purchase homes, or in one case a $362,516 loan to buy a violin.
September 07, 2009

The hunt for top professors is a high-stakes game. Like major-league baseball teams courting free agents, colleges engage in cutthroat competition to woo and retain highly sought talent.

And when standard compensation and perks are not enough, some colleges—especially those in high-priced urban areas—quietly offer low-interest mortgages to lure star professors.

Boston University, for example, issued eight such loans in 2007-8, ranging from $25,000 to $500,000. According to the most recent available federal tax forms, the university was holding $3.56-million in loans to 13 professors—two of whom had recently been appointed deans when the loans were made.

While the practice of offering loans to university employees is not new, especially for relocation, it has typically been reserved for senior administrators. But a Chronicle review of college and university tax forms shows that institutions have extended large personal loans to scores of professors in recent years. Tax experts say the Internal Revenue Service and state laws allow the loans, in most cases.

But many of those same experts question whether the practice is appropriate, arguing that nonprofit institutions such as colleges should not act like banks, nor draw on money that could be used for more explicitly educational purposes. "It's not at all a best practice," says Dean A. Zerbe, a lawyer with Alliantgroup and a former senior counsel to the Senate Finance Committee. "It's a backdoor way to hide compensation."

Congress held hearings on similar loans by nonprofit groups a few years ago, with the Senate Finance Committee investigating a dozen low-interest mortgage loans made by the Nature Conservancy to some of its officers. The loans were repaid, and the Nature Conservancy apologized for the practice. But the scrutiny did not stop the lending activity by colleges.

University officials say a competitive hiring environment for top scholars has led to innovative forms of compensation.

"They're needed, they're sought, and we're trying to see what it takes to get them here," says Jerry Derloshon, a spokesman for Pepperdine University, which makes loans to faculty members.

At New York University, a spokesman, James Devitt, says the university often provides mortgages to professors looking to purchase homes, which in turn frees up university-owned apartments for other faculty members to rent. The university, one of the city's top real-estate owners, has also purchased dozens of condominiums on Roosevelt Island, between Manhattan and Queens, which have been resold to faculty members.

Although Mr. Devitt would not give specific numbers of loans or their amounts, he suggested that the university currently holds as much as $49-million in loans, financed by its endowment and operating revenue. "Of the nearly 2,000 tenured or tenure-track NYU faculty, only 7 percent have mortgage support, at an average value of about $350,000 per faculty member," Mr. Devitt says in an e-mail message. He would not say if interest rates are below market value.

Although more than 20 colleges contacted by The Chronicle would not discuss the conditions of the loans they made to their employees or how those people were selected to receive loans, information provided in the tax forms shows that the overwhelming majority of the loans are for mortgages and are due either 30 years after the date of issue or within a year of the employee's departure from the university. The loans are secured by a lien on the property, and occasionally the employee and university split any appreciation in the value of the home when it is sold.

The new nonprofit tax form that colleges filed for the 2008 fiscal year requires them to disclose more information, including a more detailed summary of loans provided. On the old form, however, colleges vary drastically in what they provide. Some, like Boston University, disclose all loans made to professors and administrators. Others, like New York University, publish only those loans made to their highest-paid employees. And several institutions provide little to no information or offer vague details—a few unnamed "officers" at Fordham University have received relocation loans for more than $800,000 in recent years, and a university spokesman would not discuss them.

College as Lender

Boston University, like NYU, uses mortgage loans as a recruiting tool and promotion perk, says a spokesman, Colin Riley. A pool of money was set aside a few years ago to pay for the loans, he says.

Housing loans issued by Pepperdine, which is located in ritzy Malibu, Calif., vary in size according to need and "depending on how badly the particular person is wanted," says Mr. Derloshon. But the university does not disclose who gets the loans, how many have been made, or their repayment terms. As for interest rates, Mr. Derloshon would say only that the terms were not zero interest, and that the loans would generally be at a more favorable rate than those offered by a bank. "The university isn't a bank, and isn't in the business of making money giving out loans," he says.

Diana Aviv, president of Independent Sector, a coalition of nonprofit charities and organizations, says that since universities are not banks, they should not act like them.

"Making loans of any kind requires a level of expertise that many nonprofits don't necessarily have," she says, adding that if a problem were to arise—say, a professor quits or has financial problems—a personal relationship can only complicate matters.

Raymond D. Cotton, a lawyer and expert on compensation in higher education, tells his clients to steer clear of offering loans to employees, saying the IRS strongly discourages the practice.

"If a person is creditworthy, why can't they take a loan from a bank?" he says. "And if they're not creditworthy, why the heck are colleges giving them loans?"

State laws specifying who is eligible to receive loans from colleges are often murky. For example, California permits loans to be made to officers of a college to pay for a principal residence. College governing boards are required to document the reasons behind all loans and how their conditions were established. If a loan was granted improperly, the state requires repayment at the minimum interest rate set by the government. And loans to employees who are not officers must be approved by the California attorney general's office. However, an official with that office did not receive notice of Pepperdine's loans.

"It really gets down to protecting charitable assets and avoiding waste," says Belinda Johns, California's senior assistant attorney general. "The question always is: Is the use of funds in the best interest of the organization?"

Loans for Everybody?

Loans are sometimes given by colleges for more than relocation to a new city (see table, Page A10). In 2000, Carnegie Mellon University lent $362,516 to Andrés Cárdenes, a music professor, so he could purchase a violin. The university charged him 6-percent interest over 14 years, and Mr. Cárdenes did not need to provide any security for the loan. At Harvard University, Richard Zeckhauser, a political-economy professor, was given a $203,000 loan for the "education of dependents" in 2001, due 20 years later. And Charles Rosenberg, a history-of-science professor, received $61,000 for the same purpose, of which he still owes $25,000. Neither Harvard loan carried an interest rate, and the professors' life-insurance policies were used as collateral. Spokesmen from both universities declined to comment, as did the loan recipients.

John Curtis, director of research and public policy for the American Association of University Professors, says that either everyone should get loans or nobody should, because perks for only select faculty members, he says, add to inequities across a college or even in a single department.

"It's a more corporate style of management and compensation," Mr. Curtis says. "It really sends the signal that this one individual is much more important than the rest of the faculty and staff."

Some universities do open up their programs to a larger group of employees. Butler University, in Indianapolis, has had a "first-mortgage plan" for nearly 20 years, open to all tenure-track professors and administrators. Employees can take out the lower of either two and a half times their annual salary or 90 percent of the purchase price or appraised value of their new property, says Bruce Arick, the university's vice president for finance.

About $3-million of the university's $145-million endowment is tied up in mortgages held by approximately 30 employees. The interest rates do not go below the minimum applicable federal rate established by the IRS, which normally ranges from 4 to 5 percent, but are "more than likely" more favorable than regular bank loans, Mr. Arick says.

But even this more egalitarian approach has critics. Bob Hite, chief financial officer at Golden Gate University, in San Francisco, was surprised to hear that colleges use endowment money to make low-interest loans. "Nobody in their right mind would take money out of their endowment," he says, because those investments typically grow between 8 and 10 percent each year.

Mr. Arick agrees that Butler has probably lost money by making mortgage loans. "Could we have invested those funds elsewhere and got a stronger return?" he says. "At times, yes, but we're looking at the bigger picture. We see it as a valued benefit of getting high-quality faculty and staff."

Legal Wrinkles

William Josephson, a former New York State assistant attorney general who oversaw nonprofit regulation, says there is nothing illegal about college-sponsored home loans, according to New York or federal laws. However, if interest rates fall below the applicable federal guidelines, the difference would be considered part of an employees' salary and would have to be reported to the IRS.

"If you're not paying the interest rate, the IRS will—at least in theory—impute taxable income to you," he says. But in most cases he has investigated, he says, the employees are not reporting those loans in their annual tax filings or paying the associated taxes.

Ms. Aviv, from Independent Sector, says laws that prevent excessive compensation could apply to the loans. If counted as income, the loans could drive some compensation packages above levels deemed acceptable by the IRS, which could result in fines.

Mr. Zerbe, the former Senate Finance Committee counsel, says the loans are unfair to students struggling to pay rising tuitions.

"When you have students being stuck with loans that are borderline shakedowns, but then university presidents and high officials get sweetheart loans, it is disgraceful," he says.

Although new disclosure requirements in future tax filings and inquiries by the IRS suggest that changes may be coming, college-sponsored home loans show no sign of going out of style. New York City records show that over the summer, New York University made three home loans to professors, totaling $769,000.

Paul Fain contributed to this article.