The fat is in the fire.

Last week’s reports on endowment returns for the nation’s wealthiest colleges and universities has made all but certain that higher education’s endowment practices are going to receive intensive scrutiny. The letters to the institutions with the 136 biggest endowments have already been sent, requesting them to supply the Senate Finance Committee with detailed information as to how they set their prices, award financial aid, and determine how much cash they draw from their endowments to fund their educational and research programs.

Organized higher education is sure to respond — suggesting that the subject is horribly complex, that it is always important to put money away for future emergencies, and that those outside of higher education really don’t understand the true purposes of higher education’s endowments.

I have a suggestion for those who will promote this line of defense — don’t. Don’t tell Senators Grassly and Baucus they don’t understand how endowments work. Don’t pretend that the current flap, like kidney stones, must surely pass. And don’t minimize how ludicrous it really is to have institutions with very high price tags realizing huge returns on their invested portfolios and then not spending the cash on the institution’s stated purposes. The fact that it is only a relatively small number of institutions won’t help. It is, after all, a set of institutions that are truly household names.

It would also help if the defenders of higher education’s current endowment practices were to remember that gifts to endowments reduce the taxes the benefactors pay and the returns endowments earn on their investments are tax free. Simply put, one of the reasons these institutions have so much money to invest is that they didn’t pay taxes on the money they had previously earned.

It is always possible that nothing other than bad press will result. After all it is an election year. The economy has become tumultuous. The war in Iraq drags on. There are plenty of other, perhaps even meatier issues on Congress’s plate. My guess, however, is that sooner or later higher education will have to pay the piper.

Here’s a suggestion that I hope makes some sense, although I know it will be fiercely opposed by those most responsible for higher education’s finances and its tax free status. Why not require college and university endowments to pay the same taxes on the monies they earn from their investments that other, similarly constituted hedge funds are required to pay. A relatively simple rule could be applied. All dividends, interest, rents, and realized capital gains would be taxed at current rates. However, the money owed the IRS would be reduced by the amount of cash the institution withdrew from its endowment to fund educational and research programs. In years when the monies spent exceeded the growth in the value of the endowment a credit would be awarded to offset future taxes. This proposal would have little effect on smaller endowments. However, the mega- billion-dollar endowments that on average earned returns in excess of 20 percent in 2007 would either have to substantially increase their expenditures on education and research or pay substantial federal taxes.

What will not likely work, given the size of the returns earned by higher education’s mega-endowments, is a rule requiring spending equal to at least 5 percent of the endowment’s value.

I understand that few if any within higher education will like such a proposal — it punctures the no-tax barrier that now benefits not-for-profit higher education; it adds complexity to a subject already fraught with complexity; and it creates a set of incentives that might only benefit the army of accountants that would be necessary to prepare the necessary tax returns. The one advantage of my proposal is that it just might prevent much greater mischief by a Congress that wants to be seen on the side of the little guy facing a tough time paying higher education’s current high prices.