The libertarian roots of the Lumina Foundation, Part I

(Editor’s note: This is a two-part story detailing the little-known roots of the Lumina Foundation, a major force in higher education policy today. Part 2 is here.)

Major donors like the Bill and Melinda Gates Foundation and the Lumina Foundation dominate higher education philanthropy today. Most are aware of the Gates Foundation’s roots in Bill’s vast wealth, but the story of how Lumina came to be is more complicated.

Lumina, a $1.3 billion foundation located in Indianapolis, is the nation’s largest private foundation with a sole focus on higher education. Its mission is college access and completion, and it has spent hundreds of millions of dollars in pursuit of that mission. When it comes to bankrolling the movement to put more people in college, there is no one bigger.

Lumina directs its money to various organizations and programs in pursuit of the ambitious—and perhaps unreachable—goal of increasing the proportion of Americans with “high-quality” degrees and credentials to 60 percent, up from 40 percent today.

Though it is a private nonprofit, an examination of Lumina’s complex and to some extent obscure history shows it to be a creature of the federal government. Ironically, that history goes back to a group of libertarian individuals who tried to demonstrate that the federal government does not need to lend money to students—that voluntary society can solve gaps in college access.

If that sounds foreign, it is because at that time no one could have imagined how deeply the government would be involved in higher education.

Lumina was formed in 2000 with a $770 million endowment that it received when government-sponsored enterprise Sallie Mae purchased USA Group. USA Group was a nonprofit organization that owned the nation’s largest guarantor of student loans, USA Funds, which by then handled one of every three student loans in the nation. Sallie Mae, which had just begun to privatize, was well on its way to becoming the largest provider of student loans, and the USA Group purchase helped it along. But because USA Group was a nonprofit organization, this was not a typical transaction. Federal regulations required the proceeds to be directed toward a successor nonprofit.

That nonprofit was the USA Group Foundation, soon named the Lumina Foundation for Education.

The road to Lumina’s formation goes back to 1958, however. That was when the federal government began to tinker with the student loan business. President Eisenhower signed the National Defense Education Act in 1958, a response to the U.S.S.R.’s Sputnik launch—although President Truman set the wheels in motion with his 1947 Commission on Higher Education that called for one-third of American students to get four-year degrees. The 1958 act was designed to increase the number of college science and math graduates in the United States.

Richard Cornuelle was an Indianapolis activist who worked for the libertarian William Volker Fund and was associated with Ayn Rand and free-market economist Ludwig von Mises. A member of an organization called the Foundation for Voluntary Welfare, Cornuelle wanted to show that charity could perform functions better than the government. The timing of Eisenhower’s new law made student loans a ripe target for Cornuelle; he soon founded United Student Aid Funds (USAF), its mission to help poor students get private student aid by backing loans from banks.

Cornuelle’s vision for USAF was, in his words, to “search for non-governmental methods of solving the problems that have provided the excuse for the welfare state.” USAF began on an experimental basis in Indiana, and after a year went national.

The evidence indicates that it was a success. According to Jeffrey Friedman of Critical Review, within five years of Cornuelle’s creating USAF, “two-thirds of all American banks were making low-cost loans to any impoverished student whose college declared that he or she was likely to graduate if enrolled.” Those loans required some measure of accountability—a good-faith indication from the college that the student could pay back the loan. In their paper “The Political Economy of the Philanthropic Enterprise,” economists Peter Boettke and Christopher Coyne wrote that USAF’s academic achievement requirement worked as “reputational collateral” to ensure rigorous standards for borrowers.

That emphasis on ability to finish school is a far cry from today’s expansive federal loan program, which has led to a six-year graduation rate hovering around 60 percent—and to $1 trillion in debt .

In 1964, a survey by the General Accounting Office (now the Government Accountability Office) found that federal student loan delinquency was 16.6 percent. This was about 20 times the USAF rate, according to Cornuelle. “The effect of the federal program has been to undermine the confidence of commercial institutions in the credit-worthiness of college students, and they are destroying the very thing that they set out to promote,” he said in a 1965 speech to the freedom-oriented Philadelphia Society.

Jeffrey Friedman also notes that Cornuelle was equally successful at competing with the federal Job Corps program. He wrote that the government spent $6,695 to find each enrollee a job (it spends about $27,000 per participant today and over $76,000 per actual placement), while Cornuelle’s Center for Independent Action (formerly the Foundation for Voluntary Welfare) spent $22.50 to find each student a job, and with more success.

Thus, Cornuelle developed the idea of the “independent sector” (and coined the term), which he viewed as nonprofit volunteerism, different from both the private and public sectors.

His work in the independent sector was so well known by the end of the 1960s that then-presidential candidate Richard Nixon appointed him to head a volunteerism task force. Cornuelle’s willingness to work  with Nixon elicited harsh criticism from fellow libertarian Murray Rothbard, who called his state-embracing strategy “creeping Cornuellism.” According to friend Peter Boettke, a George Mason University economist, Cornuelle became disillusioned with politics and bowed out in the ’70s.

As successful as Cornuelle may have been at voluntarily guaranteeing student loans, however, USAF could not keep up with the expanding government student aid program. Lyndon Johnson signed the Higher Education Act (HEA) in 1965, as part of his Great Society program. The government’s determination to monopolize the student loan industry led to a series of legal battles with USAF’s lobbying arm, the Council of Private Lending Institutions, to defend USAF’s right to exist.

Those battles and the ultimate creation of the Lumina Foundation will be the subject of the second part of this story.