Harvard's Endowment Is $53.2 Billion. What Should It Be For?

New York Times

26-04-2025

Among Harvard University's many distinctions remains the fact it is the oldest continuing corporation in the Western Hemisphere. The designation originates in a charter, authorizing a board of officers to oversee the college's finances, property and receipt of gifts. Nearing his death in 1638, John Harvard, a Puritan minister, left half his estate to the institution that would soon bear his name. Five years later came a contribution of 100 pounds from Ann Radcliffe to underwrite Harvard's first scholarships. The university's funds, as the historian Bruce Kimball has noted, are the oldest perpetual investments in the United States.
At $53.2 billion, Harvard's endowment is the largest in the world, with more than 70 percent of its portfolio given over to interests in hedge funds and private equity. The endowment does not include its real estate, which encompasses acres of land across the river in Boston, parcels of which the university purchased for $88 million over several years in the 1990s, anonymously to avoid the possibility of paying more. In 2023, the university's chief investment officer, a title absent from any 17th-century charter, made $7.6 million. These figures can breed confusion, if not hostility, among the many people whose lives will never be touched by Massachusetts Hall.
The Trump administration's war against higher education for what it insists is a dangerous culture of intellectual inflexibility has forced a debate about capital as central now as the vast underlying disagreements over values. The endowment of the University of Pennsylvania, to take one example, stands at three and a half times the municipal budget of Philadelphia. If universities can claim assets like this, it can be hard to understand what keeps them from releasing funds to cover the research dollars the government is taking away in the name of eradicating 'wokeness.'
Unlike Columbia, which bowed to the White House, Harvard resisted. In retaliation, the government froze $2.2 billion in grant funding and threatened to revoke its tax-exempt status. Harvard has since sued the government, arguing that it cannot interfere with the university's right to free speech, 'to advance its own vision of ideological balance.'
Harvard might choose to go deeper into its reserves to compensate for losses. Or it might elect to take on more debt, or roll out a fund-raising campaign in the name of defending academic freedom — The Harvard Crimson reported that more than $1 million in online donations came in within 24 hours of the university's announcing it would not concede. This month, both former President Barack Obama and Lawrence Summers, who had presided over Harvard and the U.S. Treasury, made the point that the endowments of rich universities were there to be activated in a crisis and did not exist, as Mr. Summers put it in a guest essay in The New York Times, 'to simply be envied or admired.'
For the millions of Americans who do not pay attention to Ivy League investment strategy, that might not seem like an especially defiant proposition. But the idea abrades fiercely held tradition. It is a commandment of managing any trust, but especially university endowments, that the principal go untouched. If you suggest to academic bureaucrats that there must be a way for huge endowments to cover prospective cuts in government funding — and you are not Larry Summers — they will look at you as if you were a child wondering why it is unwise to leave raw eggs out in the sun.
Recently, university administrators have unleashed a PowerPoint of clichés to explain what endowments, with their significant spending limitations, are not. An endowment is not a 'piggy bank' or a 'checking account' or a 'rainy day fund' (to which some reasonably wonder, 'Why not?').
What endowments are becomes considerably more complicated — a matter of existential priority as much as it is a question of practical application, one leading inevitability to a reckoning with the ideals that wealthy universities are ultimately meant to serve.
The Circuitous Logic of Infinite Growth
Concerted efforts to raise funds among alumni began at Williams College in 1821. But it was Charles Eliot, Harvard's president 50 years later, who brought a focus to long-term financial planning, shaken as he was by the loss of his family's fortune in the Panic of 1857. Mr. Eliot is featured in 'Wealth Cost and Price in American Higher Education,' Mr. Kimball's excellent book on the history of college financing. In it, he charts two momentous periods in the history of endowments. The first came at the turn of the last century with the surge of wealth produced by the Industrial Revolution, which gave way to so much philanthropy and the founding of universities like Stanford, Vanderbilt and Carnegie Mellon.
The next era took shape in the late 1980s and '90s with what became known as the Yale Model, pioneered by David Swensen, who in 1985 left a career at Lehman Brothers to run Yale's endowment. Mr. Swensen's innovation was to redirect investments away from conventional formulas for allocations mostly held in stocks and bonds and toward private equity, hedge and venture capital funds, as well as real estate. Over his 35-year tenure he averaged returns of 13.1 percent. Like Warren Buffett, Mr. Swensen became a guru in the field, with acolytes spread out across the academic ecosystem swelling wealth in elite higher education.
As a doctoral student in economics, Mr. Swensen had been mentored by James Tobin, a Nobel laureate whose work provides the dominant thinking around endowments. In an influential paper published in 1974, Mr. Tobin introduced the idea of 'intergenerational equity,' a phrase woven through annual reports. 'The trustees of an endowed institution,' Mr. Tobin wrote 'are the guardians of the future against the claims of the present.' This emerged as a mantra embedded in the assumption that universities are 'immortal.'
Running the Ford Foundation in the late 1960s, McGeorge Bundy, a former presidential adviser, had already been worrying about the costs of higher education. He commissioned studies that produced two enduring recommendations — the first that endowment managers invest more aggressively, in growth stocks, to build wealth rather than merely avert losses and the second that they spend their annual earnings prudently, according to a rule.
For decades universities have taken it as catechism to spend their year-to-year earnings at a rate of no more than 5 percent of the total endowment (often less). Foundations as well as cultural and religious institutions are required by law to spend a 5 percent minimum; colleges and universities are not but do so because they think it is sound policy. (A few states, including Massachusetts, do have laws requiring 'prudence' from universities.)
Morton Schapiro, a former president of Williams and later Northwestern, described the origins of the standard as 'completely arbitrary' and yet fortuitous. 'If you look back at the past 10 to 20 years, endowments have earned about 8 percent a year; inflation has been about 3 percent. Guess what? Five percent, it's turned out to be a remarkably good rule of thumb.'
At the most basic level, that annual draw helps pay for the business of keeping a university going. Every year, the National Association of College and University Business Officers issues a report on the strength of endowments and where the money they generate ends up. The most recent looked at 658 institutions. About 48 percent of investment income went to student aid. Tuition, as high as it is, does not cover the cost of an education at most places; about a quarter of the money, the research showed, went to academic programs and maintaining facilities.
The fixation with infinite growth can hijack endowments to a circuitous logic, making them problematic in ways that are surfacing now. Locked up in order to get bigger, they become harder to access when they are needed, and the bigger they get, the more vulnerable they become to popular resentments.
As the most prestigious universities have followed the exalted fortunes of Wall Street, they have subjected themselves to the animosities leveled against the financial class; they can seem like the rich friend showing up for lunch with a Vacheron Constantin on her wrist, complaining about the cost of renovating her place in Jackson Hole while insisting on splitting the check.
A Mark of Status
From one vantage, huge endowments are an invention of Wall Street, justified as virtue. Universities defend them as an essential means of securing the most talented faculty, supporting the most valuable research, delivering the most aid.
But universities imagine themselves as quasi democracies in a way that Goldman Sachs does not. When every constituency is given a voice, many opinions are rendered. As Derek Bok, another former Harvard president, once pointed out, a huge endowment is a disadvantage to the extent that it elevates expectations that surplus ought to be targeted toward righting perceived injustices.
Endowments are not meant to be tools of politics, but they inevitably appear that way when donors writing $50 million checks assert priorities that may not be politically neutral. The competition for contributions can force concessions to philanthropic interest, vanity and control. Much of what cannot be easily freed in any single fund falls under the category of 'restricted use,' which typically means that it has been earmarked according to donor prerogative. Very few people turn over six or seven figures to their alma mater and say, 'Enjoy!'
Even in quiet times, outsize endowments invite skepticism given the inequities they expose in education more broadly. In recent years, a number of small liberal arts colleges have closed because they could not afford the alternative. For every undergraduate enrolled in Columbia or Cornell, 92 more are going to ailing, public two-year colleges.
Whether it should be the concern of the richest schools to help the poorest, the belief that elite universities have stockpiled too much money is shared across political affiliations. Two years ago, Zohran Mamdani, a progressive New York State assemblyman now running for mayor, introduced failed legislation to end more than $321 million in annual property tax exemption for New York University and Columbia and divert that money to the city's troubled public university system.
There are proposals from Republicans in Congress to increase the tax on large endowments, potentially to 14 percent, much higher than the 1.4 percent put in place eight years ago. Assuming a 10 percent return, that would leave Harvard with a tax bill of about $742,000,000, roughly equal to what it spent on financial aid last year. But you can go around and round. If Harvard raised its endowment draw, however sacrilegiously, to 7 percent, it would add about $1.3 billion to its budget.
Undoubtedly the prospect of higher taxes and the realities of a chaotic stock market have made the notion of tapping endowment income more robustly seem even less attractive to trustees. But those who consider endowments essentially inviolate dismiss some of the workarounds. It is true that as endowments have become more heavily invested in hedge funds and private equity, they have become less liquid. But there are secondary markets for selling positions in some of these funds if a need for cash is urgent. There are reports that Harvard is now considering this option.
One of the great luxuries of having a lot of money is the ability to borrow against it, often cheaply. Princeton University's president, Christopher Eisgruber, has become one of the most prominent critics of the Trump administration's antagonisms toward the academy. In response to the federal government's freezing of several dozen grants, the university, rather than hike up its draw, has issued bonds as a means of raising cash.
Some observers of the recent campus upheaval have noted that Columbia, the largest landowner in New York City, rather than acquiesce to the government's demands to preserve $400 million in grant money, might have borrowed against its real estate, the value of which stands apart from its $14 billion endowment. Harvard, with its triple-A rating, has issued more than $1 billion in bonds since March. 'For a bondholder, the only question is: 'Will I be paid?'' said Larry Ladd, a former budget director at the university who is now a consultant. 'If Harvard were liquidated, they would get paid,' he added.
And while many restrictions are imposed by donors, others are imposed by the university itself, Mr. Schapiro of Williams and Northwestern explained to me recently, 'so they can be unrestricted.' Although it is difficult to pull off, and Mr. Schapiro does not recommend it as protocol, he once approached the grandson of a donor who had died long ago to ask if he could use the money for something other than what was intended. The grandson said yes.
Years after Mr. Tobin delivered his immortality thesis, Henry B. Hansmann, an economist and a professor at Yale Law School, published a retort, questioning what was equitable about privileging a world long into the future over the exigencies of the moment. Whatever lasting arguments his theory might have ignited seem to have given way to an understanding of an endowment as an end in itself, a stand-in for a university's purpose, a rejection of the idea that underlying a belief in institutional eternity is an alienating self-regard.
As Mr. Swensen, the pioneer of the Yale Model, once put it: 'Short of beating an archrival in football,' posting an endowment's highest year-end result 'ranks near the top' of 'institutional aspiration,' a mark of status with which it becomes possible to raise more and more money. Modern universities are essentially engaged in a contest of inverse ratio: Which can claim the most dramatic differential between the amount of money piled up and the percentage of applicants turned away.
The Trump administration has named 60 universities it plans to investigate; soon enough, many will most likely have to wrestle with the questions Harvard and Columbia have. If they believe they deserve to last forever, they might ask what besides money they want to leave behind.