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Elite Colleges Have a Looming Money Problem
Trump policies and high costs could make coming years a financial challenge for Harvard and other Ivies
By Spencer Jakab
Dec. 24, 2024 9:00 pm ET
They gave it the old college try, but America’s elite universities are facing money problems partly of their own creation.
It might not seem that way compared with the broader world of U.S. higher education. Ivy League institutions and a handful in a similar orbit like Stanford, Duke and the University of Chicago aren’t just blessed to have international cachet and their pick of excellent students and professors—they also have the most money and the richest alumni. By contrast, public and especially smaller private colleges and universities are cutting staff and programs. Many are closing outright.
A school like Harvard, now well into its fourth century, will almost certainly survive for a fifth one. But there are financial problems below the surface that could emerge if the bull market stumbles and especially if some proposed Trump administration policies are enacted.
Harvard’s $53.2 billion endowment is so huge that the difference between a good and a so-so investment performance translates to sums that would dwarf most colleges’ entire nest eggs. Former Harvard President and former U.S. Treasury Secretary Larry Summers estimated this year that if Harvard had been able to just keep up with other Ivies and “large endowment schools” in the past several years, it would have $20 billion more. For perspective, he says that just $1 billion could fund 100 professorships or permanently cover tuition for 100 students.
But even Harvard’s peer group isn’t doing as well as it could. Veteran investment consultant Richard Ennis wrote this month that high costs and “outdated perceptions of superiority” have stymied Ivy League endowment returns, which could have been worth 20% more since the 2008 financial crisis if invested in a classic stock and bond mix. Harvard has more than three-quarters of its endowment in private equity, hedge funds or real estate and just 14% in publicly traded stocks. Harvard Management Co. doesn’t break out fees in its reports and a spokesman didn’t provide that information, but Ennis estimates that the all-in cost of management for such assets is easily 3%, which is a gigantic drag.
Expenses aren’t the only issue. During the financial crisis, when donations plunged and costs rose, Harvard also faced steep investment losses and collateral calls on derivatives. With some investments hard to sell and money already committed to the university, HMC had to exit some stakes at distressed prices and the university was forced to postpone capital projects and borrow to cover the shortfall.
Today it doesn’t face the same derivatives exposure, but private-equity values could be more theoretical than real if it had to sell swiftly. More liquid investments have other advantages. Last year the university relied on the endowment for 37% of its budget, up from about a fifth of the budget 20 years ago and far higher than the average across private, not-for-profit colleges. This comes as gifts have been less abundant. Despite a booming stock market, Harvard said alumni donations fell by 15% last fiscal year amid outrage over the university’s handling of campus antisemitism. Fellow Ivies Columbia and the University of Pennsylvania experienced even steeper drops.
Two Trump administration policies could further weigh on Ivies’ finances. One is a 1.4% tax on income levied as part of the 2017 Tax Cuts and Jobs Act on endowments larger than $500,000 per student at schools with more than 500 students. A few dozen schools have had to pay it and there is talk of increasing the levy.
Far costlier would be rhetoric or visa rules that make it harder or less attractive for foreign students to attend U.S. universities. Foreign students on average receive much less assistance and therefore indirectly subsidize aid to domestic students. Their enrollment took a hit during Trump’s first term.
Even if foreign students aren’t made to feel unwelcome, economic policies that have boosted the value of the dollar relative to foreign currencies could make already expensive U.S. colleges, with a total cost of attendance approaching $100,000 a year before aid, unattractive relative to European, British or Australian universities.
Domestic demographics won’t help. Paul Weinstein Jr. of the Progressive Policy Institute writes that, starting next year, colleges will face an “enrollment cliff” that will see them lose 575,000 students over four years. Yet a booming stock market and competition for student tuition dollars has led to massive growth in university bureaucracies far exceeding tenured staff hires. More than three million people are employed by four-year colleges and Weinstein notes that some actually have more non-faculty employees than students, including Duke and Caltech.
The more elite the college, the less they will suffer from a drop in overall U.S. enrollment. Harvard alone, for example, rejected more than 50,000 students last year—enough to populate several less-prestigious colleges’ freshman classes. A drop in stocks, or a reckoning that reveals their opaque private-equity funds aren’t as valuable as they look on paper, would leave a mark, though.
Write to Spencer Jakab at Spencer.Jakab@wsj.com
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