Why Harvard Can’t Rely on Its Endowment
Credit: Bloomberg / Getty Images- The Trump administration has threatened to freeze billions of dollars in federal research funding to Harvard University.
- Harvard did not accede to the administration’s demands stemming from accusations of antisemitism.
- Some wonder why wealthy schools like Harvard can’t plug funding gaps with income from endowments.
- Given donor restrictions and spending policies, endowment income cannot replace lost federal funds.
While Harvard University and the Trump administration battle over academic freedom, institutional autonomy, tax-exempt status, and diversity in its many forms, billions of dollars in research funding hangs in the balance, causing many to wonder why Harvard, with the world’s largest university endowment, doesn’t just take its money and run.
With more than $53 billion in the bank, can’t Harvard just plug the gaps left by losses in federal funding?
Not exactly.
Trump Administration Freezes Federal Funding
In March, the Trump administration promised to review $9 billion in federal funding to Harvard, including $256 million earmarked for the university and another $8.7 billion designated for its hospital affiliates, in light of claims of antisemitism on campus.
A letter to the university from the administration outlined various demands with which Harvard must comply, covering concerns such as governance and leadership, faculty and staff hiring, admissions, international students, and diversity, equity, and inclusion (DEI) policies. These demands ventured well beyond the matter of antisemitism.
Harvard said no, stating it would not “surrender its independence or relinquish its constitutional rights.”
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Accordingly, the Trump administration froze $2.2 billion in federal grants to the university, followed by another $1 billion slated for health research. University leadership decried these moves, claiming funding cuts would jeopardize critical research, scientific discoveries, and public health.
“The victims will be future patients and their loved ones who will suffer the heartbreak of illnesses that might have been prevented or treated more effectively,” Harvard President Alan Garber wrote.
“Indiscriminately slashing medical, scientific, and technological research undermines the nation’s ability to save American lives, foster American success, and maintain America’s position as a global leader in innovation.”
Harvard’s not alone in this regard. The Trump administration has frozen $1 billion in grants to Cornell University, $790 million at Northwestern University, and $175 million at the University of Pennsylvania, among other targets.
Facing a $400 million reduction in funding, Columbia University acceded to the administration’s demands pertaining to antisemitism, campus unrest, and certain academic programs.
Yet Harvard remains steadfast in its refusal to bow to federal demands and has sued the Trump administration over funding cuts.
Donor Restrictions Limit Flexibility
Meanwhile, observers wonder why a university sitting on a $53.2 billion war chest doesn’t use its own money to continue the vital research now in jeopardy.
It’s not that simple.
For starters, a university endowment isn’t “an” endowment but rather a collection of endowed accounts. It’s not a lump sum. In Harvard’s case, the endowment comprises some 14,000 individual funds.
Most of those endowed funds are designated, or restricted, by donors for certain purposes — scholarships, academic programs, faculty support, athletics, and so forth. Universities create endowment agreements, essentially legally binding contracts with donors promising to spend funds according to the donor’s wishes.
If an endowment is earmarked for, say, scholarships for philosophy students, the university can’t spend income from that fund on scientific research or lab equipment. That would violate the donor agreement.
Now consider that 80% of Harvard’s endowment is restricted in this fashion.
Of course, that leaves 20% in unrestricted funds, which Harvard says are “more flexible in nature” and “critical in supporting structural operating expenses and transformative, strategic initiatives.”
Could Harvard use these unrestricted funds to cover research expenses?
Let’s do some math. All told, Harvard’s endowment provided $2.4 billion toward the university’s budget in fiscal year 2024 (ending June 30, 2024). Twenty percent of that is $480 million.
So in theory, even if Harvard allocated every dollar generated from unrestricted endowed accounts toward research, it would still fail to cover the potential billions in federal funding losses.
Naturally, the $480 million doesn’t include income from endowed funds designated for research, but those funds would have to be restricted in such ways that they support the research unfunded by federal dollars.
Here’s another concern. An endowment might be unrestricted but held by a particular school within the university. An unrestricted fund at Harvard Business School, whose endowment constitutes roughly 10% of the university’s $53 billion, wouldn’t necessarily be available for scientific or medical endeavors.
Finally, if congressional Republicans get their way, wealthy universities will realize less cash from their endowments thanks to proposals seeking to raise the existing 1.4% endowment tax to 21% or even 35%.
In short, Harvard’s endowment revenue is no substitute for federal funding, which totaled $686 million in fiscal 2024 and was the largest source of support for university research.
Adjusting Spending Rates in Emergencies
But wait, you say. These payout figures — the usable income generated by the endowment — are predicated on a 5% spending rule. Why not increase the payout amount? Universities can and do, though sparingly.
Here’s a quick primer on how endowments work.
Think of a university endowment as a savings or retirement account. The principal, or corpus, generates interest that must be spent according to the donor’s wishes. That principle remains untouched in perpetuity, meaning forever.
As an example, say a donor establishes a $1 million endowment. Using a 5% spending rate (college rates typically range from 4-6%), the endowment will pay out $50,000 that must be used according to the donor’s wishes — as a scholarship, for instance.
Colleges invest these endowed funds, generating returns that often exceed the 5% expenditure. Excess funds are added to the corpus so it continues to grow over time and keep pace with inflation; otherwise, that $1 million endowment will have far less impact on future generations.
In managing endowments, universities exercise extreme prudence, favoring long-term growth and viability over short-term gains. That’s why they increase spending rates only in extreme circumstances.
The COVID-19 pandemic was one. When the crisis hit, endowment spending increased from 4.36% to 4.59%. Facing budgetary losses from students no longer being on campus or dropping out, colleges needed to draw more from their endowments to bridge financial gaps.
Similarly, during the Great Recession, about half the colleges in one study said they increased endowment spending in fiscal year 2009 to support campus operations.
In extreme cases where an institution might face bankruptcy or closure, a court can issue a doctrine of cy pres, which allows a college to use its endowment for sheer survival.
Harvard notes that its payout rate ranges from 5.0-5.5% depending on market returns.
During the pandemic, the university approved a 2.5% increase to the spending rate to address financial concerns.
It could adopt this tactic again, thus temporarily raising the amount of usable income from the endowment, but that doesn’t constitute a long-term strategy the university would likely entertain.
Bear in mind that some states limit the spending threshold for both public and private institutions. In Ohio, it’s 5%, and in California and New York, it’s 7%. That has implications for Columbia, whose endowment of $14.8 billion is less than a third of Harvard’s.
No Substitute for Federal Funding
In fact, the entire exercise of exploring Harvard’s possible use of its endowment to offset federal funding losses represents the most extreme end of the wealth spectrum, so it’s hardly an example other institutions could follow. And if Harvard can’t plug the gaps, no institution can.
So far, targeted funding cuts have affected only a few wealthy institutions, though the 15% indirect cost cap on the National Institutes of Health and the Department of Energy grants threatens the entire higher ed industry.
In an American Council on Education podcast, Steven Bloom, assistant vice president of government relations, pointed out that in 2023, the federal government spent roughly $60 billion on research funding. Total higher education endowment spending that year across the board — not just for research — was about $35 billion.
If endowments can’t cover federal funding losses, what can? Harvard aims to issue $750 million in bonds as a stop-gap measure addressing immediate needs.
Yet the real answer is that nothing can substitute for federal funding — not endowment spending, not investments from corporate America, not private philanthropy. Universities like Harvard will have to learn to do more with less or, more likely, just do less, which doesn’t bode well for society.