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Harvard University in Cambridge, Massachusetts, is facing a significant conflict with the Trump administration that could have substantial repercussions for the institution, despite its status as the wealthiest university in the country.
On April 14, Harvard’s President Alan Garber publicly declared that the university would not adhere to the administration’s requirement to conduct audits on its faculty and students regarding “viewpoint diversity.” Following this announcement, the federal government responded by freezing $2.2 billion in multi-year grants and an additional $60 million in contracts with Harvard.
Reports from CNN and other news organizations indicate that the Trump administration has approached the Internal Revenue Service (IRS) with requests to revoke Harvard’s tax-exempt status. If the IRS moves forward with this action, it could lead to severe financial consequences for the university, which benefits from tax-free income on investments and provides tax deductions for donors. Education historian Bruce Kimball noted to CNBC that these tax benefits are estimated to surpass $465 million in 2023.
Tax exemptions for nonprofits like universities can be revoked if the IRS determines they are involved in political activities or deriving excessive income from unrelated business pursuits. Although losing tax-exempt status is rare for universities, there are precedents, such as the case of Bob Jones University in 1983 due to discriminatory practices.
The White House has stated that the IRS’s investigation into Harvard began prior to President Trump’s commentary on social media regarding taxing the university as a “political entity.” A spokesperson from the Treasury Department did not respond to inquiries from CNBC.
In response to the IRS actions, a Harvard spokesperson asserted that there is “no legal basis” for revoking the university’s tax-exempt status. The spokesperson emphasized that the government has historically exempted universities to foster their educational missions, warning that such unprecedented actions could threaten financial aid for students and disrupt vital research and innovation programs.
Moreover, the federal government has escalated its challenge by threatening to hinder international student enrollment through the Department of Homeland Security. The Student and Exchange Visitor Program, administered by Immigration and Customs Enforcement, is impacted by these threats, and Harvard’s student body comprises over 25% international students. Unlike many institutions, however, Harvard is less reliant on these students for revenue due to its provision of need-based financial aid to undergraduates.
When asked about possible legal action against the administration concerning the cessation of federal funds, the Harvard spokesperson refrained from providing specific comments. The legal team representing Harvard, including attorneys Robert Hur and William Burck, has communicated that the federal government’s actions violate the First Amendment.
Understanding Harvard’s Endowment Wealth
Harvard’s endowment currently stands at nearly $52 billion, granting it an impressive average of $2.1 million in endowed funds for each of its students, according to a report by the National Association of College and University Business Officers and Commonfund. This endowment surpasses the GDP of numerous countries.
Last fiscal year, the endowment boasted a return of 9.6%, as outlined in the university’s latest financial report. Established in 1636, Harvard has had a long duration to amass its significant assets, bolstered by a strong donor network that contributed $368 million to the endowment in 2024. Although many of these contributions came from a broad range of donors averaging $150, Harvard has historically received substantial donations from wealthy alumni.
According to Kimball, who serves as an emeritus professor of philosophy and history of education, elite universities like Harvard have attained their considerable wealth by adopting a more aggressive investment strategy in riskier assets.
Historically, university endowments maintained conservative investment strategies, but Harvard changed its approach in the 1950s, allocating 60% to equities and 40% to bonds, thus embracing more risk for the potential of greater returns. Other universities later followed suit, with Yale establishing the “Yale Model” in the 1990s, which explored alternative investments such as hedge funds. This approach, however, generally requires the financial capacity and thorough oversight that only institutions with substantial endowments can afford, according to Kimball.
Harvard’s endowment comprises significant allocations in private equity (39%) and hedge funds (32%), with public equity representing 14%, while real estate and bonds account for 5% each. Changes in portfolio allocations over the past seven years reflect a strategy to lower real estate and natural resource investments while increasing private equity and hedge fund allocations.
Restrictions on Endowment Funds
While university endowments can appear immense, it is important to note that they are composed of numerous individual funds, many of which are designated for specific purposes like scholarships, research, or faculty positions. Harvard’s endowment consists of approximately 14,600 funds, with around 80% restricted for particular uses. In the last fiscal year, the endowment distributed $2.4 billion, with 70% subject to donor requirements.
Scott Bok, former chairman of the University of Pennsylvania, remarked on the reality of endowed funds, stating, “Universities don’t have the ability to break open the proverbial piggy bank and just grab the money in whatever way they want.” Although some of these restrictions may be overstated, as argued by former Northwestern University President Morton Schapiro, they largely pertain to expenses that the universities would incur regardless, like financial aid and library resources.
Harvard’s Financial Strategies
Harvard possesses $9.6 billion in endowed funds free from donor restrictions. Although the university has no current plans to liquidate these assets, as noted in their financial report, such a move could be considered in the face of unforeseen financial disruptions.
However, liquidating a substantial portion of the endowment would have long-term consequences for cash flow and the capacity for future investments. Harvard usually aims to spend around 5% of its endowment each year, which helps maintain its principal and address inflation, but has not provided details on potential increases in endowment expenditure.
Currently, Harvard is reassessing its operating budget and has instituted measures such as a hiring freeze and denying admission to graduate students on a waitlist for the upcoming fall semester.
Additionally, the university has opted to issue $750 million in taxable bonds, which are due in September 2035. Earlier in the year, it had also issued $244 million in tax-exempt bonds, mirroring similar actions taken by other institutions like Princeton and Colgate.
While Harvard’s AAA bond rating from Moody’s remains intact, the broader outlook for higher education shows signs of concern, as Moody’s downgraded its perspective to negative in March.
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www.cnbc.com