Venture: Bigger The Endowment Bigger The Fun

Harvard President Larry Bacow

Universities have several ways of raising money for themselves, but the most effective method as of recent is the endowment fund. An endowment fund is an investment fund established by a foundation that makes consistent withdrawals from invested capital. These funds are meant to grow investment alongside the growth of the schools themselves. Universities, like Harvard who have one of the largest endowment funds, are also seeing some of the highest returns.

Harvard has been able to log a 7.3% return on their fund, with the median return of an endowment fund being around 2.6%, they’re outdoing competition by a landslide. Harvard’s fund has been able to bring in around $3 billion for the University, making their total endowment a whopping $41.9 billion. When the 2020 pandemic first hit Harvard’s fund saw a sharp decline for the first time since the 2008 financial crisis,

Harvard was able to brace itself somewhat to prepare for larger losses. Harvard President Larry Bacow informed the school and public “Harvard is well-resourced, but that does not mean we can sustain long-term deficit spending. We will need to make tough decisions in the future if we hope to sustain and advance priorities related to our core academic mission.”

Harvard, like many schools, has already frozen salaries and hiring, also putting a halt to many ongoing infrastructure plans. Many top administrators have planned to take a pledge that would cut pay for this year, and donate these monies to a fund to support other University employees during the pandemic.

Harvard’s campus is nearly empty. With many students struggling to afford school before the pandemic, the added financial strain of the current situation will only exacerbate the issue. Some students are optimistically praying that Harvard may use its large endowment to help increase the financial security of current students.

Many schools have received federal funding in order to support themselves and to distribute amongst the student body. This light round of funding gave the schools some breathing room, but there are more problems to arise in the future. Many students feel like they are not getting the same type of education online as they would in person, hoping for some sort of partial reimbursement.

For Harvard, there is a heated debate on the use of the endowment fund more generally. Some see the money as a ‘rainy day’ fund, able to help float the budget when the school is facing below average cash flows. Others see the endowment fund as inherent to increasing school value, almost an attraction in itself, and that it should be persevered despite the situation of students. The logic being, if the endowment fund is touched and funds released future returns will be hurt irreparably.

However, the main issue with releasing monies from these funds is the heavy restrictions placed on withdrawals. Most of the money cannot be touched until the donor releases those funds for specific projects or recipients, it seems about four-fifths of the funds are tied up in this way. As the pandemic began, many schools’ endowment funds were dipped into to stay afloat. Now, schools are trying to recoup their losses by having the Federal Reserve step in and distribute money.

As the pandemic continues, it is difficult to guess how endowment funds will be used as financial markets continue to be affected. With the typical split of 60% in stocks and 40% in bonds, Harvard has good diversity, but during these times many of the risk averse would rather have their money more concentrated in bonds. Though with the Federal Reserve’s quick dropping of interest rates, large endowments are willing to take more risk with hopes of seeing higher returns when this pandemic ceases.

American higher-education is in trouble. Schools like Harvard may have a large endowment fund to rely upon, but other less well-funded schools are on the brink of collapse. All the while students are more unwilling to go into enormous debt, and have been seeking out alternatives like trade and community colleges. As student loans hit all-time highs, it has become less and less financially prudent to pursue a traditional higher-education route. While high-paying roles demand a traditional college degree (in some cases even a masters), potential students are worried competition for these roles will leave them left with nothing bar debt. Hopefully this situation will be an eye-opening experience for colleges, and they will be able to use their funds to reposture themselves to address student concerns and needs.