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Paying Tuition to a Giant Hedge Fund

Harvard's academic mission is dwarfed by its $30 billion endowment.
Harvard Yard

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The Myth of American Meritocracy

From its 1636 foundation Harvard had always ranked as America’s oldest and most prestigious college, even as it gradually grew in size and academic quality during the first three centuries of its existence. The widespread destruction brought about by the Second World War laid low its traditional European rivals, and not long after celebrating its third centennial, Harvard had become the world’s greatest university.

Harvard only improved its standing during the successful American postwar decades, and by its 350th anniversary in 1986 was almost universally recognized as the leader of the world’s academic community. But over the decade or two which followed, it quietly embarked upon a late-life career change, transforming itself into one of the world’s largest hedge funds, with some sort of school or college or something attached off to one side for tax reasons.

The numbers tell the story. Each September, Harvard’s 6,600 undergraduates begin their classes at the Ivy-covered walls of its traditional Cambridge campus owing annual tuition of around $37,000 for the privilege, up from just $13,000 in 1990. Thus, over the last two decades, total tuition income (in current dollars) has increased from about $150 million to almost $250 million, with a substantial fraction of this list-price amount being discounted in the form of the university’s own financial aid to the families of its less wealthy students.

Meanwhile, during most of these years, Harvard’s own endowment has annually grown by five or ten or even twenty times that figure, rendering net tuition from those thousands of students a mere financial bagatelle, having almost no impact on the university’s cash-flow or balance-sheet position. If all the students disappeared tomorrow—or were forced to pay double their current tuition—the impact would be negligible compared to the crucial fluctuations in the mortgage-derivatives market or the international cost-of-funds index.

A very similar conclusion may be drawn by examining the expense side of the university’s financial statement. Harvard’s Division of Arts and Sciences—the central core of academic activity—contains approximately 450 full professors, whose annual salaries tend to average the highest at any university in America. Each year, these hundreds of great scholars and teachers receive aggregate total pay of around $85 million. But in fiscal 2004, just the five top managers of the Harvard endowment fund shared total compensation of $78 million, an amount which was also roughly 100 times the salary of Harvard’s own president. These figures clearly demonstrate the relative importance accorded to the financial and academic sides of Harvard’s activities.

Unlike universities, the business model of large and aggressive hedge funds is notoriously volatile, and during the 2008 Financial Crisis, Harvard lost $11 billion on its net holdings, teetering on the verge of bankruptcy as its highly illiquid assets could not easily be redeployed to cover hundreds of millions of dollars in ongoing capital commitments to various private equity funds. The desperate hedge fund—ahem, academic institution—was forced to borrow $2.5 billion from the credit markets, lay off hundreds of university employees, and completely halt construction work on a huge expansion project, ultimately surviving and later recovering in much the same way as did Goldman Sachs or Citibank.

During all these untoward events, the dollars being paid in by physics majors and being paid out to professors of medieval French literature were of no significance whatsoever, and if institutional investors had balked at the massive bond sales, both groups might have arrived at the classroom one morning only to see a “Closed for Bankruptcy” notice, while Cerberus Capital Management and the Blackstone Group began furiously bidding for the liquidated real estate properties and private equity holdings of what had once been America’s most storied center of learning. Meanwhile, Bill Gates might have swooped in and acquired the unimportant educational properties themselves for a song, afterward renaming the campus itself Microsoft U.-East.

It is commendable that so many former students feel gratitude to their academic alma mater, but personal loyalty to a wealthy hedge fund is somewhat less warranted, and if Harvard’s residual and de minimis educational activities provide it with enormous tax advantages, perhaps those activities should be brought into greater alignment with benefit to our society. The typical private foundation is legally required to spend 5 percent of its assets on charitable activities, and with Harvard’s endowment now back over $30 billion, that sum would come to around $1.5 billion annually. This is many times the total amount of undergraduate tuition, which should obviously be eliminated, thereby removing a substantial financial barrier to enrollment or even application.

One of the major supposed reasons Harvard disproportionately admits the children of the wealthy or those of its alumni is the desperate need to maintain its educational quality by soliciting donations, and the endless irritations of fund-raising drives are an inevitable accompaniment to the reunion process. But the all-time record for a total alumni class contribution was set earlier this year by the Class of 1977 at just $68.7 million, or about 0.2 percent of the existing endowment; and even the aggregate amount of annual alumni donations to support the college is quite trivial compared to the overall income and expenditure statement.

There is also the Internet gossip of an explicit “Harvard Price,” a specific donation dollar amount which would get your son or daughter admitted. The figure is said to be $5 million these days for an applicant who is reasonably competitive and $10 million for one who is not. Daniel Golden’s The Price of Admission provides a specific example which tends to generally confirm this disturbing belief.

But if such claims are true, then Harvard is following an absurd policy, selling off its good name and reputation for just pennies on the dollar, not least because the sums involved represent merely a day or two of its regular endowment income. Harvard surely ranks as the grandest academic name in the world, carrying a weight of prestige that could be leveraged to extract far greater revenue at far lower cost of academic dignity.

Suppose, for example, that instead of such surreptitious and penny-ante wheeling and dealing, Harvard simply auctioned off a single admissions slot each year to the highest blind bidder on the international markets. I suspect that the same sorts of individuals who currently pay $50 million or $100 million for a splotchy painting they can hang on their walls would surely be willing to spend a similar amount to have their son or daughter embossed with the Harvard stamp of approval. The key factor is that such prestige goods are almost entirely positional in value, with most of the benefit derived from the satisfaction of having outbid your rival Internet billionaires, oil sheikhs, or Russian oligarchs, so the higher the price goes, the more valuable the commodity becomes. And since the goal would be to extract as much money as possible from the wealthy bidders, a non-refundable bidding deposit of 2 percent or 5 percent, win or lose, might double or triple the total dollars raised.

Thus, instead of extracting steep net tuition from thousands of undergraduates (and perhaps quietly selling a handful of spots each year for a few million dollars each), Harvard could probably raise just as much revenue by enrolling a single under-qualified student in a process which would publicly establish the gigantic financial value contained in a Harvard diploma. It’s even quite likely that a useful side-benefit of the publicity would be a large rise in Harvard’s total applicants, including those of highest quality, as families all across the country and the world sought to obtain at zero cost the exact same product which a billionaire had just bought for $70 million.

If Harvard wishes to retain its primary existence as a gigantic profit-maximizing hedge fund, that is well and good, but meanwhile perhaps it should be required to provide a free top quality college education to a few thousand deserving students as a minor community service.

Ron Unz is publisher of The American Conservative.