Should Harvard Be Free?
Posted on January 2nd, 2008 in Uncategorized | 39 Comments »
Harvard’s recent expansion of financial aid has sparked all sorts of interesting conversations, some of which, I think, the University might not have expected. First, in the Boston Globe, college consultant Steven Roy Goodman questions the university’s motives, saying that altruism had nothing to do with it.
Now the Crimson goes to the trouble of reprinting an article from last October in which it asks that question that one so often hears, Should Harvard just pay for all of its students?
For many the idea of a free private college education is a fantasy, as tuition rates around the country climb upwards at alarming speeds with no end to the rise in sight. According to âMaking Harvard Modernâ by Morton and Phyllis Keller, Harvardâs own tuition has skyrocketed from $2,600 in 1970 to $22,699 in 2000 and currently sits at $30,275, up 5.3 percent from last year. The 21st century has seen the introduction of several initiatives to address prohibitively high tuitions among elite institutions; some, including Harvard, have even moved to eliminate parental contributions from low-income students. But with an endowment larger than some countriesâ GDPs, the question becomes: is Harvard doing enough? Why canât Harvard be free for all students?
It’s an interesting question in a sort of, let’s-get-mildly-drunk-and-talk-of-wild-hypotheticals kind of way. But it’s actually a great question for the powers-that-be at the university to have kicking around, because it keeps the conversation from focusing on potentially more problematic issues. Such as:
Why does Harvard tuition consistently rise faster than the rate of inflation?
Given Harvard’s enormous wealth and profit-making ventures, should the university remain tax-free?
Should Harvard, as some in Congress are suggesting, be required to spend five percent of its endowment annually?
Harvard’s endowment will almost certainly pass $40 billion this year, and hit $50 billion in 2009. These questions are only going to get more pressing…..
39 Responses
1/2/2024 3:58 pm
These are all excellent and provocative questions you pose. What are your own views?
1/2/2024 4:21 pm
Why not six percent?
1/2/2024 5:09 pm
Richard,
You say that “Harvard’s endowment will almost certainly pass $40 billion this year, and hit $50 billion in 2009.”
Perhaps, but how do you know? In fact, you don’t. No one can predict what the endowment will be at the end of this fiscal year or next, and it is reckless to make an assumption as to what it will be. Over a long period of time, it is possible to estimate, in broad terms, what the endowment return might be (my best guess is 8-9%, perhaps a bit more, perhaps a bit less, during the next 10 years); however, nothing is certain and the shorter the time frame, the more uncertainty.
What I believe everyone is missing in the arguments about payout ratios is that, unlike foundations, universities have a very long shelf life. A foundation can give away 5% a year and if the circumstances are right, might effectively find themselves out of business at the end of 25 years.Very few will care.It has happened to some very large foundations during the past 75 years.
I won’t be here, but some of us would like to have a vibrant Harvard, 35, 50, 100, 372 years from now. It is a good bet that paying out 5% of the year end endowment, every year, will effectively sow the seeds of a very dimished Harvard over a very long period of time.
The Congress has a blase’attitude when it comes to spending other peoples’ money.It is so easy for Senators to say, pay out 5% (or more). Is it wise? I think not.
Re Standing Eagle: why 6%; why not 6.5%, why not 7%? It’s easy to pick a figure, but what are your assumptions as to a long term rate of return and a long term rate of inflation AS IT APPLIES TO UNIVERSITIES. If you pay out six percent, what has to be earned in order to at least maintain real purchasing power? Please tell us?
If the endowment were to decline by 5% a year for the next three years, would you be willing to take a hit of 15% plus in your salary, and in your benefits? Do you think your colleagues would?
1/2/2024 6:52 pm
“It is a good bet that paying out 5% of the year end endowment, every year, will effectively sow the seeds of a very diminished Harvard over a very long period of time.”
I’ll take the other side of that bet. And here’s what I’ll put up: the necessity of my own (probably fairly affluent) grandchildren possibly having to save to pay the college tuition of my great-grandchildren, just like my parents saved to pay for mine. Hope I don’t lose! Scary!
And here’s another bet I’ll take the other side of. It’s a good bet that around 2042, if the economy does badly between now and then, Social Security will not be able to meet its stated obligations. In that case, old people (i.e., God willing, us) will get just under 80 percent of what society is currently promising them. That in turn will mean that old people in 2050 will get, to pay for their living expenses day to day, — um, significantly MORE in real-dollar terms than old people get now. (Yes, you read that right; SS benefits are indexed to wages not inflation.)
And here’s what I’ll put up on the ‘wrong’ side of that Social Security bet: THIRTY PERCENT of whatever Social Security is currently promising me to help me live after I retire. You heard me; that’s like a five percentage point UNDERlay I’m signing up for.
I’m a crazy crazy gambler, Sam! Sit down at the card table with me and send me home in a barrel! I’m a total sucker. Right?
Right?
Seven percent of the endowment’s yearly income should be spent to improve access to Harvard (and that includes outreach into secondary and lower education, perhaps by partnering more closely with Teach for America). How’s that sound?
No?
Okay.
Eight percent. Final offer.
I could negotiate like this all day.
Going home in a barrel, for sure,
Standing Eagle
1/2/2024 7:25 pm
“Should Harvard be free?”
yes.
1/2/2024 7:55 pm
Well my friend (and I do know who you are), what about the last two paragraphs of my little screed? Let’s hear your thoughts.
“but what are your assumptions as to a long term rate of return and a long term rate of inflation AS IT APPLIES TO UNIVERSITIES. If you pay out six percent, what has to be earned in order to at least maintain real purchasing power? Please tell us?”
“If the endowment were to decline by 5% a year for the next three years, would you be willing to take a hit of 15% plus in your salary, and in your benefits? Do you think your colleagues would?”
SE, I do agree with the thoughts in your second paragraph. It is scary. Why take the chance?
I’m older than you. Although you’ve studied it intensely, you really weren’t old enough to fully understand first hand the effects of an extended downturn in the investment cycle where real purchasing power was severely compromised. A seven or eight percent payout is not, in my mind, prudent. Nor is five. Regression to the mean over a long period of time is almost the only certainty we have in the investment world and the regression coming up will not be pleasant; but don’t tell that to anyone… no one wants to hear it. Let the good times roll (and continue), right!?
Again,I was trained to be an actuary;my profession, however, was managing stock portfolios, a lot of it for large university endowments. Perhaps, I’m being too cautious in my outlook and perhaps your payout assumptions are justified. However, I think a good margin of safety is also justified, because if your assumptions are not correct, the consequences are horrible. Always have a large margin of safety.
Now about your answers to my questions…won’t you share them with everyone or do I have to hear them only at the card table after a few pops?
Best
1/2/2024 8:34 pm
“the consequences [for Harvard] are horrible”
But Sam, what are the consequences for the rest of society in the alternative?
I suggest that we look around us for the answer. Not pretty.
SE
1/2/2024 9:16 pm
well Richard, you’ve obviously hit a promising topic here. You’ve got the best of them to post: Sam Spektor and Standing Eagle no less.
After a long hiatus your blog is becoming serious again…
1/2/2024 9:17 pm
I thought Sam was in Italy escaping this terrible winter in Cambridge!
1/2/2024 9:23 pm
Standing Eagle. You sound refreshed after a long absence. You sound again like an economist, after a brief stint with English Literature.
I agree fully with your idea of partnering with Teach for America and reaching out into K-12. In fact Harvard could make a preemptive move on Congress by offering to underwrite the graduate education of any Teach for America graduate. How’s that for a gamble?
1/2/2024 9:48 pm
Sam, in making your point you go too far. I don’t see HMC making major reallocations to bonds, so at least THEY seem optimistic about the future.
What percentage of YOUR OWN portfolio is in stocks now? What’s your time horizon for those stocks?
1/2/2024 9:59 pm
Standing Eagle, will you be coming to Davos this year?
1/2/2024 11:19 pm
Standing Eagle, can you be more explicit re your post of 7.34pm? What alternative consequences for society do you have in mind?
1/3/2024 4:52 am
8:17 Italy has lots of problems (but is a wonderful country nonetheless). The primary problem is that the government spends far more than it takes in. However, against all odds, the country has a great cell phone system and in most places high speed internet. I use the latter to be absolutely sure not to miss Richard’s blog every single day
8:48 Unfortunately, I don’t understand your point. How am I going too far? No one said anything about not being optimistic. Am merely saying that paying out 5%, 6%, 7% (or more) of the year end portfolio value, is not a wise move for an institution that would like to maintain its real purchasing power (and probably want to increase it) over a long period of time.
SE Must have missed seeing your answers to the two basic questions. What do you expect will be the long term rate of return on investments and the long rate of inflation (as it applies to Harvard)? I feel certain that in your classes, you’d never let a student make a blanket statement and then not present the arguments to justify that statement.
1/3/2024 7:45 am
Sam,
Interesting about your endowment predictionsâ8-9%? Or about 2/5 to 1/3 of current returns?
Like you, I am a conservative predicter. But something would have to go quite wrong for Harvard not to break ten percent on its endowment returns, no?
1/3/2024 7:46 am
Sorry, make that double-digit growth closer to 20% a year.
1/3/2024 8:55 am
Sam, but the real question is not whether the Italian government spends too much or too little, the question is are Italians happy? Wouldn’t you rather be surrounded by happy people? As you know the study of happiness represents the frontier of economic thinking. There are several panels focusing on it in Davos this year.
How happy are Harvard students? and faculty? and staff? Shouldn’t Harvard’s leaders focus a bit on this question, and not just on ‘job satisfaction’?
1/3/2024 10:10 am
7:55
Glad to hear that Davos is having several panels on a subject that is at the frontier of economic thinking. I hadn’t realized that happiness is studied as such.
Some of us are happy in and of ourselves, mainly for the important things and the little things, and really don’t want economists to tinker with it and mess it up as they are prone to do with so much else (pace, my friends who are economists)
You’re right. Italians, in the larger sense, are happy people,certainly happier than many (most?) within a few miles of The Square (that’s probably going to get me into d.s. with the Cambridge/Harvard thought police). That’s one of the reasons I come here; among the others is that vegetables taste like vegetables, but that’s another story.
Unfortunately, government deficits over a long period of time,are perhaps changing things here (now I’m being serious). The breakdown of infrastructure, the high unemployment rate (students typically take 10-12 years to finish an undergraduate degree… seriously; why finish if there are few meaningful jobs),a university system that provides little in the way of resources to either faculty or students (many of the best leave… Professor Alesina is a perfect example) are all affected by constrained government finances. Italians are complaining a lot more than they formerly did, at least that is what we see from an anecdotal standpoint. Nevertheless, a happy and wonderful people.
Now to Richard’s question… “But something would have to go quite wrong for Harvard not to break ten percent on its endowment returns, no?”
Not really Richard.We’ve all basically been fat, dumb and happy re investment returns since 1982.
Those of us who were around before that year remember that there were long periods of time when the returns of the last 25 years were not the norm. There are at least three members of The Corporation who remember it as well. Your alma mater suffered very serious damage to its portfolio in the 70s. Very serious, probably the most serious among major endowments. Just go back and look at the history of Yale.
Could Harvard have less than a 10% return, compounded, for many years. You bet, and those who forget that are doomed to a rude awakening. Call it what you will, regression to the mean will probably continue rear its head and this time it is on the downside. Margin of safety should be foremost in The Corporation’s mind in terms of payout.
SE What’s your best guess for Harvard’s investment returns over the next 15 years?
1/3/2024 10:14 am
The potential challenges to the non-profit status of an institution that could not spend 5%of the return on the endowment is a topic Larry Summers understood well. Possibly in ways that only someone who had held senior policy responsibilities in goverment could.
You will recall that he was working to increase Harvard’s contributions to funding the education of public service professions.
This is more promising than providing a tuition free undergraduate education. Provide tuition free masters degrees in Education, Government and Public Health. Is that enough to re-establish Harvard’s public mission?
1/3/2024 10:17 am
Richard,
For the record, The Crimson did not “reprint” this story. It’s up on the website while we’re not publishing every day during reading period. Things you can do with the Internet these days-wild.
1/3/2024 10:23 am
Mr. Spektor, thanks for these interesting reflections on Italy. Can you comment on their K-12 education system and how it compares with what you see in Cambridge? Are Italian children, at the precollegiate level, better or worse educated than their american peers?
1/3/2024 10:38 am
9:23 As you know, the system in Italy, from middle school on, is totally different from the US. Educated differently; better or worse, I have no idea.
9:14 You did mean spend 5% of the endowment, not ” spend 5% of the return on the endowment”, did you not?
1/3/2024 11:16 am
Will you Crimson people stop being so touchy? You “re-posted” âthere, are you happier now?âan article that originally ran in the paper on October 10. There was no insult intended, and plenty of credit given, and obviously the article has sparked some interesting discussion.
Honestly, sometimes you guys need to relax a little.
1/3/2024 11:16 am
If the economy in Italy is in such disrepair, why are italians healthier, on average, than americans?
1/3/2024 11:20 am
well said Richard. People at Harvard need to learn to relax a little. Those who can should follow Sam’s example and spend a little time in Italy to live like real people. Others should follow your example and go swimming somewhere nice. Really Crimson staff, relax a little so you can be a bit more creative and not have to rehash old stuff in the middle of this awful weather.
Could you consider having some of your editorial meetings in Venice?
1/3/2024 12:28 pm
I would happily have my editorial meetings in Venice. But wasn’t there an article in the Times within a couple of weeks alleging that Italy has been gripped by a sense of malaise?
1/3/2024 2:30 pm
Back to the Q. of the post: Should Harvard be Free?
My son, a senior at another prominent college/university, and someone who has been active trying to change his institution’s admissions and aid policies suggested the following for the Ivy’s and their peers.
Students should be charged the full amount that it costs the institution for a year’s education (he says roughly $90K), and then loans should be made freely available, with partial or full loan forgiveness based on post-commencement income. This would be a way for the institutions not to subsidize the education of future investment bankers and fancy-pants lawyers, while simultaneously subsidizing those who go into teaching and other laudable professions.
I don’t know how you would structure it to take into account further education (grad school, law school, B-school, etc.), but I imagine that would not be too hard. Properly done, it would certainly change individuals’ incentives when selecting careers.
1/3/2024 2:49 pm
wonderful idea 1.30pm. Why not loan forgiveness contingent not just on income but on choosing a service profession -to avoid subsidizing people who are just unproductive or lazy.
1/3/2024 3:30 pm
Richard,
We’re very relaxed at The Crimson, so relaxed in fact that we’re taking the week off (well, minus tomorrow’s paper). No one’s being “touchy” here, just insisting on the same care with language that is a perennial issue of SITD.
1/3/2024 7:06 pm
Richard and SE
Could it happen again?
From 6/30/74 to 6/30/84,Harvard’s real rate of endowment growth
(investment return minus distributions minus inflation) was, on average, -2.5% (that’s correct, there is a minus sign in front of 2.5%). Increases in capital additions added an average
3.3%. Distributions averaged 5.1% of prior year’s endowment. Overall real growth, including capital additions, averaged 0.8%.
This is at a time when the S&P more than doubled (that’s correct; the 10 year time period measured, encompassed a bull market from beginning to end).
Could this situation happen again? Absolutely. Could the endowment earn single digits for an extended period of time? Absolutely. Could real purchasing power decline over a ten year period. Absolutely. Would the faculties be upset? Absolutely. Would it cause significantly more problems than it did from 1974-1984? Absolutely. Is a payout ratio of 6,7, or even 8% of prior year’s endowment value foolish? Absolutely. Is a margin of safety a wise decision? Absolutely.
It would be interesting to hear President Bok address these questions of endowment payout, inflation as it pertains to universities and real rates of returns, because he was the president when this was happening. Could his experience of the late
70s,early 80s, be one of the reasons that The Corporation didn’t raise the payout ratio more than it did last year (when President Bok was interim President)?
1/3/2024 8:08 pm
This is a persuasive argument Sam. You prove that doing a little research to support one’s points ‘pays out’.
Richard, in light of Sam’s excellent points let’s drop this payout business and move on to other issues, shall we?
1/3/2024 8:14 pm
Sam, your logic in that last post perfectly mirrors Dick Cheney’s logic about responding to terrorist threats in Suskind’s “The One Percent Solution.”
Good research though. I’m sorry I haven’t had time to respond to your more specific queries above.
SE
1/3/2024 11:10 pm
7:08, all due respect, but I don’t think Sam’s post is a persuasive argument. All due respect to Sam, who is far more learned in this realm than I, I don’t even think it’s an argument. To say that something happened in the past means it could happen again is, frankly, glib, and not up to Sam’s normally high standards. What happened after the ’74-84 period in the methodology of university investing? What new diversification measures were taken? What hedges implemented? What changes did Jack Meyer and David Swensen implement? Was there not a fundamental paradigm shift in the very understanding of how best to invest a university endowment?
(This would actually be quite an interesting finance book for someone to write.)
The funny thing is, I’m pretty much in agreement with Sam on the wisdom of spending the endowment returns conservatively. But I think a ten-year period of negative endowment growth is hugely unlikely, and not a convincing basis on which to argue for conservative spending.
1/3/2024 11:16 pm
Crimsonite of 2:30-tell me, what is the essential difference between reprinting a story from October and reposting it? Isn’t the essential point that you are recycling it? You folks seem offended that I pointed out that you’re re-using an old story, and so you say that you’re not re-using it, you’re just re-posting it. I don’t quite get the logic of that.
Look, it’s basically a silly argument and I don’t care all that much about it, but I don’t understand what point you’re trying to prove.
Also, as a point of principle, I think it’s odd that a reporter/editor would post anonymously.
1/4/2024 5:13 am
Richard,
Two things and then we can move on as far as I’m concerned.
It is important to understand the difference between nominal growth and real growth. When you said “But I think a ten-year period of negative endowment growth is hugely unlikely”, I would agree. That’s nominal. Negative real growth is very much a possibility.
Your point about a “fundamental paradigm shift in the very understanding of how best to invest a university endowment” is well taken. It doesn’t, however, say anything about future results. New methodology doesn’t necessarily mean better results (it might just bring “smoother” results) It’s too long to explain and this is not the proper place to discuss it, so I’ll drop it. (but be very careful about using terms like hedging etc., unless you’re fully conversant with them).
SE. Re the Suskind book. 1% is indeed small. It seems to me, however, that the risk of negative real growth in the endowment is substantially greater (than 1%) if the university were to use a 6,
7,or 8% payout of the fiscal year- end endowment. The investment world is very different from other areas. Outliers have a funny way of creeping in, more often than probability would indicate. Strange how that happens. Very strange.
Best
SE when you have a chance, would you please tell us the two numbers in your assumptions.I’m curious. Thanks.
1/4/2024 9:26 am
Not all Crimson staff are lazy these days. They just posted an interesting article:
Who’s Reading My Mail?
The University should institute more e-mail safeguards to protect student privacy
1/4/2024 9:57 am
Sam,
I’m always delighted when we basically agree. It bodes well for the purpose of a blog, which is to disseminate information, spark constructive conversation, and bring together a community of folks with similar interests.
As always, thanks for your comments, which, as I say, are far more informed than mine on this and plenty of other subjects.
Cheers,
Richard
1/4/2024 7:13 pm
NO
Why is this only focused on undergraduate tuition?
Where will funding for research come from etc.?
1/9/2024 9:40 pm
Sam Spektor probably doesn’t actually know who Standing Eagle is. I do.