Harvard’s endowment is a staggering $51 billion. That’s larger than the GDP of more than 120 nations – and all the money is tax-free. Taxing just 1% of Harvard’s endowment could make community college free for everyone in Massachusetts. We spoke to some lawmakers who want to do just that and dug into the history of how Harvard – and the rest of the Ivy League – became so rich. The following article is based on a documentary by Perfect Union, an advocacy journalism mission – Editors
by Eric
Here’s a question we’ve been investigating for the last few months: How did Harvard University get so rich? Take a look at these two data points. In 1978, Harvard University had a $1.4 billion pool of money, and they admitted 2,200 students to the incoming freshman class.
But last year, 2024, they had $50.7 billion and admitted only 1,942 students. That’s a 3,500% increase in their endowment size and a 12% decrease in the number of admissions. The same is true of the rest of the Ivy League as well.
But it’s not the case for public universities, which have seen decreased state funding over the same period, while increasing their enrolment numbers. Public universities enrol far more low-income students too. The University of California, Berkeley, for example, enrols more low-income students than the entire Ivy League combined.
In the wake of affirmative action being struck down, there seem to be two tracks for organising equity in higher education. One is making admissions to elite institutions fair by removing legacy admissions, something that Biden’s Department of Education is also investigating. But it’s not enough to just end legacy admissions at elite institutions that benefit a very small percentage of Americans.
We need to structurally reform the higher education system. We’re supposed to be the party of the working class. We ignore what these schools are doing at our own peril.
Schools like Harvard should be expanding; they should be building second and third campuses. If we taxed the top elite private institutions, we could raise a trillion dollars within a decade. It’s not impossible.
By the end of this video, we’ll show you some very real ways we can actually do all of these things right now. And as a bonus, if you watch until the end, I’ll make you a bet that I can show you one thing that Donald Trump did that you watching this video will actually agree with, and it has to do with Harvard. So, let’s get into it.
This is The Classroom from More Perfect Union, and today we’re talking about how Harvard and the rest of the Ivy League got rich. A financial endowment is essentially just an investment portfolio designed to grow a pool of money reserved for an organisation. The Bill and Melinda Gates Foundation has the largest endowment in America at $67 billion.
Endowments for universities date back as far as ancient Rome. Money and education have always been intertwined. Harvard isn’t just the oldest institution of higher learning in America; it’s also the oldest corporation in the entire Western Hemisphere.
Harvard defines its endowment as thousands of philanthropic gifts donated since its early history, many of which were given to support specific aspects of Harvard’s teaching and research work. Legal scholar Henry Hansman writes that the shift to relying on these gifts came in the 1700s as a way to free Harvard from religious policy pressures tied to state funding from Massachusetts at the time. Endowments, quote, served to protect these institutions from the vicissitudes of the political process.
It didn’t, however, free them from outside influence entirely, but rather shifted the source of that influence. But it was only recently that these endowments exploded in size. If you go back to the 1960s, endowments were mainly managed to maintain the size of the endowment.
Charlie Eaton, author of Bankers in the Ivory Tower, highlights a key moment in the history of endowments: a report published by the Ford Foundation in 1969.
In that report, they say, “Endowments should be invested to maximise return on investment,” which laid the groundwork for major changes in endowment management that took root in the 1980s.
The 1980s were the decade that transformed the university endowment as we know it. One thing that astonishes me about this period is that this is when American intellectual society seems to shift away from inventing transformative new technologies or uncovering medical breakthroughs, and instead starts inventing financial schemes. Two of these schemes were hedge funds and private equity funds.
Both are high-risk, high-reward investment methods that appeal to very wealthy individuals. Yale University’s endowment manager, David Swenson, saw an opportunity in these new investment methods. Swenson developed the Yale model of endowment investing, which involved putting large portions of the endowment into private equity investments and hedge funds that could yield higher returns than other options.
The catch was, these investments were riskier. They often also came at the expense of workers. What are you looking at? You’re labourers. You’re supposed to be labouring. That’s what you get for not having an education.
By 2019, about 60% of Yale’s endowment fund consisted of investments in hedge funds, private equity, and venture capital firms.
Hedge fund billionaire and 2020 presidential candidate Tom Steyer was a huge fan of Swenson’s, saying, “What David did was pioneer new ways of thinking about investment. He did it with absolute integrity and honour.”
And he did it for a cause bigger than himself. It just so happens that Swenson’s pioneering ways furthered Steyer’s own interests too. Both Tom Steyer and David Swenson were alumni of Yale University.
Around 1986, at a Yale homecoming football game, Tom Steyer heard that David Swenson was now managing the Yale endowment. Steyer began a two-year courtship, meeting with Swenson to say, “Hey, if you invest in my fund, I think I can earn really big returns for the Yale endowment.” Swenson replied, “Well, this is high risk. How do we know you won’t just close your firm if your hedge fund doesn’t make big returns in its early years?” Steyer said, “No, you can trust me. I won’t shut down.” And basically, as former Yalies, they shook hands.
As a result, David Swenson, on that trust, invested around $300 million with Steyer, which was about a third of his initial capital. This was key to Swenson’s success. By embracing people like Steyer, he grew Yale’s endowment from $1 billion when he took over in 1985 to $31 billion by 2021.
The same sort of transaction between colleges and hedge funds was happening at Harvard. One of the first major hedge funds was the Baupost Group, founded by Seth Klarman and others who were associated with Harvard Business School in the early 1980s. They developed a hedge fund model that has since earned tens of billions of dollars.
And oddly enough, people from the Baupost Group have gone on to sit on the Harvard Board of Managers, which manages the investment fund. This is an incredibly important point: Seth Klarman went to Harvard Business School, then graduated and founded a hedge fund. Then Klarman and others from his hedge fund went back to hold influential positions at Harvard, where the endowment invested in the hedge fund he had founded.
Fun fact: David Swenson followed a similar path. He was a Yale graduate who worked on Wall Street at Lehman Brothers and Salomon Brothers before going back to Yale to run their endowment fund.
This revolving door between the Ivy League and Wall Street was mutually beneficial. It helped secure hedge funds and private equity firms with the early capital they desperately needed, and it also contributed to the endowment boom.
Schools that added the most private equity and hedge fund managers to their boards tend to have higher rates of return on investment. So, let’s recap. At one point, university endowments were managed to simply maintain their size, growing only to beat inflation.
Then, David Swenson and the Yale model changed everything, pushing for riskier investments to maximise growth. At the same time, people like Seth Klarman graduated from Ivy League schools, went to work on Wall Street, and started populating their colleges’ boards, applying Wall Street’s lessons to make as much money as possible.
That’s how Harvard, Yale, and many other elite universities got rich. But what’s so bad about colleges having so much money? Isn’t that good for the students who go there? Well, for one thing, recent studies have shown that the colleges creating the most upward class mobility for their graduates aren’t the ones with the most money. In fact, they’re largely public universities with far fewer resources.
The Ivy League was founded by the rich and the elite, and it operates for the benefit of the rich and elite. This is Jane Chung, a Harvard alumna, who spoke to me about what it’s like coming from a working-class background and being admitted into an elite university. She said, “I found myself in a place where I was encountering incredible amounts of wealth, and I didn’t know how to navigate a system designed for the elite.”
Universities like Harvard, where I attended, have vast amounts of wealth. And yet, students graduating are mired in hundreds of thousands of dollars of debt. So, where’s the disconnect here? The story of public colleges has been starkly different.
If you take an example like UC Berkeley, a fantastic public school, they have 45,000 students and only $3 billion to operate.
Elite private universities keep their enrolments very small to remain elite. By definition, an elite is a group that excludes others. If you admit too many students, you won’t be elite anymore because you’re no longer exclusive.
This pursuit of elite status was exacerbated by another 1980s innovation: the US News & World Report’s college ranking system. Author Sahad Sharda writes about how the magazine and its billionaire owner, Mort Zuckerman, gained power and influence in his new book, The College Cartel.
US News & World Report holds a massive market share and is seen as the de facto ranking system by the majority of high school students. The formula behind these rankings aimed to make sure that the schools everyone thought were the best stayed on top, ensuring credibility.
The essential logic of the US News rankings is to spend as much money as possible on as few people as possible. The natural result of this system is that universities reject more and more students each year, just to climb the rankings. This creates a massive scarcity and distorts behaviour.
That scarcity of seats is entirely artificial, and it’s just another way the Ivy League retains its power and prestige. The billionaire who owns the magazine has donated millions to Ivy League universities and sits on several of their boards.
These close ties between US News and elite college presidents came in handy in the mid-2000s when there was talk of a government competitor to the US News rankings. During the Obama administration, there was an effort to set up a public rankings system tied to government funding, but elite college presidents convinced the administration not to pursue this.
Part of the reason it’s so hard to rein in Harvard is that despite operating like a hedge fund and boasting about being the oldest corporation in the Western Hemisphere, they are legally considered a non-profit. What this means is, if I’m a non-profit and I raise $100 in a year, I don’t have to pay taxes on that.
Tax exemption isn’t the only benefit of their non-profit status. They also gain access to additional resources to compound their wealth. Charlie Eaton writes about this in his work. You’ve probably heard of massive donations from wealthy alumni meant for buildings to be named after them. The colleges don’t use this money for buildings. They put it into the endowment fund to grow investment returns and borrow the money for the building from government markets only accessible to non-profits.
The reason they enjoy 501(c)(3) status is because they claim to operate for educational purposes and the public good. But are they doing that? That’s debatable. With legacy admissions, donations, and ties with investors, elite universities end up being gated communities for the education of elite kids. And that’s not a public good.
Remember how I said I would show you something you’d agree with Donald Trump on? Well, here it is. In 2017, Trump signed into law a 1.4% tax on net investment income from the richest schools in America. Yes, Donald Trump set the blueprint for how progressives might tackle Harvard.
And it’s not just Trump. AOC talks about taxing the wealthy, but Harvard University’s endowment pays zero tax. Harvard has over $40 billion in its endowment.
Excessively large private university endowments, Senator Tom Cotton argues, could raise $15.4 billion with a 6% tax on the top 10 universities in America. Why are we subsidising this insanity? These are the richest institutions in America.
The right-wing has co-opted ideas about making public education more accessible and affordable, but that’s a real problem. Because the one thing most people in this country share is education.
As Democrats, we should be talking about how to make education more affordable, better, and more equitable for everyone. I spoke to two Massachusetts Democrats, Representative Peter Cataldo and Senator Pavel Paiano, who introduced a bill to punish Harvard.
The bill addresses three harmful admissions practices: early binding decisions, legacy preferences, and donor preferences. Rather than banning them, if a school with a large endowment uses these practices, it will face a small public service fee. In most cases, this fee would be less than the capital gains earned on the endowment.
“Living in Lawrence, one of the poorest cities in Massachusetts, where fewer than 10% of people have a four-year degree, finances are a huge barrier. If we made community college free, it could cost $50 to $100 million,” they said.
That’s less than 1% of Harvard’s endowment. Now, imagine if we taxed all elite universities in America. States across the country are proposing legislation to do just that.
The combined endowments of the Ivy League exceed twice the cost of making community college free for all Americans. We started this video by asking how Harvard got rich, but the real mystery is why so many people have been cut out of the benefits of that wealth.
Harvard and other Ivies could be building second or third campuses and quadrupling their enrolments, but they won’t, because their prestige is built on excluding millions of working-class Americans from their country club system. That won’t change unless we get serious about tackling their endowments.
