Central Administration Acts as Bank for Faculty, Students in Need of Loans

When Neil L. Rudenstine took the University's helm in 1991, Harvard lent him a bright yellow mansion on posh Brattle Street for free. But even though Rudenstine lives on University property without rent, he borrowed $176,000 from Harvard for a mortgage.

Rudenstine is one of several administrators who have taken loans from what the University calls its Central Bank. The money originates as deposits to the central administration, made by the 10 schools, which receive interest on the funds. The central administration in turn invests some of those deposits, and it loans the rest back to the schools and to administrators, faculty and students.

Each school receives interest on its deposits, but Mass. Hall makes money by making loans back to the schools at an even higher interest rate. At the same time, it uses the loans to faculty and students, which are sometimes no- or low- interest, as a form of compensation.

"These loans are meant to support the institution and its mission," says Elizabeth C. "Beppie" Huidekoper, vice president for finance. "It's really strategic."

Without a mortgage program, says Rudenstine, most Harvard faculty members would not be able to live in Cambridge. Without educational loans, Harvard would be at a competitive disadvantage compared to other top college that offer to pay for part of the college expenses of their professors' children.

Rudenstine uses his mortgage to pay for his apartment in New York, where he stays during frequent visits to the city on Harvard business, often for fundraising. He has another $53,000 in educational loans for his children, who are graduate students.

Documents filed with the State Attorney General's office list over three quarters of a million dollars in loans to Harvard's vice presidents, former provost and president.

According to Huidekoper, student loans account for the bulk of the Central Bank's lending, however, totaling nearly $250 million. Loans to faculty and staff total $65 million, and consist of mortgages, educational loans for faculty children and "personal loans."

Huidekoper says that she and Rudenstine approve the loan requests of her fellow vice presidents, and she approves his.

The Harvard Corporation sets interest rates for the loans, and in some cases, Huidekoper says, the interest rates on Harvard loans are higher than those offered by outside banks.

Both Rudenstine and Huidekoper stress that the loans are audited, though the details of the transactions are often confidential. The items marked as "personal loans" on public records are the most ambiguous of all, with no purpose explicitly outlined.

According to public documents, former Vice President for Government, Community and Public Affairs James H. Rowe III '73 took out one such loan for $35,000.

Huidekoper says personal loans are extremely rare, however, given only in "special circumstances."

"I count two in my two and a half years here," she says. "It's something the University does with the advice of lawyers and in extraordinary cases."

While operating a bank is outside the stated purpose of the University,

Huidekoper maintains that faculty benefits and student loans do help to draw the best teachers and students to Harvard, and do support its mission. She points to other Ivy league schools with similar programs.

"Our peers are doing this," Huidekoper says.

Princeton University is one such school, administering a $150 million loan program, but with endowment income, rather than the operating budget.

Richard R. Spies, Princeton's vice president for finance and administration, says loans help his university achieve its "broader objectives" and are not made with profit in mind.

Spies says Princeton scrutinizes its loans to make sure they do not conflict the university's first and foremost priority of educating students.

"We're sensitive to the issue of compensation and making sure there's full disclosure so that any question that arises will be out in the open," Spies says.

He emphasizes the role of established procedure in administering loans, and says that all loans are submitted to a committee of Princeton's trustees each year.

As for the idea that universities should not be involved in the banking business, Spies says the issue is complicated.

"That's a fair question," he says. "I don't think the answer derives from first principles."

As a matter of course, Spies says a university is best to send its borrowers to professional banks, but sometimes that is not possible, as with foreign students.

Huidekoper goes further, defining Harvard more broadly than a mere school.

"It is a corporation," she says. "We are a corporation, literally."

Henry B. Hansmann, Harris professor of law at Yale Law School, who has criticized the universities of the Ivy League for short-changing their students in the push for endowment growth, says the banking function should not worry those who fear the corporate university.

"I suspect this sort of thing is unlikely to be terribly worrisome, as opposed to some other businesses which are pretty far removed from the university's mission," he says.