No, Harvard’s Endowment Cannot Withstand Trump

Updated April 19, 2025, at 6:00 p.m.

Within hours of Harvard’s Monday email announcing it would defy the Trump administration’s demands, the White House had frozen $2.2 billion of federal funding for the school. On Tuesday, Donald Trump posted a rambling message on social media, threatening to revoke the school’s tax-exempt status. By Wednesday, the Internal Revenue Service reportedly began planning for such an eventuality.

As the U.S. government escalates perhaps the most aggressive campaign to target Harvard’s finances in American history, many are pointing to the school’s wealth as evidence it can afford to stand up to Trump — optimistic thinking that significantly understates the immense toll Trump’s policies will impose on Harvard.

First, endowment spending cannot replace federal funding long-term without hurting endowment returns — jeopardizing future spending. Second, a loss of its tax-exempt status and the threatened increase of the endowment tax would, if enacted, further eviscerate Harvard’s long-term expenses, combining to cost Harvard much more than the $2.2 billion it lost this week.

Simply spending the endowment down is not only financially precarious — it’s also almost impossible to accomplish legally. Four out of five dollars in the endowment are restricted for specific purposes. Liquidating these funds to offset the losses from federal funding would be illegal.

But beyond the technical and legal difficulties involved with liquidating the endowment, tapping into endowment funds to compensate for other funding losses could have deeply damaging long-term effects.

Currently, the endowment’s value increases over time due to returns on investments, which eclipse the University’s average spending. If, however, Harvard were to replace its federal funding with endowment spending in the long-term, the endowment’s growth would stall. This would be detrimental to the University, which currently relies upon endowment returns to finance its operations and support expensive world-class research.

To model the endowment’s dynamics, I assumed investment returns are randomly drawn from the distribution of returns over the past ten years and that returns will continue to be taxed at the current rate of 1.4 percent. Conventional economic thinking dictates Harvard should optimally spend a constant fraction of its endowment value each year, which is aligned with the school’s official policy of an annual payout rate between five and 5.5 percent.

I forecasted two scenarios: one in which Harvard continues spending at this rate and another in which it increases to offset losses from federal funding cuts.

The results are striking. When Harvard continues spending at current levels, its endowment is projected to increase to above $66 billion over the next decade. However when Harvard spends at the level required to compensate for the estimated $650 million it is projected to lose each year — and continues spending at that pace over time — the endowment’s value only reaches $62 billion. Over time, the University’s endowment would be less capable of financing research.

In the short-term, Harvard may decide to spend at higher levels, reasoning that the federal funding freeze will eventually be reversed when a new administration enters the White House — or if they successfully battle these cuts in court. Indeed, Harvard seems to be adopting a similar strategy, recently issuing $750 million in taxable bonds following a bond sale earlier this year.

This analysis is all the more concerning since it appears the federal government will not stop there. Harvard could become liable for an estimated $465 million annually if the IRS follows through with its plans to revoke the University’s tax-exempt status, exacerbating the difficulty in any attempt to finance defunded programs using University resources.

While the Trump administration is currently mostly focused on immediate funding cuts and changes to Harvard’s tax-exempt status, there are signs it may raise the endowment tax too — an equally pernicious policy. Any increase to the endowment tax would result in additional losses and make it even more difficult for Harvard to insulate itself from federal cuts. Because endowment taxes also play well on the political left, these policies, if implemented, might never be reversed.

Using the same model as above, I forecasted Harvard’s endowment value over the next decade under different tax regimes. I ran the model with the current 1.4 percent tax on endowment earnings, as well as increases to 10 and 35 percent, as have been proposed by Rep. Mike V. Lawler (R-N.Y.) and Vice President J.D. Vance, respectively. I also included a model of the endowment earnings if a plan proposed by two Massachusetts state legislators, which would tax the endowment’s entire value at 2.5 percent, were enacted.

The tax hikes could deprive Harvard of billions of dollars over the next decade. Under Vance’s proposal, Harvard’s endowment would value $53.2 billion in 10 years, down from a projected $66.9 billion under the current tax regime. With the current endowment payout rate, the tax would cost the University $3.3 billion over the next decade — and the magnitude of the annual losses would only increase over time.

All of this analysis is based on a number of simplifying assumptions that might not hold: The endowment returns in the future may not resemble historic returns, and the University might adjust its spending patterns in response to new taxes. It also neglects to account for donors’ gifts, which increase the value of the endowment. However, the picture these forecasts paint is sobering nonetheless.

It is tempting to view the slower growth of a $53.2 billion endowment as relatively tolerable compared to Trump’s other actions — after all, the endowment is still projected to grow. However, these policy changes would effectively cost Harvard billions of dollars it could otherwise spend on research curing cancer and revolutionizing artificial intelligence. Though the mechanism for denying these funds is more subtle than an outright freeze, the effect is equivalent, if not greater.

The headline number this week was $2.2 billion, but Trump is laying the groundwork for policies that could cost the University more in the future. And despite its large endowment, Harvard will face tremendous financial pain.

If we think Harvard’s wealth makes it invincible, we’re about to learn how quickly billions can burn. Defiance has a price tag — and it’s called compounding interest.

Jacob M. Miller ’25, a former Crimson Editorial chair, is a double concentrator in Mathematics and Economics in Lowell House.

Correction: April 19 2025

A previous version of this article incorrectly assumes that the $2.2 billion cuts to Harvard’s federal funding were annual. The data visualizations and analysis have been updated to reflect that in fact, the cuts occur over multiple years.