Harvard's Endowment Drops 22%; Marks Popping of Higher Ed Bubble

Harvard announced yesterday via a letter to its Council of Deans made available on the Harvard Crimson website that its endowment dropped by 22% in the last four months, erasing $8 billion and dropping the endowment from $37 billion to $29 billion. The loss was greater than the endowments of all but four other universities—Yale, Princeton, Stanford, and MIT.

The letter is also interesting because it demonstrates the impact of what a loss in endowment has on a university, even one as wealthy as Harvard. The letter states that:

"Income distributed from the endowment now funds roughly 35 percent of the University's overall operating budget...The prospect of significant endowment losses therefore has major implications for our budgets and planning, especially since our other principal revenue streams also stand to be challenged by the financial crisis... But all of us will need to not merely contemplate change at the margins, but take a more fundamental look at how at how to align our spending with revenues that will be significantly reduced from what we had imagined just a few months ago."

Over the past twenty years, private universities in the United States have grown fat, benefiting as much as any industry from the increase in liquidity and money available. Parents were willing to pay any cost to get their students into a top school or even a mid-tier private school. As the graph below shows, universities took advantage of this, pushing tuition up way above the rate of inflation. Also note that public universities kept their tuition increases largely at the rate of inflation.

There is ample data that the cost of a private university education is no longer a good investment. Graduates do not see a large enough increase in future earnings to justify the exorbitant costs of a private four year college education.

According to the National Center for Education Statistics, Digest of Education Statistics, 2006, there are 1,845 private universities in the United States. That's 36.9 for every state. With the shotduwn in private student loan financing, many of these universities have become unaffordable to a broad swatch of students. Faced with their own endowment losses, and the inability to continue to increase tuition so rapidly, many smaller colleges and universities will be faced with scaling back, merging, or shutting down.

The hope is that at the end of this difficult process, we'll have a more sustainable, more affordable college and university system.