The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By Robert Cyran

NEW YORK, April 15 (Reuters Breakingviews) - Harvard University seems to be struggling with basic finance. The Ivy League institution, whose graduates populate boardrooms and investment giants, is scrambling to borrow $750 million as the Trump administration freezes some $2 billion of taxpayer money earmarked for the college. This crisis provides an opportunity for many schools to brush up on their funding models.

The latest clash follows last year’s campus protests by wealthy donors, including Apollo Global Management boss Marc Rowan and hedge fund manager Bill Ackman. Now, the White House is imposing conditions on hefty federal grants, which accounted for 11% of Harvard’s operating revenue in the fiscal year ending June 2024. Among them are an end to diversity-related policies and cooperating with the agency overseeing deportations. Harvard aced the tricky political science part of the exam by boldly rejecting the demands on Monday.

Elite U.S. universities have plenty of money. Harvard’s endowment exceeds $50 billion. Most of it, however, is linked to particular departments, specifically targeted at scholarships or other donor initiatives, and held in hard-to-sell assets. Like many of its peers, the Cambridge-based college has tried to improve returns by devoting a bigger proportion of the money to so-called alternative assets. About 70% is now invested in private equity and hedge funds.

More trouble is brewing. A proposal in Congress would increase the tax on net profit in endowments to 21% from 1.4%. Higher education enrollment is also down 9% from 2010, per the U.S. Department of Education, and birth rates are tumbling. Private-school tuitions have dropped 6% from a 2021 peak.

There’s more financial planning to do. Harvard’s war chest has delivered a healthy return of about 9% during Narv Narvekar’s eight years running the portfolio. It also accounted for 37% of last year’s operating budget, while median distributions across higher education exceeded endowment growth, according to consultancy Cambridge Associates.

Rushing to capital markets will add expenses. Stanford University, for example, will be paying more than $15 million annually on some $330 million of 10-year taxable bonds it recently sold with a 4.7% yield. Many more won’t even have that luxury: about three-quarters of colleges have endowments with less than $100 million and as little as none.

Top universities will struggle, but they’ll survive. The U.S. government pays for big slugs of early-stage scientific research, money that will be hard to replace. There are other flaws in educational business models that are easier to fix, such as redoubling efforts to cut bloated administrative costs and diversify funding sources. Making endowments more flexible also would help. They are valuable, but underutilized, assets.

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CONTEXT NEWS

The Trump administration said on April 14 that it froze $2.3 billion of federal funds earmarked for Harvard University, after school officials rejected a list of conditions from the White House.

Harvard said it would not end diversity initiatives, allow outside auditing of student admissions or other demands. “The University will not surrender its independence or relinquish its constitutional rights,” President Alan Garber wrote in a letter published on the school’s website.

The university, which had $7.1 billion of debt outstanding at the end of its fiscal year ending in June 2024, said on April 7 that it plans to issue up to $750 million of taxable bonds for general corporate purposes. Princeton University said on April 1 it was considering selling about $320 million of taxable bonds.

(Editing by Jeffrey Goldfarb and Maya Nandhini)

((For previous columns by the author, Reuters customers can click on CYRAN/robert.cyran@thomsonreuters.com; Reuters Messaging: robert.cyran.thomsonreuters.com@reuters.net))