Are US colleges becoming glorified hedge funds?

April 30, 2021
Editor(s): Thomas Sinclair
Writer(s): Daniel Li, Inga Steenblock, Kerrie Liang


With an increased scrutiny over exorbitant student fees in the USA and the ensuing debate on whether the government should intervene and cancel student debt, the operations and finances of universities and colleges in the US have come into question.

Private contributions to higher education in the form of endowments was estimated at $46.73bn USD in FY2018 (Giving USA, 2018). These have reached historic levels, with a donation of $1.8bn to John Hopkins University by Michael Bloomberg in late 2018. (Bloomberg, 2018). This has been enabled through the lax tax deduction rules regarding donations to colleges of universities, where individuals can directly reduce the amount donated from their taxes in the US (IRS, 2020)

Academic institutions, particularly in the US, possess extraordinary wealth. Furthermore, at the very top, more students come from the top 1% of the income range than the bottom 60% (Aisch, Buchanan, Cox and Quealy 2017). How is it then, that tertiary education is still prohibitively expensive, which has grown so excessively that there is over $1.5tn USD of outstanding student debt in the US alone (Aratani, 2021)?

This essay will focus on the intricacies of endowment management by wealthy academic institutions, particularly of Harvard University and the University of Texas. We find that not only do a negligible amount of donations go towards increasing accessibility to education, but also significant portions of university endowments go towards their investment funds. These endowments often directly invest in industries responsible for environmental damage, such as the fossil fuels industry. Furthermore, we also discuss the private nature of some academic institutions, comparing them to their public counterparts, contending that the current model for US endowments is not only elitist, but unethical. Therefore, we firmly believe that this system is in dire need of reform, and at the very least, more scrutiny.

How much money are we actually talking about?

It is no secret that the USA is home to many of the richest universities in the world. In the fiscal year ending June 2020 (FY2020), American institutions’ endowments totalled over $637 billion, with 15.7% of endowments being greater than $1 billion (NACUBO, 2021). Even in the midst of a pandemic, elite colleges have continued to thrive; in FY2020, Princeton returned 5.6% on its investments (Princeton Office of Communications, 2020) and Yale’s endowment has returned 9.9% per annum over the past 20 years (YaleNews, 2020).

However, while colleges have become richer, tertiary education has not become more affordable. Since 2001, in-state and out-of-state tuition at public universities have increased 212% and 165% respectively, and private university tuition has risen 144% (Boyinton & Kerr, 2020). When asked why their endowment could not reduce fees, Harvard responded that they had an obligation “to preserve the purchasing power of these gifts by only spending a fraction of their value each year.” So, if the majority of the endowment is not used to make education more accessible, where does the money go?

The Colleges ‘investment strategy’:

According to Harvard’s annual report, in FY2020 the endowment distributed merely $2 billion towards the operating budget. That is, only 5% of the endowment contributed towards salaries, equipment, financial aid and research. With the remaining 95% of the largest endowment in the world, Harvard invested its $41.9 billion in public and private equity, hedge funds, real estate, natural resources, bonds/TIPS and other assets.

Breakdown of Harvard’s Investments. Source: Harvard Annual Report FY2020

Over recent years, universities have incited controversy surrounding the ethics of their investments. A notable example is Harvard’s financial ties to the private prison industry.

An undergraduate-led initiative, Harvard College Project for Justice, referenced the university’s $23 million worth of shares in Vanguard during FY2016, calling it “a fund that is notorious for private prison investments.” Students petitioned for Harvard to divest from “direct and indirect investments in private prison stock” and to publicly denounce corporations that profit from immigration detention and mass incarceration (Dixon, 2017). This effort was especially important considering the rise in immigration arrests after Donald Trump took office.

College ‘greenwashing’:

Undoubtedly, elite colleges’ environmental investments have sparked the most outrage. Despite many institutions pledging to commit to net-zero carbon emissions by 2050, their actions say otherwise. According to Divest Harvard, a student-led grassroots movement, only 1% of Harvard’s endowment is disclosed and of this 1%, $5.6 million is invested in companies that produce, own or are powered by oil, natural gas and coal reserves.

However, this is not an issue that finds only private universities guilty; in 2017, the University of Texas (UT) system – holding the second-largest endowment of nearly $40 billion – received over $600 million from an oil and gas fund in Winkler County (Satija & Watkins, 2017). Moreover, the UT system also faced political backlash for committing $215 million to purchasing 300 acres of empty land while general administration expenses quadrupled between 2011-2016. This money could have instead increased funding for UT-Austin’s financial aid as their tuition fees were rising.

Since private institutions are not required to disclose all investments, these findings barely scrape the surface of how elite colleges manage their funds. Large endowments are often heavily invested in funds that hold stock in various industries, like fossil fuels, that consequently lead to extreme environmental damage. Currently, over 40 U.S. colleges and some European countries have committed to almost $10 trillion divested from fossil fuels (Divest Harvard, 2019). Meanwhile, some of the wealthiest institutions continue to put their money in these corporations while greenwashing their initiatives with a “net-zero plan.” Colleges claim that divestment can be “too political” and that their endowment should not be used to influence policy. However, their allocation of funds demonstrates to the public where their priorities lie. Investment is political.

Is there anything meritocratic about US Colleges?

Apart from elite universities’ investments and endowments, another point to consider is the accessibility of these types of schools to the general public in the United States and abroad. To question this, it is first necessary to ask oneself why students seek to attend universities such as those of the Ivy League in the United States. Indeed, the mean salary a graduate from Harvard University can expect in their early career is US$ 76,400 (Duffin, 2020). According to US News, the average median salary received by someone who recently graduate from college with a bachelor’s degree is just over $52,000 (Kerr, 2021).

Ruchika Tulshyan, a writer for Forbes, lists higher levels of self-confidence and opportunities for networking as further important motivators for seeking an Ivy league or “elite college” education (Tulshyan, 2014). In 2018 in the United States, in excess of 14.5 million students were enrolled in a public college (Duffin, 2021), alongside more than 5 million further students in private colleges (Duffin, 2021). This suggests that roughly a quarter of students in the United States choose to attend a private college, a stark contrast to Australia, where private tertiary education is far less plentiful. According to a presentation by Universities Australia, there are 41 universities in Australia in total, of which 37 are public universities and only 4 are private universities (2019). In “At Private Colleges, Students Pay for Prestige”, the magazine The Atlantic insinuates that the heavy presence of private universities among the United States’ best tertiary education providers is a US-specific phenomenon, with other countries around the world more likely to have public universities at the top (Wong, 2018). The same article also references the “prestige gap” exhibited between colleges of private and public nature (Wong 2018), which may be one of the most important factors explaining why students in the United States choose private education at such a high rate. However, an ivy league education can cost in excess of US$50,000 per year, including housing and meal costs as well as miscellaneous costs (Ward, 2019). Even with most students receiving some form of financial support (more than 75% at Harvard University) (Ward, 2019), it is no surprise that college affordability is a topic of highest concern in American politics, especially among the Democrats in the lead up to the 2020 election last year (Harris, 2019).

Australia, a point of comparison:

The status of private tertiary education in the United States provides a point of contrast for Australia, where public tertiary education providers far outstrip private ones, with the “best” universities by ranking indeed represented by public universities. An opinion article by Paul Oslington also highlights the difficulties associated with establishing a new private university in Australia as a result of current public policy “favouring” public institutions (2018). Nonetheless, the picture is very different when considering secondary education instead of tertiary education; here, a staggering 53 per cent (ascending trend) of Australian students were enrolled in a private secondary school in 2018, compared to a world average of less than 27 per cent (The World Bank, 2020). In the United States, only 9 percent of students attended a private secondary school, along with 13 percent in Mexico, 10 percent in Germany and 9 percent in New Zealand (The World Bank, 2020). Consequently, this data suggests that the Australian education system may not be all too different after all from that of the United States, although the emphasis on private education occurs at a different stage. This result opens the question as to the position of private education in a society; as discussed by The Conversation, there are two perspectives on the value and benefits of education in general (Riddle, 2014). On one hand, education provides private benefits to an individual due to improved job prospects and hopefully higher future wages (Riddle, 2014); on the other hand, society also benefits from individuals attaining higher levels of education (Riddle, 2014). These benefits are widely facetted and can include lower levels of poverty and better health outcomes as a result of a rise in literacy rates (Riddle, 2014). 

Can we really define Education as a public good?

Even so, it is important to consider the economic definition of a public good, which describes it as a good that is non-excludable as well as non-rivalrous (Cooper, 2017). The economic definition of “non-excludable” implies that it is impossible to prevent anyone from consuming a good (Fernando, 2020), whereas “non-rivalrous” means that one individual’s consumption does not diminish another individual’s ability to consume the good (Fernando, 2020). Preston Cooper explains that education is most definitely excludable, as universities can decide who to admit (2017). However, he argues that education is non-rivalrous “at the margin” (Cooper, 2017), which I would dispute as there is an immense benefit associated with lower student-teacher ratios and smaller class sizes, implying that education is a good that diminishes in quality for the individual if you add more students to any given class. Either way, it is obvious that education is not economically a public good, regardless of how much we would like it to be. Beyond that, access to (quality) education is noted as one of the most basic human rights in the Universal Declaration of Human Rights from 1948 and as one of the United Nation’s 17 Sustainable Development Goals as a part of the 2030 Agenda for Sustainable Development (United Nations – Department of Economic and Social Affairs, n.d.; United Nations Educational, Scientific and Cultural Organisation [UNESCO], n.d.). Therefore, the fact that education is not a public good does not justify the inaccessibility of higher education to many students, it only implies that education is indeed a scarce good and that more debate about its optimal allocation is required in order to ensure that everyone can access secondary and tertiary education of a high quality.

Final Words

Overall, the endowments received by high quality, often Ivy League universities in the United States provides a thought-provoking case study for the function and accessibility of education in our societies. On one hand, these types of universities are heavily involved in the financial sector and go beyond purely providing educational services to their students. Nonetheless, they are widely regarded as the most sought-after universities to gain entry to in the world, and the future of graduates is likely to contain a valuable reputation and high salaries. On the other hand, we have attempted to analyse the effect of this scarcity and frequent inaccessibility of top tier education on broader society. Economically, it is imperative to keep in mind the definition of a public good, in order to be able to classify education correctly and develop the best policies to make it accessible and available to all. While from an Australian perspective we are often astonished by the enormous fees associated with university degrees in the United States, we would do well to analyse our own education system and ensure that education here is accessible and equal for all.



The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Thomas Sinclair
Daniel Li

I am a second year Bachelor of Commerce student majoring in Economics and Finance. I am passionate about following and analysing economic events and policies on both a domestic and international level, researching the impact that these affairs have on individual welfare and financial markets.

Inga Steenblock
Kerrie Liang

Hi! I’m a first-year Commerce student planning to major in Actuarial Studies or Economics. Everyone has a story to tell and as a writer at Cainz, I hope to share these insightful and diverse stories with the world.