Does Harvard Need Your Money?

It didn’t take long for the criticisms to begin rolling in after Harvard University announced a $400 million donation to its engineering college.

The gift was proudly touted by the university as its largest-ever gift, and a significant step toward reaching the towering $6.5 billion fund-raising goal of its ongoing capital campaign.

Yet for many others, the gift didn't make sense. They questioned why wealthy donors repeatedly choose to give large sums to the wealthiest university in the world.

Harvard has a $36 billion endowment that last year had a 15 percent investment return. The university has more than $43 billion in total wealth. It’s part of a prestigious pack of 10 rich universities that hold more one-third of all the wealth in higher education.

“The idea that the superrich are just handing some of their money to the other superrich in a time of need and insecurity just seems obscene,” said Kevin Carey, who directs the education policy program at New America. “There’s literally not another university in America that needs that money less.”

Harvard, however, disagrees. The university says the gift will go toward expanding its newest college, which has seen a 150 percent growth in enrollment since it was founded in 2007.

The School of Engineering and Applied Sciences will be named after its beneficiary, John Paulson. Paulson, a 1980 graduate of Harvard Business School, is a hedge fund investor who made $15 billion betting against the subprime mortgage market in 2007.

Author Malcolm Gladwell mocked the gift shortly after it was announced Wednesday. “It came down to helping the poor or giving the world's richest university $400 mil it doesn't need. Wise choice John!” Gladwell wrote in one tweet. In another: “If billionaires don’t step up, Harvard will be down to its last $30 billion.”

Vox.com and other media outlets also slammed the choice, with a Vox education writer suggesting that “giving to Harvard is not an act of altruism. It's a gigantic, immoral waste of money, and it's long past time we started treating it as such.”

A Slate piece titled “Billionaire's Ego Donates $400 Million to Harvard” was similarly critical, as was a Quartz article that opened with the question, “Why are so many billionaires so eager to give money to institutions that clearly don’t need it?”

Significant impact?

Moody’s reported in April that of the 500 financially sound universities it rates, the 40 richest receive two-thirds of the donations. Prior to this most recent $400 million donation, Harvard received a $350 million donation to its public health college, which was renamed the Harvard T. H. Chan School of Public Health.

Meanwhile, Harvard's recent donations eclipse the average endowment among Moody’s-rated colleges and universities, which is $273 million.

Sue Cunningham, president of the Council for the Advancement and Support of Education, said donors often give such large amounts after they have developed “long and careful” relationships with universities, and after college officials have a full understanding of the donor's passions.

“This is something that he and Harvard have developed in a way that will have significant impact for the long term,” Cunningham said of Paulson’s donation. “This is an institution that is profoundly respected and well-known, and has captured the hearts and minds of many.”

Officials from Harvard declined an interview request for this article, but in email correspondence about another Inside Higher Ed article in May, a Harvard communications staffer, Jeff Neal, said that donations help fund education and research at Harvard, as tuition and research grants don’t cover the full cost of these activities. They also fund things like financial aid, libraries and Harvard's edX online learning platform.

Paulson’s donation will go toward growing the engineering college’s endowment, which sits at about $1 billion, adding more course offerings and majors, and expanding the college's physical footprint through new buildings, among other endeavors.

During the rush of media criticism after Harvard's announcement, a few came to the university's defense.

“There’s this sense that Harvard is hoarding money, so it never really needs anything and any gifts are pure waste,” offered Inside Philanthropy writer Tate Williams. “When people make these gifts… it’s because Harvard, since at least 2011, has been fund-raising like crazy to make sure it never has to panic, like it did after losing almost 30 percent of its endowment in the 2009 crash, and can expand in the future without spending down its endowment.”

The vast majority of Harvard’s $36 billion endowment is restricted, meaning it can only be used for donor-authorized purposes. Such will be the case with Paulson’s gift.

'Slack-Jawed'

Dean Zerbe, a tax lawyer and former senior counselor for the Senate Finance Committee from 2001 to 2008, estimates that Paulson will receive a nearly $200 million tax deduction due to his donation. Zerbe worked with Republican Senator Chuck Grassley in 2008 in a failed attempt to require that universities spend a certain amount of their endowments (most wealthy universities cap endowment spending at about 4 percent of annual returns).

Donations to universities, the returns on their endowments and their property holdings are not taxed, as colleges are considered nonprofits. This tax-exempt status has, at times, been a controversial one. Billions of dollars of investment returns and donations go untaxed each year at wealthy universities like Harvard. Zerbe believes that more and more lawmakers are becoming frustrated by such tax advantages for wealthy universities.

“Congress is just slack-jawed people are giving huge amounts of money to institutions that have more money, and don’t even know what to do with the money they’ve got,” he said. “Is this more frosting on a cupcake that’s already got seven layers of frosting on it, or what?”

Cunningham says that, in her experience, donors aren't motivated by tax breaks. Yet such tax incentives impact the bottom line for American taxpayers, and some wonder if such benefits should exist for donors who choose to give to the wealthiest institutions in U.S. higher education.

“It's great if a wealthy individual wants to donate $400 million to an institution like Harvard, but the problem is that the rest of us support that gift -- and subsequent earning on it -- through generous tax breaks,” said Richard Kahlenberg, a senior fellow at the Century Foundation, in an email.

While Harvard and universities like it usually offer large amounts of financial aid to middle- and low-income students, they generally enroll fewer low-income students than regional colleges and community colleges with less wealth. In 2012-13, for example, 19 percent of students at Harvard were eligible for Pell Grants, a type of federal aid only available to low-income students. Yet 36 percent of undergraduates in the U.S. received Pell Grants that year.

Conversely, Harvard enrolls many more wealthy students than most universities, and their graduates generally have better employment and earning outcomes than most U.S. college graduates, although critics say that these students likely have qualities -- academic, and for many, socioeconomic -- that make them likely to succeed wherever they go to college.

“For a large number of years now, Harvard and colleges like it are sending their graduates to Wall Street. You have a very wealthy institution that is selecting the best and the brightest, sending them into what is essentially a giant casino, and inevitably a few of them are winners and send the money back to where they came from,” explained Carey.

Such transfers of wealth are cyclical, and exacerbate inequity in American higher education. Moody's, in its April report, asserts the gap between rich colleges and poor colleges is growing, with no signs of stopping. As the wealth gap becomes a larger part of a national conversation about the future of college, highly visible donations like Paulson's fuel questions about what is fair, and what isn't, in the ever-changing world of higher education.

“There's sort of a growing sense that the rich get richer and the poor suffer in myriad ways,” said Karen Gross, former president of Southern Vermont College and a former senior policy adviser at the U.S. Department of Education. “If there isn’t enough money to go around, and the elite institutions can self-support, why aren't we helping the institutions that are serving our most vulnerable students?”