Again just to clarify the things I am looking at:
According to Harvard’s latest financial statements, education revenue (which includes tuition, housing, and dining income net of financial aid) made up about 21% of their overall operating budget. It can be more or less depending on the unit–the most was 43% at the law school, the least 0% at Radcliffe. The Faculty of Arts & Sciences, which makes up the bulk of the College and the grad programs that are hosted by the same departments, was at 21%, so right at the weighted average.
To make up for this, Harvard could conceivably cut the operating budget, but it would presumably see that as bad for their competitive interests. So instead it could increase the payout rate from its endowment. That endowment income makes up 37% university-wide, 52% in Arts & Sciences, and so on.
As it explains later in its financial statement, it is targeting about a 5.0 to 5.5% endowment payout rate. Depending on what units we imagine were included in the hypothetical policy, their endowment payment targets would have to be increased, possibly by quite a bit. As they explain, there are also a lot of donor restrictions on various components of the endowment–they say 70% in total is restricted. So they would have to target any payout increases specifically to the funds which could be used that way. Like 20% is actually currently restricted to Scholarships and Student support, but they presumably could not increase the draw from the 24% restricted to Professorships for that purpose. There is, however, 30% available for General Mission Support, but they say some of that is still restricted to a particular school. So for this hypothetical, for any given unit, they would have to get the increased payout from whatever Scholarships funds and General Mission funds were available for that unit.
Beyond this it is really impossible for me to predict what that would mean for those particular funds. But certainly any significant increase in payout rates would decrease any predicted growth. Possibly it could go negative, at least in real terms, or it could just be slower real growth.
The long term consequences of that are complicated because Harvard is constantly soliciting new gifts to these funds, which is part of why the donation side of things is important (as is the fact another 8% of their operating budget is covered by gifts for present use). But unless you assume an increase in predicted gifting, the portion of Harvard’s endowment available for these purposes would either grow more slowly, or start decreasing, at least in real terms.
My general assumption is Harvard would prefer to avoid that. Indeed, my general assumption is Harvard has already set its payout rates to reflect what it sees as an appropriate balance between the present use of the endowment, and its future goals for its endowment. Which is actually what it says it is doing in the financial statement:
The University’s endowment spending practices balance two competing goals: the need to provide a stable and sufficient distribution to fund the operating budget, and the obligation both legally and to our donors to maintain the long-term value of the endowment. There is a common misconception that endowments, including Harvard’s, can be easily accessed like checking accounts, available for any purpose at any time as long as funds exist. In reality, Harvard’s flexibility in spending from the endowment is limited by donor conditions and the principle that endowed funds are designed to last forever, crucial for serving future generations of students and advancing new knowledge. Harvard is obligated to preserve the endowment’s purchasing power by spending only a sustainable portion of its value each year. Spending significantly more than that over time would favor the present at the expense of future generations, undermining the endowment’s fundamental purpose of maintaining intergenerational equity.
That said, lest I be accused of being insufficiently cynical–Harvard’s endowment has done a lot more than merely “maintain” its “purchasing power” over time. As this report details, Harvard’s endowment grew tremendously in inflation-adjusted value in the period 1990 to 2022:
But so did the endowments of Harvard’s rivals. Indeed, Harvard was top of the list in 1990. It was top of the list in 2022 as well. But if Harvard’s endowment of 1990 had merely maintained its purchasing power, it would only have been about 22.6% of its actual size in 2022. And in fact, at that level, Harvard would have dropped from 1st to about 13th.
So although Harvard did not say this in its financial statement, my working assumption is Harvard’s goal is not in fact to merely maintain its endowment value in terms of something like inflation. Its goal is actually to maintain its relative position as the wealthiest university in the United States, and indeed the world.
And so I believe Harvard has set its endowment payout rates, including for the purpose of scholarships, at a level it believes best balances its current competitive goal to offer generous aid, against its long term competitive goal of having more financial resources than any of its rivals for the indefinite future.
And if you assume it has already done that, then increasing its payout rates further would be moving it away from that balance, in a way I at least believe Harvard would be unwilling to do.
Unless perhaps its rivals made similar moves. And in a way, I think that is happening. All these colleges have gotten increasingly generous with aid farther up the household income/wealth distribution. I think this means the competitive balance has been shifting somewhat in favor of those households, and it triggered these universities taking a little more money from possible long-term wealth increases and using instead on student aid.
But again, my working assumption is that process has gotten as far as it has gotten for now, that each of these universities has concluded more aid right now would not strike the best competitive balance. But I also suspect over time the aid will in fact keep getting more generous–we shall see.
Anyway, that is what I am looking at. And I do think it implies that once any given university has set its budget including its target contribution from net educational revenues and associated endowment payout rates in light of its desired balanced between short-term and long-term competitiveness . . . it is going to make sure it more or less hits those targets when it enrolls the relevant class.