Can Colleges Survive Trump’s Cuts?

Since Inauguration Day, the Trump administration has engaged in a relentless attack on higher education, particularly targeting the finances of research-intensive universities. Hardly a week goes by without some new proposal or threat. We’ve seen the elimination of federal grants that supported research related to diversity, attempted reductions to indirect-cost recovery rates at the National Institutes of Health and the Department of Energy, the cancellation of most federal education-research grants, and sudden changes to the immigration status of international students that are likely to lead to an exodus of tuition-paying students.

The cost of Trump’s proposals could exceed $100 million per year for dozens of institutions, according to analysis by the economist Phillip Levine. And yet the Trump administration has gone even further by withholding nearly all federal grant funding from some elite institutions. Columbia University tried to preserve $400 million in federal funding by agreeing to a list of onerous federal demands that get into the minutiae of academic governance, but even that has not satisfied the federal government.

This week, the administration’s concern is Harvard. “What if we never pay them?” Trump asked over lunch earlier this month, according to The New York Times. “Wouldn’t that be cool?” On Monday the Trump administration took steps in that direction, freezing $2.2 billion in grants and contracts, reflecting the roughly $700 million that the university receives each year in federal funding. The justification? Harvard’s decision not to comply with the federal government’s demands, which included, among other things, affirmative action for viewpoint diversity, the reduction of power held by untenured faculty, and the overhaul of the Graduate School of Education.

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While only a few universities have had the bulk of their federal research funding frozen, their ranks are likely to swell as the Trump administration looks to force elite private colleges into compliance with its vision for the sector. Blue-state public flagship universities are likely the next target, and even institutions that avoid such politicized attention are likely to suffer from structural cuts in federal grants and contracts. These cuts have happened so suddenly that some universities began to take action immediately in order to preserve cash flow, a key lesson from the pandemic. But this is also a longer-term financial issue as 45 months remain in the Trump administration, and there is no guarantee that federal funding returns to normal in 2029.

What can these colleges do to survive? Here are four tactics they should employ strategically, though each comes with substantial downside.

Increase the endowment draw and increase fund raising. Collectively, American colleges hold approximately $900 billion in their endowments, with about half of those funds in the hands of just 20 universities or systems. However, most endowment holdings are restricted for particular uses, such as student financial aid or supporting faculty salaries. Eighty percent of Harvard’s roughly $50-billion endowment and three-fourths of Yale’s approximately $40-billion endowment is restricted, which limits their financial flexibility. The investment vehicles they use are often illiquid, such as South American farmland or hedge funds. It would take a while to unload those assets.

Harvard currently relies on endowment funds to cover nearly one-third of its total spending, according to its most recent IRS filing. That is in line with generally accepted endowment-spending rates of 4 to 5 percent per year of the fund’s total value. Most institutions are much less reliant on their endowments, so the question for them becomes whether to spend more out of the endowment during a time of crisis. The investment return on endowments has averaged just under 7 percent during the last decade, so spending more than that percentage (known as the draw rate) would reduce the principal available for the future. Universities do not like to spend down their principal, but desperate times call for desperate measures.

Endowments and gifts are threatened by two other potential policy changes. Congress has discussed increasing the current 1.4-percent tax on the earnings of super-wealthy universities’ endowments to as high as 35 percent, and President Trump threatened Harvard with the loss of tax-exempt status the day after the university rejected his administration’s demands. Either of these could result in falling endowment values and fewer gifts, reducing the value of these key sources.

Issue bonds. A less risky way for wealthy universities to raise short-term funds is by issuing bonds. This preserves the endowment to the greatest extent possible, leveraging the difference between higher average endowment returns and lower interest rates. Princeton explored this route in early April, and Harvard’s recent announcement of a $750-million bond issuance directly noted issues with federal funding. This may not make sense for institutions with weaker credit ratings that result in higher interest rates. Additionally, public universities often do not have the ability to issue their own debt. But this is a good wait-and-see strategy for financially strong private universities.

Conduct layoffs and hiring and spending freezes. Hiring and spending freezes and chills (additional reviews on any spending) have been the norm at major research universities since late January. Johns Hopkins University laid off 2,200 employees around the world following the termination of $800 million in USAID grants. As it becomes increasingly obvious that the Trump administration will not release funds already appropriated by Congress (DOGE has recently taken control of approving all grants), universities are beginning to cut loose employees funded by grants. (If you are working on a research project, check with your supervisor to see if you are on a so-called “soft money” position.)

Layoffs of grant-funded employees, not filling vacant positions, and canceling pay raises can help to plug some of the budget gaps. But they do not solve a key issue: facilities expenses. Laboratory science buildings are expensive, incredibly complex facilities that are difficult to repurpose for instructional purposes — something that may be moot if graduate-student enrollment falls due to diminished funding. Universities will be forced to make a difficult choice: Mothball buildings and let expensive equipment go to waste or try to support research out of strained budgets.

Increase tuition revenue. The only silver lining for large research universities is that they are generally seeing strong enrollment demand and have the market power to increase tuition. Some universities have already started to go deeper into their admissions waitlists in an effort to generate more undergraduate tuition revenue, and this is a viable option for a number of flagship public universities and some private institutions that have available housing in the local community that will allow them to expand.

This is a much more difficult tactic for Ivy League institutions and universities in big cities. The Ivies pride themselves on a resource-rich residential model, with Yale budgeting $500 million to add just 900 new on-campus beds back in 2017. Throw in a healthy dose of NIMBYism in many cities and adding on-campus capacity could readily take a decade for some of these wealthy institutions to pull off. That timeline is not compatible with the lightning speed of Trump’s cuts.

Can Harvard and some of the Ivy League institutions afford to eschew federal research grants? The answer is likely yes if they employ as many of the above strategies as possible. But the Trump administration will make their efforts as painful as possible by trying to tax endowments and strip tax-exempt statuses. As Leo Terrell, a political appointee in the Justice Department, said on Fox News last month: “We’re going to bankrupt these universities” if they do not “play ball.”

To this point, the federal government has promised that financial aid to students, the largest source of federal funding to most universities, will not be affected by cuts elsewhere in the Department of Education. But it is possible that the federal government tries to selectively pull federal financial-aid eligibility, which Harvard students rely on to the tune of just over $100 million per year, as a maximum pressure strategy. This is a bigger lever at some other universities that do not meet financial need to the extent that Harvard does: New York University students receive more than $600 million in federal-loan dollars annually.

The Trump administration wants to defeat elite higher education and will take every step possible to do so. As AEI’s Max Eden wrote in December, “To scare universities straight, [Linda] McMahon should start by taking a prize scalp. She should simply destroy Columbia University.” I am sure the Trump administration would settle for leaving Harvard in ruins as a consolation prize, even if the university remains nominally open. But with some careful financial management and some painful decisions, these wealthy colleges can likely hold the line over the next few years. I am much more concerned about the implications for blue-state public flagships, which are next in line, but the administration may rethink its efforts if the juiciest targets are able to successfully fight back.