Harvard's exit strategy

By R.A. | LONDON

A RECENT Free exchange column looked at how online education might affect higher education. Elite institutions should be fine, we wrote, because they product they offer is completely different from the standardised, distance education that MOOCs offer. Unless, that is, they begin offering their own course material online at low prices, in the process breaking their business model. What is that model? Stanford economist Caroline Hoxby has one answer:

Elite institutions face very different circumstances, Ms Hoxby reckons. They operate like venture-capital firms, offering subsidised, labour-intensive education to highly qualified students. They aim to cultivate a sense of belonging and gratitude in students in order to recoup their investment decades later in the form of donations from successful alumni.

Ironically, these universities may have threatened their own business model by embracing MOOCs. Online courses break the personal link between students and university and, if offered cheaply to outsiders, may make regular graduates feel more like chumps than the chosen few. For top schools, the best bet may simply be to preserve their exclusivity.

The past 24 hours have provided an excellent illustration of both sides of that model. First, NPR's Planet Money reports:

In 1984, it cost $10,000 a year to go to Duke University. Today, it's $60,000 a year. "It's staggering," says Duke freshman Max Duncan, "especially considering that for four years."

But according to Jim Roberts, executive vice provost at Duke, that's actually a discount. "We're investing on average about $90,000 in the education of each student," he says. Roberts is not alone in making the claim. In fact, it's one most elite research institutions point to when asked about rising tuition.

And then there is this:

A Harvard alumnus who started trading stock options from his dorm room is donating at least $125 million to support financial aid for Harvard College undergraduates, the university planned to announce Thursday.

It is Harvard’s largest-ever gift specifically devoted to financial aid. The donation, from billionaire hedge fund manager Kenneth Griffin, founder of Citadel, will boost a financial aid program that is already the envy of other colleges.

With $15 million more that Griffin is giving, which may go to aid or to other undergraduate priorities, his is also the biggest donation in Harvard College’s history.

In addition, $10 million will be donated to endow a professorship at Harvard Business School, for a total of $150 million.

This is the business. No student at an elite university pays the full cost of her education and most pay a small fraction. This system is sustainable because a few members of each class will become phenomenally wealthy and, out of some sense of obligation, will return a share of their fortune to the university.

Now as Matt Yglesias notes, a gift to Harvard is an odd way to spend one's money. Harvard just plum doesn't need the money. Its endowment is around $32 billion, 50% larger than Yale's and five times larger than that of the University of California system. If it never received another gift it could probably fund itself indefinitely off the financial returns to its wealth. For lesser elite schools like Duke, with an endowment of "only" $6 billion, donations remain a critical part of the business, especially given the zero-sum nature of a lot of the competition among elite universities. Here's Planey Money again:

[T]he biggest category of costs is faculty, at $21,000 per year per undergraduate student.

Jennifer West is a professor of bioengineering and materials science with a long list of publications, awards, and titles. To hire West away from Rice University, money wasn't enough. She came with an entourage. "I moved a whole entire research group with me so I had to move a lot of people and then we had to move a lot of our equipment and rebuild our lab," she says, "They actually sent architects to Rice who looked at our lab facilities there, then used that information to go back and design the facility that would work for us at Duke."

And West is not alone. Duke pays what it calls "start-up costs" for a lot of professors, particularly in the sciences.

Elite universities need big war-chests to attract and retain the top professors and to build top facilities, since those are the sorts of things that seem to attract top students. If the donations aren't materialising then the best assets will get picked off, the university will sink to the second tier, and it might even find itself competing with vastly cheaper higher-education options.

That might well end up being a good thing, from a social welfare perspective. In the meantime Mr Griffin's gift looks like a good occasion to revisit the sense of giving tax-advantaged status to charitable donations to phenomenally rich universities.

(Picture credit: Wikimedia Commons)