Ivy League universities are on a debt binge

The borrowers, including Harvard, Princeton and Yale, benefit from a “prestige premium”

For stewards of elite university endowments, the past year has been difficult. All eight Ivy League colleges lagged behind the S&P 500 index by at least ten percentage points in their most recent fiscal year. Those ensnared in President Donald Trump’s culture wars, including Columbia and Harvard, are writing cheques for hundreds of millions of dollars to settle disputes and regain public funding. And the endowment model itself is under strain. Devotion to alternative assets is being questioned amid high fees, revised valuations and low liquidity. Some colleges, including Yale, have sought to offload private-equity stakes in order to raise cash.

Tata Hall on the Harvard Business School campus in Boston, Massachusetts, US, on Sunday, July 27 (Bloomberg File)

Treasurers can take comfort from the size of their funds—Harvard’s comes to $53bn, for instance—and the fact that, over the long run, their endowments have outpaced smaller peers’. They can also console themselves with one other perk: privileged access to debt markets.

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Since January, Ivy League universities have collectively issued more than $1.7bn in debt, the most in any year since 2020. In doing so, they have borrowed at rates many firms, governments and less illustrious rivals must envy. Even the priciest recent bond issuance by Harvard, Princeton and Yale trades at 0.34 percentage points above the Treasury curve—about the same as debt issued by Johnson & Johnson, one of only two American companies with a “triple A” credit rating. Lenders are less forgiving to universities further down the league table. Many of Pepperdine’s bonds trade at more than two percentage points above corresponding Treasuries.

The pattern holds across the pecking order. Using US News & World Report’s rankings of colleges, and comparing them with value-weighted spreads on their debt, a clear pattern emerges: the better a private university, the lower its borrowing cost. This reflects the size of their endowments, a comfort to creditors. As in the corporate world, where larger firms are more likely to borrow on the bond market and benefit from cheaper rates, a similar pattern appears in academia. All the top 15 private colleges have tapped bond markets; by contrast, fewer than 60% of the next 45 have any outstanding bond debt.

Although elite universities would prefer not to borrow, ready access to debt markets allows them to commit more capital to illiquid assets and reduces the need to sell during downturns. This, in turn, lets them capture the extra returns such alternative investments can offer. As such, low borrowing costs boost their performance. Cheap leverage is not what made elite universities elite, but it certainly helps them keep their lead.