Oct 4, 2022 - Economy & Business

Princeton isn't free — but it could be

Illustration of a large pile of money with a graduation cap on top.

Illustration: Aïda Amer/Axios

Princeton University is so rich it has become a perpetual motion machine — an institution that can operate with no outside financial support whatsoever. That's the claim made by Malcolm Gladwell, in a recent newsletter, and opposed by Harvard economics professor John Campbell, in a letter to The Browser.

The big picture: Gladwell is broadly correct. Campbell's quibbles might change the exact numbers, but Princeton really does seem to have reached the point at which it's capable of funding itself in perpetuity, even without research grants or tuition income.

Why it matters: A handful of ultra-rich universities increasingly resemble hedge funds with a nonprofit educational arm attached. Critics like Gladwell say that endowments have become so huge that Princeton and its ilk no longer need to beg for money from alumni; that such donations would almost certainly be better spent at almost any other nonprofit; and that even charging tuition seems unnecessary at this point.

State of play: Princeton's endowment hit $37.7 billion in 2021, or $4.5 million per student. The school's entire annual operating expense that year was $1.86 billion, which is less than 5% of the value of the endowment.

  • The endowment will probably decline in value in 2022; such are the markets. But over the long term, it's reasonable to expect the endowment to continue to grow more quickly than the university's expenses.
  • Princeton's historical investment returns alone have been significantly higher than the rate of inflation in tuition and other education costs — that explains why proceeds from the endowment account for an ever-greater share of spending every year. On top of that, Princeton continues to be very good at persuading its alumni to continue to donate generously to the fund.

By the numbers: Princeton made an astonishing 46.9% investment return in 2021 — a number most hedge funds would covet. Andy Golden, the president of Princo, the university's money-management arm, made $7.2 million last year, vastly more than the $1.1 million earned by Christopher Eisgruber, the university president.

  • Unlike most hedge funds, however, Princeton — a tax-exempt nonprofit — pays only a small 1.4% excise tax on its investment returns. It has lobbied hard against paying even that much.

The bottom line: Princeton could indeed operate indefinitely without any tuition fees or research grants — not that it will ever have to.

  • In a virtuous cycle, its wealth allows it to attract the best researchers, who in turn make it a center of academic excellence that attracts even more money from funders, current students, and alumni.
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