The Trump administration plans to freeze $2.2 billion in federal funding in contracts and grants to the university and, according to multiple reports, will attempt to revoke the institution’s tax-exempt status. Escalating the dispute further, Trump threatened to pull an additional $1 billion in health research funding, the Wall Street Journal reported Sunday. The move is in response to Harvard’s refusal to comply with a list of demands from the administration, which included federal government oversight of the university’s admissions and hiring processes.

“The gravy train of federal assistance to institutions like Harvard, which enrich their grossly overpaid bureaucrats with tax dollars from struggling American families is coming to an end,” White House spokesperson Harrison Fields told Fortune in a statement. “Taxpayer funds are a privilege, and Harvard fails to meet the basic conditions required to access that privilege.”

Harvard, with an endowment valued at $53.2 billion, is the country’s wealthiest university. It employs about 20,000 people—the sixth largest employer of Massachusetts residents—and has deep affiliations with local hospital networks and research institutions. The administration’s cuts have threatened to imperil critical medical research and rattle the job security of staff and faculty hired with university investment funds.

Pulling tax-exempt status and funding would cause “diminished financial aid for students, abandonment of critical medical research programs, and lost opportunities for innovation,” according to Harvard spokesperson Jason Newton.

“The unlawful use of [a revocation of tax-exempt status] more broadly would have grave consequences for the future of higher education in America,” he told Fortune in a statement.

‘Wealth spiral effect’

The precariousness of Harvard’s funding has the potential to jolt the local economy. In past times of economic instability, higher education has acted as a stabilizing force for university-dense regions like Boston, as young people seek out degrees to improve job prospects. For example, university and college enrollment increased from 18.2 million to 20.4 million between fall 2007 and fall 2009, according to the National Bureau of Economic Research. Now, however, because of the Trump administration’s continued threats to pull funding from elite universities, higher education is no longer a reliable source of economic security, according to Evan Horowitz, executive director of Tufts University’s Center for State Policy Analysis.

“It’s a reversal of the standard pattern for us, and a quite unfamiliar reversal,” Horowitz told Fortune. “We rely on [higher education institutions] for stability. This time, they are agents of instability.”

Along with Trump’s aggressive tariff plan that has mounted recession concerns, the cuts to Harvard’s funding has contributed to a “wealth spiral effect,” Horowitz posited. Even the perception of threats to the area’s major employer is enough to shake economic confidence.

“There’s a self-fulfilling nature to it, where people feel like they’re doing worse before they start doing worse, and that alone encourages them to pull back on their spending, on their economic activity, which of course, weakens the local economy and ensure the outcomes that they fear,” Horowitz said.

Boston’s high stakes

For Boston, an area known for its high-income residents, the stakes are particularly high. The city was ranked the eighth wealthiest in the country by number of millionaires, according to a 2024 report by Henley & Company, and the neighboring Cambridge has established itself as an oasis for young, wealthy Americans. Those high-earners play an outsized role in the economy: Individuals making at least $250,000 per year account for nearly 50% of all U.S. spending, according to a February report from Moody’s Analytics.

Though Horowitz believes just the threat of cuts can have a toll on the local economy, Harvard is inextricable from the broader Massachusetts community, meaning tangible shifts could have a rippling effect. About $574 million of Harvard’s $1.02 billion in research spending in fiscal 2018 was spent on salaries and purchases of goods and services in Massachusetts, according to a 2023 Harvard report on its local and state impact. In 2023, the university pumped more than $9.2 billion in venture capital into 78 biotechnology companies, $8.5 billion of which went to 62 companies with Harvard connections.

Harvard’s far-reaching resources and impact also bring with it an elite reputation, which have contributed to its attraction of wealthier young people, as well as highly educated individuals and their families seeking prestigious university jobs, Bruce Kimball, emeritus professor of the history of education at the Ohio State University, told Fortune.

“All Boston universities get a dividend from the fact that people want to live in Boston and when spouses are hired, they bring their well-educated spouse with them,” Kimball said.

“You might say there’s a big dividend to the whole Boston area because of these universities—not only because of their employees, but also because of the spouses and families of these employees,” he added.