The financial crisis may claim yet another victim: the nascent effort to make college education more affordable.
Fat endowments allowed dozens of universities to announce dramatic improvements in affordability. In recent years, schools took a variety of measures, including:
- Replacing loans with grants in financial aid packages for lower- and middle-income families, either entirely or after students met a low cap on borrowing.
- Eliminating parental contributions for lower- and middle-income families.
- Waiving tuition entirely for lower-income students.
Princeton University launched the trend in 1998 by banishing loans from financial aid packages for low-income students, said college financing expert Mark Kantrowitz, editor of the FinAid Web site.
But the movement really took off after 2006, when the congressionally chartered Advisory Committee on Student Financial Assistance found that financial barriers, including excessive reliance on student loans in aid packages, were inhibiting lower-income students from attending and graduating from college. (You can read the committee's report, "Mortgaging Our Future: How Financial Barriers to College Undercut America's Global Competitiveness," in this .pdf file.)
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So far, Kantrowitz said, 67 colleges have adopted no-loan policies for at least some of their students, including 40% of all universities with endowments greater than $1 billion.
When the other shoe drops
Harvard, for example, jettisoned loans from all financial aid packages, eliminated parental contributions for families making up to $60,000 a year and limited tuition costs to no more than 10% of income for families making up to $180,000 a year.The price tag for such generosity was affordable in the days when endowments gained an average 10% a year, as they did in 2005, 2006 and 2007, according to surveys by Commonfund Institute. High-flying funds, like Harvard's, often posted annual returns in excess of 20%.
Some of the growth was fueled by a plunge into alternative investments, such as hedge funds, private equity and venture capital -- strategies that made up 42% of the typical endowment fund's asset allocation in 2007, compared with the 23% that was invested in domestic stocks and 12% in fixed-income instruments.
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That appetite for risk set up the funds for a shellacking when the financial crisis hit.
Today, universities are reeling from huge losses in their endowment funds. The average fund shrank 24.1% in the six months ended Dec. 31, 2008, according to Commonfund's benchmark survey.
Harvard's fund, the largest in the nation, became the poster child for the endowment debacle. Harvard's endowment lost 22% of its value, or $8 billion, in just four months last year, forcing the university to freeze hiring, slash budgets and put the $1.2 billion construction of a science complex on hold.
Some of the alternative investments that fueled past growth have been tough to value or sell since the financial crisis hit and investors retreated from risk, said John Griswold, Commonfund Institute's executive director.
How to pay for collegeThat has cut off many universities from a needed source of income and led to great uncertainty about what the endowments are really worth.
Both students and schools are scrambling
The chaos at endowment funds comes as financial need has soared. High unemployment rates, reduced portfolios and lower home values have made paying for education tough for many families.So far, no university has backed off of its no-loan or tuition-waiver pledge, although some acknowledge considering the option. Swarthmore College's dean of admissions and financial aid recently told Bloomberg News that the school may not be able to offer loan-free packages to future students.
Continued: What you need to know
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