Colleges and the Financial Crisis

Few of us have escaped the economic impact of what some economists are calling the worst financial disaster since the Great Depression. The colleges haven't escaped either.  Many, whether public or private, are more vulnerable than you might suppose. It's a good idea to be aware of how they will be affected, especially if you're planning to join their campuses either this fall or next.

If you attend a college with a sizable endowment, and in 2007, 373 colleges had endowments of $100 million or more (NACUBO), its endowment has probably been reduced in value. According to Moody's Investors Service most endowments have lost, on average, almost a third of their value. Harvard's endowment of over $37 billion might now be around $26-27. On November 10th, Drew Faust, the president of Harvard, announced that she is in the process of reviewing compensation costs (which comprises half of Harvard's budget), possible tuition increases, and a multibillion dollar capital expenditure to expand into Boston's Allston district.

Harvard is not alone, as Cornell, Brown, and Dartmouth have also acknowledged earlier this week, that their endowments had dropped in value. Cornell announced a suspension of any building projects for the next three months, while Brown has placed a hiring freeze on all administrative and staff positions. Dartmouth College announced spending reductions as its endowment had reportedly lost $220 million.

Federal grant and research money is also being reduced. Most of the major research universities rely heavily on such grant money to finance research and salaries.  Cornell, in 2007, received over $170 million in research grants from the state of New York. This figure is expected to be reduced by 5-10% this year.

The public universities, who educate 80% of our undergraduates, are not faring much better. The Cal State system just took a $66 million mid-year budget hit, translating into a reduction of 10,000 spaces for the fall 2009 class. The University of California's budget is also getting axed: already underfunded by close to a billion dollars, the budget is now threatened with another $65 million in mid-year cuts.  Arizona State also just suffered a $25 million budget cut on top of the $30 million already extracted from this year's budget.  To stem some of its red ink, it is ending its contracts with 200 adjunct professors.  All told, there will be substantial budget cuts in 17 state university systems, including New York (SUNY) and Florida. This is happening just when applications are surging in the public schools, ironically, because families turn to public universities in financially trying times.

What does all this mean? Should alarms sound when Harvard's endowment falls below $30 billion? At Harvard, this is probably the case.  Many schools, however, including Princeton, Yale, and a slew of liberal arts schools, are aware that though they're suffering financial setbacks, their students are probably even more burdened. Princeton alone is adding $3-4 million to its financial aid pool to offset tuition expenses. Tufts University, despite severe financial woes, is increasing its financial aid, and fighting hard to maintain 'need-blind admissions.' Even though some public schools have sizable endowments (University of Texas with $15 billion, and the University of California with $6.4 billion), most are dependent on state funding or tuition increases. When funding ebbs, they must turn to staff reductions or fee increases. Neither is palatable. Both adversely affect the quality of the school's educational experience.

The next two years are going to be painful for students, their families, and the colleges. Be very attentive to filing your FAFSA, CSS/Profile (for private schools), Cal Grants (should you qualify) as quickly as possible. Be equally aware, that whichever school you elect to attend will be under financial constraints that will impact student: faculty ratios, turn more classes into lectures, and require students to learn how to advocate for scarcer university resources. Advocating, fortunately, might be the most valuable skill a student might gain from what will be challenging years ahead.