U.S. colleges punished by financial crisis

CHICAGO Thu Oct 30, 2008 9:20am EDT

A view of the Bennington College in Bennington, Vermont, is seen in this handout photo taken in 2007. REUTERS/Gregory Cherin/Bennington College/Handout

A view of the Bennington College in Bennington, Vermont, is seen in this handout photo taken in 2007.

Credit: Reuters/Gregory Cherin/Bennington College/Handout

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CHICAGO (Reuters) - Higher education has been a growth industry in the United States, evidenced by swelling enrollments, expanding campuses and growing endowments. But the global economic crisis has caught colleges and universities in a vice.

With their endowments shrinking along with stock markets, some schools may raise tuition more than usual, even as students complain it is already too expensive and struggle to get loans.

"This will definitely test many schools," said Ronald Watts, the finance chief of Oberlin College, an elite private school in Ohio whose endowment of nearly $750 million has shrunk by about 15 percent in the past four months.

To be sure, schools have proven resilient in past recessions, helped by rising student enrollment as people seek a leg-up in a bleak job market.

"It's not going to be as drastic as what corporations are doing," Watts said. "You don't just eliminate people and lay off faculty and expect not to destroy your academic program."

Nevertheless, a few schools have already announced fresh tuition hikes, and school officials said they were keeping a close eye on their finances. And, with schools under financial pressure, local economies all over the country are likely to suffer.

Tuition increases have outpaced inflation for years. Tuition and fees at public universities have risen 175 percent since 1992, while the consumer price index rose 48 percent.

At the University of Wisconsin in Madison, the school's $1.8 billion endowment has shrunk by 18 percent since the start of the year, Sandy Wilcox of the University of Wisconsin Foundation said. Dipping into the endowment to make a promised contribution to the school's budget only shrinks it further.

Wisconsin, like many schools with substantial endowments -- 400 have endowments over $100 million and 76 above $1 billion -- use a three-year averaging system to smooth out how much they pay out from earnings.

RAINY DAY FUND

The wealthiest schools have come to rely on endowments and there has been growing pressure from Congress to boost payouts, threatening to take away their nonprofit, tax-free status if they don't comply.

For most other schools, small endowments serve as a "rainy day fund" that can disappear quickly in tough times, said John Griswold of Commonfund, which manages money for nonprofits.

"Schools we're most concerned about are smaller, less well-endowed private colleges," said Roger Goodman, vice president at Moody's Investors Service, which assigns credit ratings to 500 schools. He said endowment balances have likely plummeted by 30 percent or more.

"You still need a college degree to be a full participant in the work force," he said. "What we may see is a shifting (of applicants) from the higher-priced, small, private colleges, to a lower-priced four-year university, and from the four-year universities to community colleges for a couple of years."

A survey of 2,500 prospective students by MeritAid.com found 57 percent were now considering less-expensive colleges due to the economic downturn.

Many prospective students encounter sticker shock when confronted by the $50,000 price tag at schools like Oberlin, Boston University and Bennington College in Vermont.

But financial aid and federal loans remain available, and families whose assets have declined qualify for more aid.

Boosting access to college is one plank of Democratic presidential hopeful Barack Obama's platform. This may add pressure on publicly-funded universities to boost enrollment, which has already climbed 10 percent since 2002.

Sticker prices at private colleges are usually much higher than pubic schools, but students rarely pay full price.

"Sometimes a small, liberal arts college will actually be better for a student and more affordable than in-state (public schools)," said Ken Himmelman, Bennington's dean of admissions.

Public universities, which educate roughly 75 percent of the 17.5 million U.S. students, are anticipating cuts in state appropriations, which cover a substantial chunk of their costs.

State tax receipts have declined due to the economic slowdown and the bursting of the housing bubble.

"They'll look to the university to cut. They don't want to cut prisons, or roads," Wisconsin's Wilcox said.

MAKING CUTS

Massachusetts' public universities have cut budgets by 5 percent as their part in covering a state-wide shortfall.

Some public and private schools have declared hiring freezes and made efforts to reduce expenses because of shrunken endowments, and actual or expected declines in gifts and government support.

The state of Arizona cut its contribution to the state university system by 4 percent this year and 5 percent next year -- with another mid-year cut possible, Its more than 118,000 university students may have to absorb a tuition hike next year of 10 percent or more.

Hawaii lowered its contribution 2 percent, though enrollment rose 6 percent. Pennsylvania's public universities will raise tuition 4 percent next year ahead of state cuts.

California sliced 1 percent off its $3 billion contribution to universities but more cuts are expected as tax revenues lag projections. This spring, New York reduced its contribution and warned another 30 percent cut may be in the offing.

The bursting of the housing bubble has dried up home equity loans many families have used to pay tuition. And the stock market drop has shrunk some families' savings for education.

Often, much of the media's focus is on wealthy private schools with multibillion-dollar endowments like Harvard and Yale, which have promised to cover costs for many of those fortunate enough to gain admission.

But at less well-heeled private schools, which make up most of the United States' unrivaled roster of 4,300 nonprofit institutions of higher learning, significant tuition increases may be unavoidable.

"If history repeats itself, you're going to have falling state support on a per-student basis, rising enrollments, and probably rises in tuition," said Paul Lingenfelter, president of State Higher Education Executive Officers.

Some schools may try to wring more out of their campuses. Professors may have to teach more courses, schools may rent out underutilized campus buildings, or even sell dormitories to hoteliers and lease them back, suggested Richard Vedder, who heads the Center for College Affordability and Productivity.

"Schools normally rely on tuition increases" to offset falls in government and donor support, Vedder said. "But as economic conditions worsen, students are going to be resistant, plus there is political pressure not to raise tuition. In dollar terms, budgets may be equal to last year, and some may be forced into some sort of austerity mode."

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