U.S. colleges punished by financial crisis

By Andrew Stern

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.