Colleges Getting Hit by the Credit Crunch

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David Wink / / Corbis

American universities have long been the envy of the world, with seemingly bottomless purses to bankroll cutting-edge research, top-notch faculty and construction projects galore. And fiscally speaking, these schools have it better than most businesses in the U.S.: multiple sources of revenue, including parents willing to pay tuition through the nose amid all kinds of money trouble, have often kept these institutions insulated from economic downturns. But in a financial crisis of this magnitude, even the ivory towers are getting hit — and in more ways than one. Not only have Bank of America, Citigroup and some two dozen other lenders cut back on or stopped issuing student loans, but the market meltdown has left many colleges scrambling to come up enough cash to cover payroll and other near-term necessities.

Last week, nearly 1,000 colleges were told they couldn't access most of the $9.3 billion sitting in a short-term fund that had been offering slightly higher returns than U.S. treasuries. To prevent a run on the fund —12% of which was invested in mortgage-backed securities — the fund's trustee resigned and froze withdrawals so it could liquidate the assets and distribute the proceeds in an orderly manner. The same thing happened to another 200 schools with $1 billion in an intermediate-term fund. Given that the schools will get about half of their money by the end of this year and the rest by 2011, there's a severe cash crunch for many small schools, some of which had up to half their liquid assets in the short-term fund.

Because these funds were terminated a few days before Congress passed the mega-bailout bill, Minnesota's independent-college association sent a letter to its Congressional delegates warning that without government help, some schools would be unable to fulfill their payroll responsibilities this week. "Any further delay by Congress or the administration," they wrote, "will have immediate devastating effects on these institutions and the families they serve." The American Council on Education sent a similar plea to every member of the House of Representatives.

But even though the bailout has been approved, the financial future remains murky, and some schools are already reporting cutbacks: Boston University has called for a hiring freeze, while Grinnell College in Grinnell, Iowa, plans to delay any further plans for new buildings or other capital projects.

Universities with deep pockets, however, could stand to reap some benefits from the downturn. Schools with enough financial security — from a solid endowment or good planning or both — could attract more top students by offering more aid to families that find their budgets stretched thin. Last year, Grinnell expanded its financial aid program, which covers about 90% of its students, to offer mostly grants instead of loans. That could give the school a competitive edge — as long as it can convince parents to get past the sticker shock and learn about the financial aid options that sometimes make elite private colleges even cheaper than state schools. Ditto for Hamilton College in Clinton, N.Y., where a $700 million endowment and a budget designed ahead of time to accommodate a growing number of college students (this year marks the demographic peak) will allow the university to maintain its full financial aid program.

Still, Monica Inzer, Hamilton's dean of admission and financial aid, fears recruiting top candidates may prove more difficult this year, in part because of an increasing sense that college is just too expensive. Admissions inquiries at Hamilton are down 2% so far this year, Inzer says, (though part of the dip could come from students preferring to read online brochures) and noticeably fewer students have been visiting campus. Where students in past years might have applied to dozens of schools, this year's prospective students may be targeting their inquiries more carefully; and Inzer says parents are consulting financial aid counselors earlier in the college-search season than ever before. "I think now people are saying, 'This is what we can afford, so before you get your hopes set on X College, let's talk to them,'" she says. "We need to remind them how important education is as an investment."

Some reforms are already underway to help parents understand that college may be more affordable than they think. Education Secretary Margaret Spellings recently unveiled a proposal to simplify the federal financial aid process by shrinking the application form from 100 questions to 26 and allowing students to find out before their senior year of high school how much federal aid they would qualify for. Private universities are also stepping up to the plate, increasingly offering such user-friendly options as online aid calculators to give each student a personalized estimate. Molly Corbett Broad, president of the American Council on Education, says the down economy could accelerate such reforms, which could ultimately "go a long way to demystify the cost of colleges."

Despite optimism in some corners, however, universities are cautious as they survey the economic horizon. "In a huge downturn, everybody suffers immensely," says Grinnell President Russell Osgood. "Those that are a little bit better off will just be cushioned a little bit better at the front end."

See the new battle over financial aid here.

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