The Recession Hits College Campuses

Ivy-covered walls, Ph.D. economists, and growing demand for education seem to have, so far, offered colleges and universities at least a little protection from the recession and market meltdowns, according to several new analyses of colleges' financial health.

University endowments, those big pools of "rainy day funds" that were designed to be so well diversified that they'd protect colleges during bad years, have fallen only about 25 percent in the past 18 months or so. While that has been painful for the colleges, it could have been worse. The U.S. stock market fell by more than 40 percent in the same period.

In all, the average college endowment lost 2.7 percent in the fiscal year that ended June 30, 2008, according to Commonfund, an organization that manages many colleges' endowments. A follow-up survey found endowments lost another 22.5 percent in the five months that ended Dec. 1, 2008.

Most colleges have such small endowments—half have $88 million or less, according to the most recent endowment analysis by the National Association of College and University Business Officers—that changes in their values don't make a big difference. But the market meltdown is having an impact on wealthy schools like Harvard, which typically take 4 to 5 percent of from their endowments to pay for scholarships, buildings, and other projects. While most colleges are refraining from cutting aid, several have laid off instructors, frozen construction, and cut employees' pay.

And there are worries that this is only the beginning of a wider recessionary impact on campuses. State governments are starting to enact higher education budget cuts that could mean reduced aid, fewer services, and even fewer classroom seats for students next fall.

The alternative investments that were supposed to protect wealthier university endowments, such as real estate and commodities, have fallen in recent weeks as the U.S. stock market stabilized. Yale, which saw its widely diversified portfolio increase by 1.5 percent in the fiscal year ended June 30, 2008, last month warned that its endowment had already fallen 25 percent since then.

A few schools, including Tufts, New York University, and Yeshiva University, have recently reported losses due to the Madoff fraud.

Adding all this up, 2009 will be a rough year for colleges, predicts Moody's, a credit rating agency. While higher education "has been more insulated from economic impact in prior recessions," this cycle might be different, Moody's warned recently. Moody's expects donations, financial aid, and other grants to fall as state governments and philanthropists reel from the downturn. And it warns that the credit crunch is driving college borrowing costs up. Meanwhile, students and parents may finally rebel against annual tuition increases that used to make up for declines in other revenues. Princeton University, for example, recently announced it would raise its costs just 2.9 percent in 2009, its lowest increase in more than 40 years. (Of course, that's still a big dollar increase. For those who don't receive any aid next semester, the total sticker cost of attendance—tuition, fees, room, board, books, travel, and laundry—will exceed $50,000.)

"There are a lot of reasons to think this could be a turning point," says Roger Goodman, editor of the Moody's report. Expensive colleges, especially, are holding their collective breath to see whether students start voting with their feet and choose cheaper schools this fall, he says. But while 2009 will probably be rough for schools that have overborrowed or scared students off with high prices, the long-term outlook for higher education in general is good, Moody's believes.

Colleges are likely to be among the beneficiaries of proposed government stimulus spending. And in previous recessions, college enrollment has risen, since college graduates get bigger paychecks and more opportunities.

Many college officials remain cautiously hopeful that universities' previous protections against economic cycles will buffer them from the worst of this storm. At Dordt College in Sioux Center, Iowa, President Carl E. Zylstra says donations are flat, the endowment has suffered, "and we don't have as much freedom to raise tuition prices." But applications and deposits for the fall are rising, he says. "Demand for college will remain strong ....We are not panicking," he says.