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The Universities in Trouble

Fulfilling the Commitment: Recommendations for Reforming Federal Student Aid in Brief

by Sandy Baum, Michael McPherson, and others
Spencer Foundation/College Board/Lumina Foundation for Education, September 2008, available at www.collegeboard.org

Trends in College Spending: Where Does the Money Come From? Where Does It Go?

by Jane V. Wellman and others
Delta Cost Project/ Lumina Foundation for Education, January 2009, available at www.deltacostproject.org


Since the financial meltdown began to accelerate last summer, the world has changed utterly for colleges and universities just as it has for everyone who had not been stashing cash under the mattress. Along with failing banks, auto manufacturers, and insurance companies, universities have been making headlines—especially those whose gigantic endowments (Harvard’s was approaching $40 billion before the crash) have sharply declined. Last year, politicians and pundits were complaining about the unseemly wealth of such institutions. This year, alumni are getting e-mails from beleaguered presidents assuring them that Alma Mater will somehow ride out the storm.

The headlines tend to focus on the collapse of institutional investments, which, indeed, has been spectacular. No one quite knows how much has been lost. Led by the example of Yale’s chief investment officer, David Swensen, whose Pioneering Portfolio Management is described by the chair of the Yale investment committee as “the best book ever written on managing institutional investment portfolios,” endowment managers had been shifting large sums toward illiquid assets such as private equity partnerships, which typically require periodic infusions of fresh capital, and whose current market value is virtually impossible to assess. This and other versions of “an unconventional approach to institutional investment” (the subtitle of Swensen’s book, first published in 2000 and recently reissued in revised form) worked very well during the boom years, bringing home double-digit returns.

Today, leading universities are reporting endowment losses of 20 percent or more, but some informed observers think that the true figure, at least in some cases, may be closer to 50 percent. Actions that would never have been contemplated a year ago, such as selling severely depreciated assets in order to meet cash obligations or issuing bonds at punitive interest rates, are no longer unheard of. And in the current market, would-be sellers and borrowers are finding few buyers or lenders.1

What does the financial turmoil really mean for America’s colleges and universities? It depends on whom you ask and which institution you are asking about. Trustees generally limit spending from the endowment to under 5 percent of its value, calculated as a three-year trailing average, which means that at colleges where endowment income is an important source of operating revenue, the decline in asset valuation will suppress available funds for several years even if markets recover sooner than expected. Harvard, for instance, covers more than a third of its $3.5 billion annual operating budget from its endowment, and is therefore facing deficits in the hundreds of millions of dollars.

Since most American colleges have an endowment less than 1 percent the size of Harvard’s, most do not have Harvard’s problem. But they have other problems. The sources of income on which they depend—tuition revenue (at private colleges) and state appropriations (at public colleges), as well as annual alumni contributions (at both)—are under pressure too. Everyone knows about the competitive frenzy to get into a few highly ranked colleges, but in fact most of the 1,500 private colleges in the United States do not attract significantly more applicants than they can enroll. On the contrary, they struggle to meet enrollment targets, especially now that families in economic distress are turning to public institutions, which tend to be cheaper.2

The prevailing financial model at private colleges is one by which relatively affluent students pay more than needy students, although even those who pay full “sticker price” (roughly $50,000 per year at a top-tier school) meet less than two thirds of the full cost of their own education—calculated as a proportional fraction of faculty and staff salaries, dormitory accommodations, dining, library, health, and athletic services, as well as overhead costs such as keeping the lights on, the heat flowing, and the buildings in good repair. In other words, all students in America’s private colleges—except for those at institutions run for profit, such as the University of Phoenix—are subsidized to one extent or another.

Since the crash, it has become harder to provide the subsidy—and at just the moment when many students need more. The financial need of both enrolled and prospective students is rising as parents lose their jobs and watch the value of their homes drop, leaving them ineligible for home equity loans, which, until recently, were a common instrument for financing their children’s education. At Syracuse University, for example, the number of students appealing for additional aid has risen by nearly one third compared to the same period last year. At many private colleges there is pressure to enroll more students who can pay at least a substantial fraction of full tuition and fees, and fewer who depend heavily on financial aid.3

Meanwhile, at public institutions, where tuition historically has been kept relatively low by means of a subsidy derived from tax revenue, the financial model is also at risk. These institutions—long before the current crisis—were seeing what Peter Sacks, in an indignant and informative book, Tearing Down the Gates: Confronting the Class Divide in American Education, calls “massive disinvestment” by the states. The University of Virginia now receives a mere 8 percent of its funding from the state of Virginia, down from nearly 30 percent a quarter-century ago. At the University of Wisconsin, in a state with a long progressive tradition, only about 19 percent comes from public funds—also down from around 30 percent just a decade ago. To make up for the decline in public money, tuition rates at public universities have been climbing even faster than at private institutions—a trend likely to accelerate, at least in the short run.4

These are only a few of the reasons that the same lame metaphors one hears every night on the evening news are pouring out of the dean’s office: it’s time to “tighten our belts” and “batten down the hatches.” But the questions remain: What does it all really mean, and how are colleges and universities dealing with the new circumstances?


On the expense side, one finds the usual strategies: salary and hiring freezes, reduction of staff by layoffs or attrition, cancellation or postponement of construction projects. Soon after the markets went into free fall, Clemson University announced mandatory unpaid five-day furloughs for staff employees in order to cut its looming deficit. Beloit College laid off 10 percent of its staff after fewer students than anticipated registered last semester, creating a shortfall in anticipated tuition revenue. At Stanford (whose endowment is the country’s third-largest, after Harvard’s and Yale’s), early projections called for a cut of $100 million over two years, but the provost has recently announced that the reduction must be achieved within one year.5

On the revenue side, some selective institutions (those that receive more applications than they accept) are increasing the number of undergraduate students they admit, in order to collect additional tuition to help close the budget gap. Colleges that normally attract many more qualified applicants than they accept may be able to enlarge the entering class without jeopardizing their academic standards—though deans and presidents fret that if their school becomes even marginally less selective, its standing in the (absurdly) important US News and World Report rankings is bound to slip. Moreover, such a strategy stretches the capacity of existing dormitories, classrooms, and advisers at just the time when more and more students, facing a contracting job market and longer odds against getting into and paying for graduate school, are turning to the career and counseling services for help.6 To respond by building more dorms or hiring more counselors (not to mention more faculty) would, of course, defeat the purpose of taking in more students in the first place.

At less selective private colleges, increasing the size of the student body is a dubious strategy. Their applicant pool has been shrinking as families turn to more affordable public institutions, especially to community colleges, where enrollments are up as financially strapped students choose to attend colleges where evening classes and part-time enrollment allow them to work during the day and live at home.7 At the same time, unemployed adults are turning to community colleges in hopes of retraining themselves for jobs that require skills they currently lack.

As a result, these colleges are coping with overcrowded classes and onerous—sometimes crushing—duties for their already burdened faculty, who teach many more hours and get paid much less than their counterparts at more prestigious institutions. In cases where state law mandates maximum class sizes, students find themselves shut out of courses they want or need. And at almost all institutions—public and private, two-year and four-year—reliance on part-time (adjunct) faculty who work for low wages and few or no benefits is increasing.8 As for staff members—from librarians to custodians—they are at risk of being laid off no matter what kind of institution they work for.

In short, the financial crisis not only is threatening the livelihood of faculty and staff but is also degrading the experience of students. And despite the big hit on the big endowments, the further you go down the hierarchy of prestige, the worse the effects. For instance, the chancellor of the Connecticut community college system recently informed faculty that the first phase of the governor’s proposed budget cuts would require limiting student enrollment, reducing service in libraries and laboratories, and cutting back on the availability of advising, remedial tutoring, and childcare. On the West Coast, things are no better: San Jose State University has been forced by budget reductions to turn away thousands of qualified applicants for the first time in its hundred-year history.9

For years, we have witnessed a growing gap between rich and poor colleges, the privatization of public universities, and aggressive if not reckless investment and spending practices at wealthy institutions, where the allure of gain appears to have overwhelmed the consciousness of risk. Now we are also witnessing drastic budget contraction at the most fragile and vulnerable institutions. Higher education has always been a mirror of American society—and, for the moment, at least, the image it reflects is not a pretty one.


Still, compared to Americans who work at manufacturing jobs or in the service industries, many people who make their living in academia are reasonably well insulated from financial devastation. For most tenured faculty, the worst they are likely to experience is stagnant pay and deferred retirement. For graduate students and young faculty hoping to start or keep a teaching career, the situation is more alarming, since postponed retirements mean fewer entry-level positions and promotions. But if we step back from the troubles of students, faculty, and staff already inside the academic world, there comes into view the most disturbing effect of the economic collapse: many young people who had been hoping to attend college will not be able to do so.

Before the crisis, their chances were already diminishing. Over the last three decades, the United States has been backtracking from its post–World War II commitment to expand access to college. Starting with the GI Bill, the immediate postwar decades had seen a huge infusion of federal money into old (by American standards) universities to support defense-related projects, including not only scientific training and research but language and area studies, as well as the creation of many new institutions—notably the two-year community colleges—aimed at providing virtually universal higher education. By the last quarter of the twentieth century, the United States led the world in the proportion of young people in college.

  1. 1

    For the debacle at Harvard, see Bernard Condon and Nathan Vardi, “Harvard: The Inside Story of Its Finance Meltdown,” Forbes, March 16, 2009; and Steven M. Davidoff, “Harvard, Private Equity and the Education Bubble,” DealBook, nytimes.com, March 3, 2009. For a broad critique of endowment management and reporting, see Jim Wolfston, “The New Endowment Portfolio,” www.InsideHigherEd.com, April 9, 2009.

    One measure of how investment strategies have changed from the traditional mix of stocks and bonds is the fact that colleges and universities have been, directly and indirectly, the victims of swindles, including Bernard Madoff’s Ponzi scheme. Yeshiva University initially reported losses of more than $100 million from funds entrusted to Madoff, then declared that figure a “fictitious” gain and revised its estimate downward to the amount of its original investment, around $14.5 million. Tufts and NYU calculate that they lost in the range of $20 million each, and NYU is suing the money manager who directed its funds to Madoff.

    The Picower Foundation, which supports brain science at MIT and diabetes research at Harvard, has ceased making grants since most of its assets have vanished, and several projects on human rights funded by the JEHT (Justice, Equality, Human Dignity, and Tolerance) Foundation have been scaled back or shut down. The University of Pittsburgh and Carnegie Mellon University may have lost $65 million and $49 million respectively, which they had invested with Westridge Capital Management, whose senior managers were recently arrested for fraud.

    See Bill Schackner, “Questions Remain over Management of Pitt CMU Funds,” Pittsburgh Post-Gazette, March 8, 2009. For Madoff’s institutional victims, see Javier C. Hernandez, “Betrayed by Madoff, Yeshiva U. Adds a Lesson,” The New York Times, December 22, 2008; Tracy Jan, “Tufts Loses $20m in Madoff Scheme,” The Boston Globe, December 20, 2008; Nathan Koppel, “Fund Manager Ordered Not to Destroy Madoff Documents,” The Wall Street Journal, December 25, 2008; June Q. Wu, “Madoff Scam Hits Harvard Medical School Grants,” The Harvard Crimson, December 21, 2008; Jillian Wagner, “Ethics Center Won’t Get 400k,” The Justice (Brandeis University student newspaper), January 13, 2009.

  2. 2

    Lisa W. Foderaro, “Well-Regarded Public Colleges Get a Surge of Bargain Hunters,” The New York Times, March 1, 2009.

  3. 3

    For Syracuse, see David Moltz, “Give or Feel Guilty,” www.InsideHigherEd.com, December 10, 2008. Departing from its policy of full “need-blind” admissions, Tufts University has been forced to consider the applicant’s ability to pay as a factor in the admissions decision for some 5 percent of next year’s entering class; see Scott Jaschik, “A Retreat from ‘Need Blind,’” InsideHigherEd.com, April 6, 2009.

  4. 4

    The trustees of the University of Massachusetts, for example, have approved a $1,500 increase in tuition for the next academic year, representing a 15 percent jump (from $9,548 to $11,048) over the current year. The total cost of attendance, including fees, housing, etc., is now close to $20,000. See Tony Dobrowolski, “UMass Students to See Significant Fee Increase,” The Berkshire Eagle, March 1, 2009.

  5. 5

    For Clemson and Beloit, see Gabriela Montell, “Cuts, Cuts, and More Cuts,” The Chronicle of Higher Education, November 13, 2008; for Stanford, see Jack Stripling, “DoubleTake,” Inside HigherEd.com, March 10, 2009.

  6. 6

    See An Audit of Mental Health Care at US Colleges and Universities: Focus on Anxiety Disorders, a report issued by the Anxiety Disorders Association of America, 2007, available at www.adaa.org; and Steven Bushong, “College Counseling Centers Remain Understaffed Though Demand Is Strong, Survey Finds,” The Chronicle of Higher Education, March 10, 2009.

  7. 7

    Even prestigious liberal arts colleges are seeing declines in the numbers of applicants. See Janet Frankston Lorin, “Williams College’s Applications Drop 20% as Economy Takes Toll,” Bloomberg.com, March 10, 2009.

  8. 8

    Most part-time faculty, with little chance of gaining promotion to full-time status, do not have even probationary status as full-fledged teaching members of the institution. Because of low pay, many have no choice but to teach at several colleges simultaneously, and while they are often talented and dedicated, there is good evidence that student learning declines when part-time faculty grows. See Peter Schmidt, “Use of Part-Time Instructors Tied to Lower Student Success,” The Chronicle of Higher Education, November 14, 2008. At UCLA, where the new budget will not allow fielding a sufficient number of seminars to accommodate demand, the faculty voted last fall to rescind the requirement that all students in the College of Letters and Science take at least one seminar: see Caitlin Moran, “UCLA Faculty Leaders Vote to Suspend Seminar Requirement,” The Chronicle of Higher Education, November 6, 2008.

  9. 9

    Lisa M. Krieger, “San Jose State University Rejects 4,400 Prospective Freshmen,” MercuryNews.com, March 25, 2009.

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