Jan. 8 (Bloomberg) -- Princeton University, expecting a 25 percent loss in its endowment by next June, may set the lowest cost increase to parents and students since 1966 and provide a marker for other top U.S. schools.

Princeton’s President Shirley Tilghman will ask the 263- year-old school’s trustees to approve a 2.9 percent cost increase at their next meeting scheduled Jan. 22-24, Cass Cliatt, a school spokeswoman, said today in an e-mail interview.

If approved, the increase would be about half of last year’s U.S. average of 5.9 percent for private institutions, said Tony Pals, a spokesman for the National Association of Independent Colleges and Universities, in Washington. The move may touch off similar cost measures by Princeton’s peer institutions, such as Harvard University in Cambridge, Massachusetts, and Yale University in New Haven, Connecticut.

“Princeton takes the lead on these things and then every other school pulls their hair out,” said Kalman Chany, 51, author of “Paying for College Without Going Broke.” “I would imagine many other schools are going to follow suit. Most of them are very cognizant of staying in the same neighborhood as other schools.”

In 1998, Princeton eliminated student loans, replacing them with grants for low-income student and for all undergraduates in 2001.

The move triggered a pricing war among elite institutions that has led to many schools’ offers of deep discounts on tuition, Chany said. Harvard lets students from families earning $60,000 or less attend free, he said.

“That is the pattern we have seen,” said Pals, whose group represents about 1,000 U.S. institutions. “All of higher education is very competitive with their peer institutions. Princeton’s move will be watched very closely by its peers.”

Parents’ Pain

Chany said the move also means the elite schools may be responding to parents’ financial pain.

“Even at the elite level they aren’t immune to price resistance from their customers,” Chany said by telephone. “What the schools charge is a function in part of what the market will bear, and they are reading the tea leaves.”

Princeton has 7,502 graduate and undergraduate students. Its current undergraduate cost is $45,695, according to school records. The proposed increase includes the cost of tuition, fees, room and board at the New Jersey university.

Princeton has been hearing from parents hurt by the recession and the drop in the stock market, Cliatt said.

Cliatt said Princeton increased the amount budgeted for scholarships by $5 million, to $92 million, as of November. The school also raised the average scholarship by $1,000, to $33,700.

“Institutions have to be very sensitive to what is happening to household income and there is a lot of attention being paid to that by university leaders,” said John Walda, 58, president and chief executive officer of the National Association of College and University Business Officers, in Washington.

Endowment Loss

Princeton’s endowment at Oct. 31 had fallen 11 percent since June 30, the end of its fiscal year, and “may be down as much as 25 percent” by next July, Tilghman said in a letter today to students, faculty and alumni. The fund had ended fiscal 2008 with a value of $16.3 billion.

The 2008-09 operating budget was projected at $1.25 billion, of which $534.6 million or 45 percent, was to come from the endowment, Cliatt said.

“Although our endowment spending policy is designed to smooth the impact of volatility in market returns, a decline of this magnitude is unprecedented in recent times,” Tilghman said in the letter.

Competitors’ Losses

In the context of the last six months, Princeton’s losses weren’t as bad as those of other institutions, Walda said. The average loss since June 30 has been 25 to 30 percent, he said.

In December, Yale said its endowment had fallen 25 percent, to $17 billion. Harvard University’s fell 22 percent in the first four months of the fiscal year, even before the school accounts for losses in private equity and certain other investments.

Princeton will limit salary increases, capping raises at $2,000 “for the best compensated individuals,” Tilghman said. Princeton is slashing administrative budgets by 5 percent though students will get financial aid, she said.

“We will sustain our commitment to meeting the full financial need of undergraduates, so that every student who is admitted will be able to attend, regardless of family circumstances,” Tilghman said in the letter.

To contact the reporter on this story: Brian K. Sullivan in Boston at bsullivan10@bloomberg.net.

Last Updated: January 8, 2009 15:11 EST