Endowment Losses Threaten No-Loan Policies as Guarantees Vanish

By Janet Frankston Lorin

Aug. 25 (Bloomberg) -- Swarthmore College, perennially ranked among the top liberal arts colleges, was among a select few to replace loans with grants to 50 percent of its 1,500 students as the endowment peaked at $1.4 billion two years ago.

Today, following an estimated investment loss of 17.5 percent in the year ending June 30, Swarthmore has frozen salaries, reduced its budget by 7 percent and allowed a financial planning group to scrutinize the entire budget for additional cuts that may include loan-free packages for future students, according to Suzanne Welsh, vice president for finance and treasurer.

“We’ll be re-evaluating this like everyone else in the country,” Jim Bock, dean of admissions and financial aid, said in an interview. “I can’t promise anything past the class of 2013,” the first-year students who start on Aug. 31.

More than 30 top-ranked private U.S. colleges adopted policies in 2007 and in early 2008 that replaced loans given in financial aid packages with outright grants that students don’t have to repay. Schools were driven by competition for students comparing financial aid packages and criticism from Congress as annual costs approached $50,000 a year, said Donald Heller, a professor of higher education at Pennsylvania State University in State College, Pennsylvania.

‘Admirable Programs’

While the no-loan programs are admirable, they may no longer make sense in this economic climate for less wealthy schools that are more dependent on tuition revenue to operate, said Heller.

Pomona College, in Claremont, California, offered grants instead of loans to families that typically earned less than about $45,000 annually. In December 2007, with its endowment at $1.8 billion as of the previous June, and up from $1.3 billion at the end of fiscal year 2005, the school expanded the program to include all students who qualified for financial aid.

Investments from the endowment have fallen about 21 percent to an estimated $1.3 billion as of June 30, according to controller Andrew O’Boyle. The school has frozen salaries and reduced the number of replacements for teachers on sabbatical, according to Karen Sisson, the school’s treasurer and vice president. The expanded no-loan program will cost an additional $2.4 million annually, said Bruce Poch, the school’s vice president and dean of admissions. In the year before the expansion, about 10 percent of students qualified for loan-free financial packages; now, all students who qualify for financial aid, or 54 percent of the school’s 1,530 students, receive loan- free awards, Poch said.

Decision in Hindsight

“If we were making the decision in December ‘08 rather than December ‘07, would we do it? I think we probably wouldn’t have,” Poch said in an interview. “We were looking at a different world. If we knew then what we know now, we may not have gone this route.” Poch said trustees are still committed to the program.

No-loan policies began to spread after Senator Charles Grassley, a Republican from Iowa, in a September 2007 Senate Finance Committee hearing introduced the topic of endowment growth as tuition continued to rise and families struggled with affordability, said Jill Gerber, a spokeswoman. Later, Grassley raised the idea that university endowments should follow the same rules as foundations, which must pay out 5 percent of their total values each year, she said. At least 10 schools announced their new no-loan programs in November and December 2007.

Bidding War Driven

The new programs, aimed generally at students with family incomes from about $75,000 to $150,000, were also driven by a bidding war among colleges for students, said Michael McPherson, president of the Chicago-based Spencer Foundation, which funds education research.

The schools “didn’t assess carefully enough whether these policies were really sustainable and what they would do if they weren’t,” said McPherson, former president of Macalester College in St. Paul, Minnesota.

At private four-year colleges, the median loan debt for bachelor’s degree recipients was $22,375 in 2007-2008, up 5 percent from $21,238 four years earlier, according to the College Board, the New York-based nonprofit company that owns the SAT college admissions test.

Private colleges may price themselves out of the market if they don’t hold down tuition increases, U.S. Education Secretary Arne Duncan said Aug. 20 in an interview with Bloomberg Television.

Caroline Emch, 20, said one reason she chose Davidson College in Davidson, North Carolina, was because of a no-loan program. She may want to work for a nonprofit or attend graduate school after she completes her bachelor’s degree in two years and didn’t want a loan burden to dictate her career choice.

Pressure Off

“I didn’t want to change what I was interested in because of loans,” Emch said in an interview. “There’s no pressure to have a high-paying job out of college.”

More than 50 percent of Davidson’s 1,700 students benefit from the no-loan program and receive outright grants instead of loans, said David R. Gelinas, director of financial aid.

Schools stretched beyond their means may be forced to abandon the policies, said Richard Levin, president of Yale University in New Haven, Connecticut.

“If I were leading one of those institutions and the choices were having to reduce the size of my faculty versus back off the no-loan pledge, I would think hard about that,” Levin said in an interview.

Investments in Yale’s endowment have declined an estimated 25 percent, to about $16 billion as of June 30. The school has no plans to scale back its no-loan promise or any financial aid programs, Levin said.

Princeton, Harvard

Princeton University, in Princeton, New Jersey, and Harvard University, in Cambridge, Massachusetts, also say they plan to continue their no-loan policies. Princeton began its program in 1998. Investments in Harvard’s endowment fell about 30 percent from $36.9 billion on June 30, 2008. Investments in Princeton’s endowment have fallen an estimated 25 percent from $16.3 billion on June 30, 2008.

Of the top 16 national universities ranked in U.S. News & World Report’s 2010 guide to colleges, all but one -- Johns Hopkins in Baltimore -- adopted a variation of the program that replaced student loans with outright grants. All Ivy League members, the eight private schools in the northeastern U.S. that include Yale, Harvard and Princeton, are among the group.

Liberal Arts Colleges

Of the top 13 liberal arts colleges ranked by U.S. News, all except Middlebury in Middlebury, Vermont, and Carleton College, in Northfield, Minnesota, implemented no-loan programs.

Some of the offers were restricted to the neediest students.

Swarthmore, in Swarthmore, Pennsylvania, decided in December 2007 to replace student loans with grants for all students receiving aid based on a family’s financial situation, including income and assets. It previously offered loan-free packages only to students whose families earned less than $60,000 a year. The enhanced policy cost $1.7 million for the last school year, Welsh said.

About half of Swarthmore students now qualify for outright grants instead of loans under the new program, Bock said. Some parents take out loans on their own to pay for college costs.

Swarthmore’s total 2009 operating budget is $107 million, according to the school.

“We’re trying to figure out the best composition of the budget to meet our mission and that necessarily includes the future shape of the financial aid program,” Welsh said in an interview.

Swarthmore’s endowment is estimated at just more than $1.1 billion through June, Welsh said.

Davidson’s Future

When Davidson College announced its no-loan program in March 2007, school officials said in a news release they needed to raise $70 million to endow the aid policy permanently.

While it has money for the 2009-10 school year and part of the next year from a grant, the school won’t dip into its operating budget to fund it, said Eileen Keeley, Davidson’s vice president for college relations.

The no-loan program will cost Davidson about $2.6 million for the 2009-10 school year, about 10 percent of its financial aid budget, Gelinas said. The school’s operating budget for fiscal 2010 is about $95 million, said Ed Kania, controller and director of business services.

Davidson is need blind, which means a family’s financial situation won’t be considered in the admissions process. Its endowment investments fell by about 24 to 25 percent for fiscal 2009, Kania said.

Davidson’s endowment was valued at an estimated $372 million as of June 30, 2009, Kania said. The college intends to keep the no-loans program as long as it can afford it, Keeley said.

Protecting Programs

“We will not hurt any other program in order to fund this,” Keeley said in an interview. “It’s going to have to come from our loyal alumni and parents and others who feel this is a commitment worth supporting.”

Grassley favors a consistent payout for all tax exempt organizations that accumulate assets, such as universities. The right policy would work regardless of economic fluctuations or endowment losses, said Gerber, his spokeswoman.

Smith College in Northampton, Massachusetts, didn’t implement a no-loan policy.

“We looked at the program and at the time we made a determination it was prohibitively expensive,” said Audrey Smith, dean of enrollment at Smith College, where investments in the endowment fell 16.7 percent for fiscal year 2009.

“Given what subsequently happened to our endowment, that decision seems completely justified,” she said in an interview. “Nobody would have anticipated that the world was going to change so dramatically.”

To contact the reporter on this story: Janet Frankston Lorin in New York jlorin@bloomberg.net .

Last Updated: August 25, 2009 00:01 EDT

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