Well endowed? A crisis in financial aid

Danny often talks at the CB about the size of university endowments.  And how UW-Madison’s is small in comparison.  Of course, with this cold economic climate, there has been some, um, shrinkage.  College endowments are investments and are subject to the whims of the stock market.

Harvard’s loss of 22% of its endowment sent shockwaves through the higher ed community.  If Harvard, at the top of the ivory tower, lost $8 Billion – which is roughly 4 times what UW’s total endowment was as of 12/31/2007 – what about everyone else?

The UW Foundation sent an e-mail to donors (I’m assuming) on 12/5, a sort of “state of the endowment” status report to encourage alumni that it is still safe to donate, though the endowment had declined 20% between January and October.   It also provides a few details about its investment strategies, which may be of interest to you econ kids:

The endowment portfolio is exposed to a number of these strategies [high-risk derivatives strategies, highly leveraged strategies and overexposure to illiquid asset classes], but in a manageable way. In fact, the philosophy of the endowment portfolio over the last two years has been to reduce risk in the portfolio, raise our level of cash and opportunistically invest in assets at depressed prices. Derivatives vehicles have been used, but used successfully to hedge our exposure to credit markets rather than enhance our returns. The Foundation has never used leverage at the portfolio level. By managing our exposure to illiquid asset classes, we are not a forced seller of our assets, but actually are in a position to be an opportunistic buyer.

…and also how it proposes to cope with this loss.  (I haven’t seen this e-mail accessible anywhere on the web, so I’m posting the crux of it):

For our short-term portfolio, dollars are available for purposes for which they are intended. For endowment gifts, the Foundation’s Board of Directors has determined a spending plan that approximates 4.75 percent per year (paid quarterly). However, rather than simply spend 4.75 percent each and every year, the spending plan averages the endowment’s value over the previous 12 quarters and spends 4.75 percent of this averaged amount. The effect of this plan is to spend a little less in good times and spend a little more in bad times on a percentage basis. In 2009, this plan will not be affected. The end result will be that the spending dollars will decline as the endowment declines in value, but at a much slower pace. This smoothing effect should assist the University as it plans for the upcoming year. However, we are ensuring our campus partners are aware of the current environment to allow them to plan appropriately for what may well be a lower level of support in the near future.

“Lower level of support,” not just from the Foundation but from the state (I hear there’s a budget crisis), private donors (who themselves have come upon hard times), and tuition.  This last one is the one we have to be careful with, especially in the short term.  In the short term, it’s easiest to raise tuition, “easy” being relative.  Getting a tuition increase passed through the state legislature is more likely than (a) the economy correcting itself, (b) the state discovering a treasure chest, and (c) the capital campaign (what capital campaign?) achieving astronomical success.  To an extent, tuition at UW-Madison can and should be increased (for many reasons which I won’t get into right now), but it must be accompanied by adequate increases in financial aid.

Except, with this economic situation, financial aid has become less accessible and less affordable, severely compromising access to to this public university, or to any university, for that matter.

(It should be noted that spending is being cut, but the need for funds goes beyond that.)

1.  Who will be able to afford a college education?  The NY Times paints a doomsday picture, except that the doomsday is quickly becoming reality, and, for many students, already is reality.

2.  More families will need to take out student loans.  But…no one is lending.  Not only have the numbers of private lenders decreased, but the terms of the loans have also become less favorable, such as high interest rates and unfriendly repayment terms.  Lenders used to waive such things like 1% origination fees…but not anymore.  1% that is still calculated in your budget but never disbursed to you.

3.  Who can get a loan?  Not international students, at least not for med school.  The US government, which finances much of US citizens’ medical education, doesn’t lend to international students.  Private lenders are being harsher with demands for cosigners, but many international students don’t have family in the US or know of people willing to be a cosigner.  Especially for the volume of medical school debt.  When international med students get their visa, they only have to show one year of financial support.  What happens after that first year?  This problem has become so severe, at least here at Columbia med, that this will factor into admissions decisions.  It’s not fair for a school to admit a student and offer a first-year financial aid package if that is effectively meaningless for the rest of the tenure and the student may not be able to continue his/her education because of finances.

Columbia University President Lee Bollinger said, via e-mail to the CU community in early November,

Let me also make clear that we will not permit the economic downturn to affect Columbia’s long-standing commitment to need-blind admissions and the meeting of full financial need in student aid for undergraduates in the College and the School of Engineering and Applied Sciences.  We will also work to sustain, and when possible enhance, current levels of financial aid in other schools and programs.

That’s nice, but that only pertains to undergraduate admissions.  From my conversations with the P&S (College of Physicians and Surgeons) financial aid advisor, it seems that the admissions committee will *not* be blind to a prospective student’s financial need, at least for an international student.

And Columbia isn’t the only medical school or graduate school facing these tough decisions.

UW-Madison recently launched a study to determine the role of financial aid in college.  I can tell you right now what they’ll find:  financial aid (or lack thereof) is a significant barrier to access to higher education, and the problem only gets worse in grad and professional school.

How do we solve these problems?  How do we ensure that all students have access to an affordable education (and yes, *everyone* deserves affordability)?  How do we fund our universities?  These are just some of the difficult (impossible?) questions that need to be addressed.

Meanwhile, let’s cross our fingers and hope the stock market goes up, slowing the hemorrhaging of university endowments.

Tags: College of Physicians and Surgeons, Columbia University, economy, endowment, financial aid, Harvard, international students, student loans, tuition, University of Wisconsin-Madison, UW Foundation