Financial aid safe in downturn

Nathalie Tadena

Correction appended

Representatives from Northwestern and several other wealthy universities say they are confident their schools can maintain projected financial aid policies despite the recent economic downturn.

“Right now we need to pay attention to overall expenses,” said Joe Case, dean of financial aid at Amherst College. “We don’t expect it to affect us since we are historically committed to providing financial aid equal to students’ need.”

Amherst funds 30 percent of its financial aid through its endowment. A small liberal arts college in Massachusetts, Amherst has one of the higher endowment-to-student ratios in the country, Case said. With only 1,600 students, the school still has an endowment of $1.6 billion.

The funding rate varies greatly among affluent universities, with NU on the lower end at 15 percent. Princeton University uses its endowment to fund 80 percent of financial aid.

Since a portion of a school’s endowment is invested in the stock market, low share prices could lower a university’s endowment value and, in theory, hurt a school’s financial aid fund.

But this doesn’t seem to be the case, regardless of how much of a school’s investments are used to fund aid programs.

“Harvard and Yale’s endowments are so great that the current financial problem will only but a small dent into it,” said Roger Kaufman, an economics professor at Smith College and an expert on university endowments. Kaufman said he could not comment on how NU uses its endowment on financial aid because it depends on several factors, such as the school’s takeout rate: how much it withdraws from the endowment every year.

NU’s endowment

In 2007, NU had the 11th largest endowment of colleges and universities in the country with more than $6.5 billion. But the schools with the largest endowments – Harvard, Yale, Princeton, Stanford and the University of Texas system – all boast endowments more than twice the size of NU’s.

Yale’s $22.5 billion endowment funded more than $61 million of the school’s $80 million financial aid program. Eighty percent of Princeton’s $81 million financial aid budget also came from the endowment last year.

When donors make a sizeable contribution to the university, they usually specify what the money should be used for, said Eugene Sunshine, NU’s vice president for business and finance. The number of endowment funds used for financial aid is determined by how many contributions are marked for financial aid, he said.

Relying on endowment rather than a central budget was a “big plus” for the country’s richest universities, but these schools will now be hard-pressed to maintain those funds if endowment values continue to decline, NU president Henry Bienen said in an interview with the Daily two weeks ago. Bienen estimated NU’s endowment has lost 14 percent of its value due to the bad economy.

“The very universities that had very high endowments for financial aid are taking a huge hit on their endowments that they could not have dreamt would happen so precipitously,” Bienen said.

NU has an endowment spending rate of 4 to 5 percent each year, said Sunshine. NU funds most of its aid program through tuition revenue, annual gifts and other funds in the central budget. In the long run, schools heavily dependent on their endowment may need a “reallocation of their revenues” to make up for lost money value.

“It creates a level of difficulty and potential problems that we don’t necessarily have,” Sunshine said.

The alternative

Most schools, however, already have spending budgets that take into account economic downturns and protect the endowment.

“We have our spending rules and we’re not going to change them,” said Caesar Storlazzi, university director of student financial services. “We’re keeping a close eye on what the markets are doing and what our endowments are doing, but we’re committed to the welfare of our students and we’re not going to back away from increased financial aid.”

Regardless, NU does not plan to change the way it uses the endowment to fund financial aid, Sunshine said.

“One, it’s limited in the first place by virtue of how many gifts you get for financial aid,” he said. “And two, the value of the endowment is dropping, which makes it harder to pull money out of it.”

The schools that should be concerned about their endowments are state schools and lower-ranking private universities, Kaufman said. Declines in endowments at less affluent schools that have expanded and enhanced aid to compete with Ivy League universities “may well find it difficult to maintain” their new policies, he said.

“We may be entering a very deep and long recession, which means more difficulty for families to finance education,” Kaufman said. “It’s going to make a different right now, but further down the line, it may well become a strain for other universities and even some wealthy places are cutting back.”

Last December, Harvard released plans for a major initiative to provide more money for middle class families by adding an additional $22 million from the school’s endowment into financial aid. More than a half-dozen top-tier schools, including NU, also announced new aid policies in response.

Although the endowment has dropped between June and September it is “too soon” to predict how many more students may be applying for financial aid, said Michael Mills, associate provost for university enrollment.

“The aid budget is going to grow pretty significantly to deal with this,” he said. “But we have to get ready for that.”

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Correction: Due to an editing error, an earlier version of this story misstated how Princeton University funds its financial aid program. Princeton uses its endowment to finance 80 percent of financial aid.