For years, it seemed simple: Donations rolled in, the booming stock market multiplied them, and college endowments swelled. At the wealthiest schools, millions became billions, and even small colleges amassed sizable fortunes.
But with the Wall Street collapse this fall, all bets are off. Now, colleges across the country that have watched years of double-digit returns wash away are scrambling to readjust to a stark new economic reality, with endowments predicted to plummet by an average of nearly 30 percent this academic year.
Universities, a pivotal sector of the New England economy, are casting a wary eye on nearly everything they do.
Many schools, after racing to build glittering research centers and multimillion-dollar dorms in recent years, are shelving or downscaling long-term plans. Without hefty endowment proceeds, even the wealthiest schools — among them Harvard, MIT, and Dartmouth — suddenly find themselves in the unfamiliar situation of trimming budgets and freezing hiring to offset heavy investment losses. Even more worrisome, colleges are questioning whether the recession finally — after years of tuition increases — pushes their cost beyond the means of most families.
“It’s a sea change,” said Molly Corbett Broad, president of the American Council on Education, the nation’s primary higher education association. “There is a lot of soul-searching going on.”
Most colleges are confident that their finances are fundamentally sound, and that they will be able to weather the hard times. But in many ways, the scope of the financial crisis has raised the unsettling prospect that the landscape has permanently shifted. At least for now, many administrators suspect, the days of vast capital campaigns, state-of-the art fitness centers, and generous financial aid increases could be over.
Instead, finance directors are crafting contingency plans for a prolonged downturn, a sharp departure from years of ambitious expansions and seemingly bottomless student demand. And recruiters at private colleges worry that families, reeling from declining home and investment values and scarce credit, will flock to less expensive schools.
“I think we’re reaching a tipping point,” said Jack Maguire, a leading higher education consultant. “Colleges are worried that some families just won’t be able to afford it anymore.”
Colleges with modest endowments and significant numbers of financially needy students are at the greatest risk, Maguire said. If they raise tuition sharply, he said, the schools risk losing families to lower-cost schools; if they don’t, their financial aid budgets will likely fall well short of demand.
With so many unknowns, colleges are worried that any plans will almost immediately be outdated.
“The volatility is paralyzing,” said Lawrence S. Bacow, president of Tufts University, which is seeking $36 million in budget cuts for next year. “I think everyone is asking hard questions now.”
The speed and scope of the shift has sent shockwaves through campuses.
In September, Harvard University announced that its endowment, by far the country’s largest, had risen to a staggering $36.9 billion as of June 30. But last week, in a stark sign of the economic times, Harvard said the value of its investments had plunged 22 percent, or approximately $8 billion, in the past four months. Even that stunning figure, university officials wrote, probably underestimated “the full extent of losses for this period.” The university anticipates a 30 percent loss by next June, in keeping with projections from Moody’s Investors Service.
That news followed a string of grim announcements from wealthy universities this fall. The value of Amherst College’s $1.7 billion endowment plunged 25 percent, while Dartmouth’s fell by $220 million in three months to $3.4 billion. Williams College’s dropped by $500 million to about $1.3 billion. Many other schools, while declining to provide specifics, have acknowledged substantial losses.
In response to the downturn, colleges have combed their budgets in search of savings. MIT, whose endowment had been worth nearly $10 billion but has not said how much it has fallen, said it would trim its budget by $50 million. Harvard said it would reconsider both the “scale and the pace” of planned expansions, including its sweeping plan to expand across the Charles River in Allston.
Tufts is projecting a 25 percent drop in the value of its $1.4 billion endowment, leading to $24 million in lost income next year, and suspended new capital projects this fall. The university may also be forced to abandon its policy, in some cases, of admitting all students without regard to their ability to pay, Bacow said.
Brown University announced a hiring freeze through January and is considering which big projects could be delayed.
Other colleges, particularly those whose students rely heavily on financial aid, said they are as worried about their students’ finances as their own. Boston College has called for a 2 percent budget cut to reinforce its financial aid reserves, and other schools, such as Princeton and Tufts, said they will spend millions more on student assistance next year.
Colleges are expecting a sharp increase in financial aid requests next year because of rising unemployment, declining home values, and the scarcity of private loans. (Government-backed loans are expected to be widely available.)
“We’re not agonizing over the endowment losses,” said Bob Brown, president of Boston University, which froze hiring and imposed a moratorium on all new construction projects in October. “All of our anxiety is around our students, and their financial ability to attend. That’s an absolutely fundamental shift from the past few years.”
At Wellesley College, finance officials have been tinkering with projection models by adjusting for unemployment rates and other economic variables to estimate student financial need.
“It’s a major unknown and a major concern,” Andrew B. Evans, the college’s treasurer and vice president for finance, said of potential aid requests. “But you can’t assume the norm in this environment. You have to adjust.”
What many colleges are assuming, Evans said, is that hard times will not pass soon.
“This kind of pain will be felt by everybody,” he said. “It will not be a quick fix.”
The recession will also hurt public colleges, as many public state systems are bracing for steep reductions in subsidies.
Yet while endowment values have plummeted, most schools still hold significant reserves, and early signs indicate that applications to public and private schools are up.
“With endowments, colleges take the long view,” said Richard Doherty, president of the Association of Independent Colleges and Universities in Massachusetts. “They’re saying ‘This gets us back to 2006 levels, and we did OK in 2006.”
Even before the downturn, high tuition and stagnant incomes threatened to put college out of reach for a growing segment of society, a new national study found last week.
“There are schools that are quite worried the families and students they have been serving will be unable to afford even with financial aid to go to college,” Broad said. “If that happens on any kind of a scale, it could be a national disaster.”