A wild week on Wall Street has jolted higher-education leaders out of the summer doldrums.
With global financial markets on edge, the Dow Jones industrial average swung to 11-month lows midweek following trading sessions in which the market shed 634 points on Monday and then 520 points on Wednesday. Thursday, as they did earlier in the week, the markets bounced back, erasing some of this week's losses. While it's anybody's guess whether stocks will continue their swoon, the up-and-down cycle has led many finance experts to question how prepared colleges are for more potential fallout.
The short answer: If the country slides into another recession, most colleges would have a somewhat easier time adjusting than they did in 2008, says John C. Nelson, who heads the higher-education practice at Moody's Investors Service. And yet growing financial need among students, donors' greater wariness about long-term commitments, and continued uncertainty in global markets could make for bumpy years ahead.
Many institutions were ill prepared for the last downturn. As the economy fell apart, lots of colleges found themselves short on cash, which forced them to borrow money to meet their general operating needs. Management structures on many campuses, which gave deans autonomy over budgets, made it hard for administrators to cut expenses quickly.
Since then, many colleges have stockpiled enough cash to cover salaries, student aid, and other expenses for a year or so, Mr. Nelson says. They have also put more-centralized controls and contingency plans in place, giving top officials the flexibility to cut expenses swiftly if the need arises.
Who's Vulnerable?
Should the markets continue to fall, who's most vulnerable? As in the last recession, elite private colleges that rely heavily on their endowments for operating needs would be among those hardest hit. They would probably be forced to make more serious cuts than they did during the 2008 downturn, and become far leaner—not a concept familiar to them, Mr. Nelson says.
Elite institutions with generous institutional-aid policies could also be forced to revisit their plans. "People aren't suddenly going to take away aid packages," says Kent John Chabotar, president of Guilford College, who consults on financial matters. "But longer term, there could be questions about how much will be available from the endowment to support them."
Grinnell College, whose $1.26-billion or so endowment provides about half of the college's operating budget, has a generous need-blind aid commitment. It has no plans to decrease the amount it spends on scholarships, says Raynard S. Kington, the college's president. But a strategic-planning group is now reviewing its policy. "I don't think you'll see any abrupt changes in the short run," he said in an interview Thursday, "but it would be irresponsible of us not to take a second look to see if these policies make sense given where the world is."
Officials at Pomona College, which will spend about $61-million from its $1.6-billion endowment next year—including some $28-million on institutional financial aid—say it would take a "truly catastrophic permanent change" in the financial markets to make the college revamp its aid policy. (Pomona guarantees aid to all admitted students and packages its aid with no loans.)
"What's happening this week makes us nervous about where things might end up," says Richard A. Fass, Pomona's vice president for planning. "But financial aid is and remains our first priority. We have not made any changes to it, and we'd be unlikely to do so in the future."
Although the wealthiest colleges often see the most direct impact from declining stock markets, tuition-dependent institutions could also suffer from a sustained market downturn, says Roger Goodman, a partner at Yuba Group, which offers financial advisory and consulting services to universities.
"If we're worried about another recession and families' ability to pay, this could be just as much of a problem for tuition-dependent colleges, especially since a lot of them are already struggling with high discount rates," he says. According to the National Association of College and University Business Officers, private colleges spent an amount equivalent to about 37 percent of all of their tuition and fee revenue on scholarships for students in fall 2010, an all-time high.
Recent ratings actions from Moody's and other agencies have shown a general nervousness about institutions that are highly dependent on tuition. Moody's downgraded the rating of John Carroll University last month, citing its heavy dependence on student charges, which make up more than 70 percent of the university's operating revenues. The university, which faces stiff competition in a crowded Ohio market, has seen its discount rate climb to 52.5 percent, an increase of 13 percentage points since the 2008 fiscal year.
Anger, and a Silver Lining
It's not just those struggling in the middle of the pack that are worried about what they see. David Cave, a senior major-gifts officer at the University of Michigan, says the donors he's met with this week have expressed anything from powerlessness and insecurity to anger over what's happening in the economy.
"People are just upset that the government hasn't been able to work things out better," he says. "They're saying, 'Now I have to work not just until I'm 75 but 80 until I retire.'" Several weeks ago he had a spring in his step when he knocked on doors. Now he's wondering whether he should even be knocking.
If there's a silver lining to the crisis, it might be this: Colleges could get a chance to rethink how they operate, pruning costs and realigning their curricula to better accommodate the market, says Sal D. Rinella, chief executive at Penson Associates, a firm that focuses on regional public institutions.
Too few colleges have explored distance education or a no-frills model, he says. "Not everyone needs an engineering program or a medical school," Mr. Rinella says. "Institutions can really focus more on centers of excellence so they're not duplicating programs as much."
This moment could also give colleges greater motivation to think about how to use their resources more effectively, including making better use of their facilities and finding responsible ways to improve faculty productivity, says Eva Klein, a consultant who works with mostly public universities.
"If we recognize that maybe this is not just a passing public whim, and that the time for resisting productivity and accountability measures is over, we should seize the opportunity to lead and to decide what those productivity and accountability measures should be."
