Falling Endowments to Eliminate No-Loan Aid Packages?
February 22nd, 2010One of the most positive financial aid developments in recent years involved the creation of the no-loan student aid package for the most needy students. It has been a much-heralded concept, described by many as having the potential to truly transform college attainment rates for financially strapped families.
But amidst today’s falling endowments, the concept that blossomed over the last five years has led at least two colleges to take a step back on their pledge. More importantly for students, experts insist many more schools will give careful consideration to reversing their pledges as well over the next few years.
Meeting 100% Need
For years, while many schools have insisted that they will meet 100% of a student’s financial need, those schools have included lending as part of the aid package. In other words, the pledge to meet 100% student need involved only a guarantee that student loans would be available should the student need them.
The result has been students and their parents often borrowing large sums of money to close out what was a significant hole in the 100% need funding process.
The no-loan student aid package took the 100% pledge to a more honest level. Students with significant financial aid needs received an aid package that covered the cost of school without mandating students take out loans.
While some schools took the step to its full conclusion, another group took a slightly different approach. Called the limited-loan schools, these institutions capped the total amount that financially needy students would have to borrow over the course of four years.
While still not meeting 100% need through grants, scholarships, and work study options, students attending a limited-loan school would know up front just how much they would be asked to borrow over the course of four years.
More than seventy schools have begun offering no-loans packages. Some of the colleges eliminating loans from the financial aid packages of all needy undergraduate students included: Princeton University, Davidson College, Amherst College, Harvard University, Pomona College, Swarthmore College, Haverford College, University of Pennsylvania, Yale University, Bowdoin College, Stanford University, Wellesley College, Columbia University, Claremont McKenna College and Vanderbilt University.
Endowment Headaches
Such a no-loan or limited-loan pledge came from these schools ever-growing endowments. From 2004-2008, the four-year rate of return on investments was 15.3%, 9.3%, 10.8%, and 17.2% respectively. With such investment successes and additional funds flowing in from alumni donors, it is easy to see why schools could begin to consider the loan pledge.
But then came the economic downturn and with it a crushing blow to these investments. First, 2008 saw a three percent average drop in the endowments for all schools. But that drop seemed almost inconsequential when contrasted with 2009 where colleges and universities saw an astonishing average endowment decline of 18.7%.
It was the worst average year for endowments over the nearly 40-year period the data has been tracked. It was also 50% higher than the previous worst year, an 11.4% decline in 1974.
The impact was even worse for those institutions with endowments topping $1 billion. On average the decrease stood at 20.5%, but for the three of the largest, Harvard, Yale, and Stanford, the decrease topped 25%.
Two Schools Reverse Policy
These poor investment results led two colleges that had previously eliminated loans from the financial aid packages of all undergraduate students to restore borrowing to the process: Dartmouth College and Williams College.
Thankfully the changes will be phased in at both institutions. In addition, the no-loan provision threshold remains for the most needy students.
For Dartmouth, it will reintroduce loans in the financial aid packages of students with family income greater than $75,000 commencing with the class entering in fall 2011. Those students already in the program as well as those that will enter this fall will not be affected by the change.
At Williams, the school will be reintroducing “modest loans” for some students receiving financial aid. As with Dartmouth, the change will occur in the fall of 2011 and the school will continue to eliminate loans for lowest income students.
Students Need to Be Alert
While these are the only two schools to date to make changes, the overall impact on college endowments will most likely cause some of the other 70 plus schools to reconsider their policy as well. Those students choosing their school based on the no-loan or limited-loan promise will need to carefully observe what takes place over the next few years.
