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Struggling Economy Puts Colleges in a Tight Spot

By Susan Kinzie and Valerie Strauss
Washington Post Staff Writers
Tuesday, November 11, 2008

The economic crisis hit home at Frostburg State University quite suddenly, just as students were arriving for the start of the school year: A lender told financial aid director Angie Hovatter on Aug. 25 that it would not have money for about 200 student loans -- money she thought they were going to get the very next day.

Hovatter and her staff scrambled to reach all the students as they arrived at the Western Maryland campus. They quickly pulled together some short-term fixes, such as credits at the bookstore to cover class materials. They wrote to the students' off-campus landlords, explaining that there was a legitimate reason for those falling behind on the first month's rent. And they rushed to get paperwork approved immediately for those who wanted to switch to a different lender.

At colleges across the country, the economic crisis is playing out in ways large and small, immediate and long-term. It is creating short-term problems that school officials have scurried to patch. And it is creating more-fundamental worries about the future.

Many administrators are finding that most, if not all, of their revenue streams are under pressure, including government funding, tuition payments and donors' gifts. Most are rethinking fundraising campaigns, construction projects and tuition levels as they try to predict the road ahead in an uncertain time. And most are working hard to maintain and increase financial aid so they can continue to attract and retain students.

"The sense of helplessness is enormous," said Patricia A. McGuire, president of Trinity Washington University. "Right now, we're watching and waiting and not spending anything we don't have. We all just want to stay in bed and pull the covers up till it's over."

The federal government has stepped in to try to help shore up student loans. Yesterday, Under Secretary of Education Sara Martinez Tucker briefed reporters on steps the government will take to back federal student loans taken out in recent years. The proposal is meant to reassure investors that the loans are safe so that funds would continue to be available.

Moody's Investors Services has predicted troubles for some colleges because of weakening investment returns, pressure on families' ability to pay, potential reductions in donations and risks from the variable-rate debt that some schools have taken on.

Some schools had immediate problems: Washington and Lee University in Virginia had about 6 percent of its operating cash in the Commonfund Short Term Fund, which closed recently, creating liquidity problems for some schools. The school has been reevaluating its cash investments as a result.

At St. John's College in Annapolis, about 11 percent of the operating budget came from the school's endowment, and administrators said it now will be less.

At Shenandoah University in Virginia, administrators set aside money for an emergency fund for students and staff members who might find themselves short of cash, unable to get a home equity loan or suddenly out of a job. In some cases, that has meant increasing financial aid; in others, giving emergency grants to cover books or food.

The goal of any cuts or change in investment strategy, administrators said, was to maintain academic standards and assist students.

"Into the future, we are going to be doing less capital construction, and we will be only hiring faculty if we have the endowment funds to support them," said Barry Mills, president of Bowdoin College in Maine, which has an $850 million endowment.

He added, however: "I think it is important to note that when we talk about strategically cutting back, we are not talking about cutting back on academic programs, and we are not talking about cutting back on financial aid."

Many schools depend heavily on tuition revenue. At Shenandoah, for example, it accounts for about 75 percent of the budget. So Shenandoah officials, like those at other schools, will be watching application numbers particularly closely this fall and winter, hoping to keep enrollment steady.

At George Washington University, administrators planning their budget for next year expect to need several million additional dollars for financial aid. Slightly more students than usual have asked for recalculation of their financial aid packages because their family income has changed dramatically since last year's tax returns, on which their packages are based.

GWU will be changing some of its recruitment strategies, including asking staff to travel more to reach prospective applicants whose families may be reluctant to pay for a trip to campus. Because the school is one of the most expensive in the country, GWU will emphasize that it has a fixed tuition plan so that families can prepare.

At schools with lower tuition, such as state and community colleges, some officials expect enrollment to rise. And some programs, such as graduate and professional schools, often do well in a recession as people decide to shore up job skills while waiting out an uncertain hiring market.

But public universities are facing another blow: At least 17 states have made cuts to higher education, and many schools are expecting money to continue to sag in the next year or two. Maryland and Virginia have cut higher-education funding in recent weeks.

At the University of Virginia, which has committed to cover tuition, room and board for low-income students, administrators are bracing for a significant increase next year in the cost of need-based aid.

And they are watching the market. The endowment's value has dropped more than 20 percent since summer, much of that last month -- about $1 billion from a fund that was worth $5.1 billion in July.

Some schools are considering delaying major building projects or rethinking how they approach donors whose assets have just taken a hit.

Trinity was about to launch a capital campaign this fall. "Obviously, we have lengthened the timetable," McGuire said. "It's not that we're not going to do it. But to go public with a big capital campaign now would be the height of foolishness."

Johns Hopkins University does not have the short-term liquidity and credit issues that some others do, said James McGill, a senior vice president. "The next six months or so we'll get through fine," he said. "I'm more worried about two years out, if this recession lasts."

Because the school is so research-intensive, it depends on federal funding and grants and expects that money to be under pressure. Along with just about every school, Hopkins expects lower investment returns, is rethinking estimates of how much financial aid it will provide and is looking for potential cuts.

Robert Chernak, a senior vice president at GWU, said, "In the next couple of months, there's going to be a lot of emotional roller coasters."

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