First it was Williams earlier this month; now Dartmouth has announced that it is pulling back from its “no loan” policy for students who qualify for financial aid. Anyone who has been reading about college investment losses should not be surprised by this development. A couple of weeks ago a study on college endowments reported that these investment portfolios in the aggregate lost about $95 billion in value in the 2009 fiscal year (June 2008 to June 2009), contracting 23% on average. Since colleges such as Williams and Dartmouth rely on endowment earnings to fund a major portion of their operating budgets, these investment losses have significant ramifications.
Back in late 2007 and early 2008 about 40 highly selective and well endowed colleges instituted no loan or limited loan policies for their student aid programs. This trend took hold after Senator Charles Grassley, Republican from Iowa, suggested that colleges and universities be held to the same standards as foundations that must spend 5% of the value of their investments annually in order to maintain tax exempt status. Yet as colleges grapple with structural deficits, even after a series of budget cuts, the practicality of these policies is now being revisited.
With Williams and Dartmouth taking the first steps, it is just a matter of time before others follow suit, as none of these colleges has been spared the economic pain. Both schools have stated that the reinstitution of loans in financial aid packages is a necessary move in order to preserve educational programs. Each has emphasized, however, that the return to loans will not affect students who demonstrate the most significant need. Dartmouth, for example, has stated that it expects this to impact those students whose families earn above $75,000, for whom loans will comprise $2,500 to $5,500 of the financial aid package per academic year. With income under $100,000, loans will not exceed $2,500.
So what does this mean for financial aid, in general, at colleges across the country? Without a crystal ball, I can only make some educated guesses. Neither Williams nor Dartmouth has backed away from fully meeting demonstrated need, and I expect that maintaining this policy will be a priority. We will just begin to see a higher percentage of loans in the packaging. The selective schools that currently have no loan policies generally offer need-based aid only (no merit). That of course, will not change. But what about other colleges that use merit aid to attract students and shape a class? Many of these colleges do not have the hefty endowments that prompted the no loan policies in the first place. They rely heavily on tuition to meet their budgets and fund aid.
Given the importance of filling seats, I predict that merit aid as an enrollment management tool will continue for many colleges. In fact, schools that survive by maintaining enrollment numbers may find merit aid even more important. Offering some tuition discount, past experience has shown, attracts students who still bring in tuition dollars. These are the ones that also raise GPA and standardized test score averages.
But back to need-based aid...will we continue to see less generous financial aid packages? Pure economics would suggest so. Don't be surprised to see other highly selective colleges dial back their no loan policies, especially now that two of their prestigious peers have already taken the plunge.