Colleges Learn to Navigate the Credit Crunch

As the semester began in September, Wisconsin's Beloit College found itself 36 students short. Some of the no-shows at the small liberal-arts college had enough credits to graduate early. Others, with an eye on the souring economy, chose to either delay their education or go somewhere cheaper.

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Whatever the reason, the 36 absentees have had a big effect on this bucolic 1,300-student campus, a two-hour drive north of Chicago. The lost tuition was the primary factor in creating a $1 million budget shortfall that is leading the school to lay off nearly a tenth of its staff — including all nontenured faculty — by Dec. 31. Student leaders, distressed by the news, have sprung into action. "We meet with the administration on a nearly weekly basis about how we can conserve," says junior Sarah Dunn. "We've considered things such as switching to energy-efficient lightbulbs or cutting back on how much toilet paper dorms use." (See pictures of the college dorm's evolution.)

Conserving toilet paper? School administrators have no plans to cut back on this particular item, but students' volunteering to use less of it is just one sign of desperate times calling for desperate measures. This fall nearly all U.S. colleges and universities are grappling with how to survive the ongoing credit crunch. Over the past decade, schools have financed their operations with ever escalating tuition and fees — Beloit's total bill rose from $24,848 in 1999 to $38,006 this year — and increasingly sophisticated investment portfolios. The latter strategy, which reaped huge returns in better times, has now set many institutions on a perilous path. Add in struggling families' greater demand for financial aid, and the waters ahead look even rougher. "If you're really smart, tough and decisive, you'll navigate it," says David Warren, president of the National Association of Independent Colleges & Universities (NAICU). "And if you aren't, you may submerge."

Beloit isn't the only school searching high and low for ways to trim expenses while preserving academic quality. Stanford, for instance, is reducing top administrators' salaries to help cut as much as 12% from its budget, while Cornell and Brown have stopped hiring. At South Carolina's Clemson University, all faculty and staff must take an unpaid five-day leave. The prospect of widespread school closings or mergers, though unlikely, is still a possibility, Warren warns, "if the market continues to be as dismal and credit lines are difficult to thaw." (See pictures of the recession of 1958.)

How did higher education get so caught up in the subprime mess? A few years ago, Beloit followed the lead of wealthier institutions such as Princeton and Yale by putting about 20% of its endowment in alternative investment vehicles like private equity and real estate. Many other private schools did the same, and their endowments are taking a battering. Some could face losses of up to 30%, according to the credit-rating agency Moody's. (For Harvard, that could translate into an $11 billion blow to the $37 billion endowment it boasted in June, and the school has already announced it will freeze faculty-hiring and salaries.) In the past, Beloit's $1 million budget shortfall would easily have been covered by its endowment, which stood at $132 million last year. As of October, the endowment had dropped to $89 million. "We just can't count on that money anymore," says John Nicholas, the school's vice president for administration and its treasurer. To compound the problem, private-equity-fund managers, short on liquid assets, have begun issuing capital calls — that is, demanding that their investors cough up cash immediately. So far, Beloit has received only one capital call, for just $500,000, a small amount compared with the size of other schools' capital calls.

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