Colleges Cut Back on Generous Financial Aid

The college admissions process is already a crapshoot without throwing in the financial aid game. Subsidized Stafford loans, unsubsidized Stafford loans, Pell Grants, DirectPLUS loans -- it all adds up to a bewildering tangle for which families of prospective students are turning to financial aid consultants to sort out.

And now, making the task of financing a recession-era college education even more difficult, colleges are withdrawing generous no-loan policies they implemented as the stock market hit its giddy heights.

Dartmouth College and Williams College are the most recent casualties.

In the wake of a $500 million decline in its endowment, Williams announced last week that it would repeal its 2008 pledge to drop loans from the financial aid packages of students. Williams was among nearly 30 top institutions to make the move for loan-free aid within the past couple of years, following harsh criticism – especially from politicians – that students were buried in debt post-graduation. Dartmouth said Monday it was limiting its no-loan policy to cover only families with income below $75,000, as part of an effort to address a $100-million deficit.

Senator Chuck Grassley (R-Iowa) helped catalyze the no-loan movement in 2007 when he addressed the crisis of conscience posed by sky-high tuition at a time when colleges were enjoying healthy growth in their endowments.

But the timing could not have been worse for pumping money into financial aid. 2009 turned out to be the worst year for university and college endowments since the Great Depression, with an average decrease of 18.7%.

Still, not all colleges and universities are rolling back their no-loan policies, even in hard times. Top-tier institutions like Harvard University, despite an $11 billion drop in its endowment, have continued their commitment to no-loan education. To do that, the university had to cut costs elsewhere, such as by halting construction on a $1 billion science complex this fall, leaving only its foundation in place.

In President Obama’s 2011 budget request he apportioned an additional $3.5 billion in educational spending, including an expansion of the Pell Grants, the lifeblood of college financial assistance for lower-income families. If approved, the expanded grants would provide aid to one million more students.

The debate continues among college cost experts about whether federal aid like Pell Grants, which will undoubtedly become more necessary as schools roll back no-loan programs, are actually counterproductive. There's a chicken/egg dilemma here: Does more federal aid mean higher college costs, or do higher college costs necessitate more aid? With its generosity to students, is the federal government effectively padding the coffers of educational institutions?

As it stands, the math is this: Two-fifths of schools with billion-dollar endowments have some sort of no-loan policy in place. (The top 16 universities in U.S. News & World Report’s 2010 ranking, with the exception of Johns Hopkins, fall into this category.) If the endowment amount per equivalent full-time enrolled student exceeds $500,000, a school should be able to afford eliminating loans from financial aid packages for low-income students.

For many schools no-loan policies began as a way to increase enrollment for low-income students -- that is, those coming from households with less than around $50,000 in income. But in the case of a number of schools (large universities and smaller liberal arts colleges alike), the programs cover all undergraduates.

Until, that is, it turns out they don't.

Post updated 2/13/2010.

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