The Universities in Trouble

1.

Since the financial meltdown began to accelerate last summer, the world has changed utterly for colleges and universities just as it has for everyone who had not been stashing cash under the mattress. Along with failing banks, auto manufacturers, and insurance companies, universities have been making headlines—especially those whose gigantic endowments (Harvard’s was approaching $40 billion before the crash) have sharply declined. Last year, politicians and pundits were complaining about the unseemly wealth of such institutions. This year, alumni are getting e-mails from beleaguered presidents assuring them that Alma Mater will somehow ride out the storm.

The headlines tend to focus on the collapse of institutional investments, which, indeed, has been spectacular. No one quite knows how much has been lost. Led by the example of Yale’s chief investment officer, David Swensen, whose Pioneering Portfolio Management is described by the chair of the Yale investment committee as “the best book ever written on managing institutional investment portfolios,” endowment managers had been shifting large sums toward illiquid assets such as private equity partnerships, which typically require periodic infusions of fresh capital, and whose current market value is virtually impossible to assess. This and other versions of “an unconventional approach to institutional investment” (the subtitle of Swensen’s book, first published in 2000 and recently reissued in revised form) worked very well during the boom years, bringing home double-digit returns.

Today, leading universities are reporting endowment losses of 20 percent or more, but some informed observers think that the true figure, at least in some cases, may be closer to 50 percent. Actions that would never have been contemplated a year ago, such as selling severely depreciated assets in order to meet cash obligations or issuing bonds at punitive interest rates, are no longer unheard of. And in the current market, would-be sellers and borrowers are finding few buyers or lenders.¹

What does the financial turmoil really mean for America’s colleges and universities? It depends on whom you ask and which institution you are asking about. Trustees generally limit spending from the endowment to under 5 percent of its value, calculated as a three-year trailing average, which means that at colleges where endowment income is an important source of operating revenue, the decline in asset valuation will suppress available funds for several years even if markets recover sooner than expected. Harvard, for instance, covers more than a third of its $3.5 billion annual operating budget from its endowment, and is therefore facing deficits in the hundreds of millions of dollars.

Since most American colleges have an endowment less than 1 percent the size of Harvard’s, most do not have Harvard’s problem. But they have other problems. The sources of income on which they depend—tuition revenue (at private colleges) and state appropriations (at public colleges), as well as annual alumni contributions (at both)—are under pressure too. Everyone knows about the competitive frenzy to get into a few highly ranked colleges, but in fact most of the 1,500 private colleges in the United States do not attract significantly more applicants than they can enroll. On the contrary, they struggle to meet enrollment targets, especially now that families in economic distress are turning to public institutions, which tend to be cheaper.²

The prevailing financial model at private colleges is one by which relatively affluent students pay more than needy students, although even those who pay full “sticker price” (roughly $50,000 per year at a top-tier school) meet less than two thirds of the full cost of their own education—calculated as a proportional fraction of faculty and staff salaries, dormitory accommodations, dining, library, health, and athletic services, as well as overhead costs such as keeping the lights on, the heat flowing, and the buildings in good repair. In other words, all students in America’s private colleges—except for those at institutions run for profit, such as the University of Phoenix—are subsidized to one extent or another.

Since the crash, it has become harder to provide the subsidy—and at just the moment when many students need more. The financial need of both enrolled and prospective students is rising as parents lose their jobs and watch the value of their homes drop, leaving them ineligible for home equity loans, which, until recently, were a common instrument for financing their children’s education. At Syracuse University, for example, the number of students appealing for additional aid has risen by nearly one third compared to the same period last year. At many private colleges there is pressure to enroll more students who can pay at least a substantial fraction of full tuition and fees, and fewer who depend heavily on financial aid.³

Meanwhile, at public institutions, where tuition historically has been kept relatively low by means of a subsidy derived from tax revenue, the financial model is also at risk. These institutions—long before the current crisis—were seeing what Peter Sacks, in an indignant and informative book, Tearing Down the Gates: Confronting the Class Divide in American Education, calls “massive disinvestment” by the states. The University of Virginia now receives a mere 8 percent of its funding from the state of Virginia, down from nearly 30 percent a quarter-century ago. At the University of Wisconsin, in a state with a long progressive tradition, only about 19 percent comes from public funds—also down from around 30 percent just a decade ago. To make up for the decline in public money, tuition rates at public universities have been climbing even faster than at private institutions—a trend likely to accelerate, at least in the short run.⁴

These are only a few of the reasons that the same lame metaphors one hears every night on the evening news are pouring out of the dean’s office: it’s time to “tighten our belts” and “batten down the hatches.” But the questions remain: What does it all really mean, and how are colleges and universities dealing with the new circumstances?

2.

On the expense side, one finds the usual strategies: salary and hiring freezes, reduction of staff by layoffs or attrition, cancellation or postponement of construction projects. Soon after the markets went into free fall, Clemson University announced mandatory unpaid five-day furloughs for staff employees in order to cut its looming deficit. Beloit College laid off 10 percent of its staff after fewer students than anticipated registered last semester, creating a shortfall in anticipated tuition revenue. At Stanford (whose endowment is the country’s third-largest, after Harvard’s and Yale’s), early projections called for a cut of $100 million over two years, but the provost has recently announced that the reduction must be achieved within one year.⁵

On the revenue side, some selective institutions (those that receive more applications than they accept) are increasing the number of undergraduate students they admit, in order to collect additional tuition to help close the budget gap. Colleges that normally attract many more qualified applicants than they accept may be able to enlarge the entering class without jeopardizing their academic standards—though deans and presidents fret that if their school becomes even marginally less selective, its standing in the (absurdly) important US News and World Report rankings is bound to slip. Moreover, such a strategy stretches the capacity of existing dormitories, classrooms, and advisers at just the time when more and more students, facing a contracting job market and longer odds against getting into and paying for graduate school, are turning to the career and counseling services for help.⁶ To respond by building more dorms or hiring more counselors (not to mention more faculty) would, of course, defeat the purpose of taking in more students in the first place.

At less selective private colleges, increasing the size of the student body is a dubious strategy. Their applicant pool has been shrinking as families turn to more affordable public institutions, especially to community colleges, where enrollments are up as financially strapped students choose to attend colleges where evening classes and part-time enrollment allow them to work during the day and live at home.⁷ At the same time, unemployed adults are turning to community colleges in hopes of retraining themselves for jobs that require skills they currently lack.

As a result, these colleges are coping with overcrowded classes and onerous—sometimes crushing—duties for their already burdened faculty, who teach many more hours and get paid much less than their counterparts at more prestigious institutions. In cases where state law mandates maximum class sizes, students find themselves shut out of courses they want or need. And at almost all institutions—public and private, two-year and four-year—reliance on part-time (adjunct) faculty who work for low wages and few or no benefits is increasing.⁸ As for staff members—from librarians to custodians—they are at risk of being laid off no matter what kind of institution they work for.

In short, the financial crisis not only is threatening the livelihood of faculty and staff but is also degrading the experience of students. And despite the big hit on the big endowments, the further you go down the hierarchy of prestige, the worse the effects. For instance, the chancellor of the Connecticut community college system recently informed faculty that the first phase of the governor’s proposed budget cuts would require limiting student enrollment, reducing service in libraries and laboratories, and cutting back on the availability of advising, remedial tutoring, and childcare. On the West Coast, things are no better: San Jose State University has been forced by budget reductions to turn away thousands of qualified applicants for the first time in its hundred-year history.⁹

For years, we have witnessed a growing gap between rich and poor colleges, the privatization of public universities, and aggressive if not reckless investment and spending practices at wealthy institutions, where the allure of gain appears to have overwhelmed the consciousness of risk. Now we are also witnessing drastic budget contraction at the most fragile and vulnerable institutions. Higher education has always been a mirror of American society—and, for the moment, at least, the image it reflects is not a pretty one.

3.

Still, compared to Americans who work at manufacturing jobs or in the service industries, many people who make their living in academia are reasonably well insulated from financial devastation. For most tenured faculty, the worst they are likely to experience is stagnant pay and deferred retirement. For graduate students and young faculty hoping to start or keep a teaching career, the situation is more alarming, since postponed retirements mean fewer entry-level positions and promotions. But if we step back from the troubles of students, faculty, and staff already inside the academic world, there comes into view the most disturbing effect of the economic collapse: many young people who had been hoping to attend college will not be able to do so.

Before the crisis, their chances were already diminishing. Over the last three decades, the United States has been backtracking from its post–World War II commitment to expand access to college. Starting with the GI Bill, the immediate postwar decades had seen a huge infusion of federal money into old (by American standards) universities to support defense-related projects, including not only scientific training and research but language and area studies, as well as the creation of many new institutions—notably the two-year community colleges—aimed at providing virtually universal higher education. By the last quarter of the twentieth century, the United States led the world in the proportion of young people in college.

This primacy was achieved by a distinctively American blend of public and private money—a hybrid approach that has existed in some measure ever since the Massachusetts General Court, in the 1600s, granted income from a public conveyance (the Charlestown ferry) to Harvard College, and paid its president directly from the public treasury. Such early examples of public subsidy of private institutions—which now takes the form primarily of tax exemption for the college and tax deductibility for the donors—amounted to a sort of matching challenge, since citizens were expected to follow the lead of the magistrates and make donations of their own.¹⁰ Today, the distinction between public and private remains ambiguous as “flagship” state universities raise billions of dollars toward the establishment of private endowments. At the University of Michigan, for example—just completing a $4 billion capital campaign—there is periodic talk of “going private,” which, supporters say, would allow it to hike up the discounted tuition rate for Michigan residents and thereby compensate for the loss of public funds.¹¹

But the public–private partnership that did much to democratize American higher education has been coming apart. In 1976, federal Pell grants for low-income students covered 72 percent of the average cost of attending a four-year state institution; by 2003, Pell grants covered only 38 percent of the cost. Meanwhile, financial aid administered by the states is being allocated more and more on the basis of “merit” rather than need—meaning that scholarships are going increasingly to high-achieving students from high-income families, leaving deserving students from low-income families without the means to pay for college.

In 2002, a federal advisory committee issued a report, aptly entitled “Empty Promises,” which estimated, according to Donald E. Heller, a leading authority on the economics of higher education, that “more than 400,000 students nationally from families with incomes below $50,000” met the standards of college admission “and yet were unable to enroll in a four-year college because of financial barriers. More than 160,000 of these students did not attend any college because of these barriers, not even a two-year institution.” Two years later, Heller pointed out that “the college-going rates of the highest-socioeconomic-status students with the lowest achievement levels is the same level as the poorest students with the highest achievement levels.”¹² In short, bright and focused kids from poor families are going to college at the same rate as unfocused or low-scoring kids from families much better off.

This fact is an affront to America’s claim to be a nation of equal opportunity where talent and effort can overcome poverty and prejudice. Today the United States stands tenth, along with Australia, Spain, and Sweden, behind Canada, Japan, South Korea, New Zealand, Belgium, Ireland, Norway, Denmark, and France in the percentage of its young people (ages 25–34) who have earned a post-secondary degree. Since secondary education abroad is often stronger than in the United States, the comparative educational attainment of Americans is probably even worse than these rankings suggest. Among adults in the age group 55–64, we still lead the world in the percentage who are college graduates—which means not only that over the past three decades many nations have surpassed us, but that, in the aggregate, younger Americans are less well educated than their elders.¹³

Before the crash, a national discussion seemed to be getting underway about these alarming trends. Influential educators—notably William G. Bowen, former president of Princeton University and of the Andrew W. Mellon Foundation—were arguing that academically promising students from low-income families who apply to selective colleges should get “a thumb on the scale” in the admissions competition—an advantage comparable to what alumni children, athletes, and minority candidates already enjoy. Proposals of this sort were responses to the fact that at most selective colleges, enrollment of low-income students has been extremely small and getting smaller—and this at a time of unprecedented accumulation of institutional wealth.¹⁴

Until recently, among the so-called “Ivy plus” colleges, only Emory and Stanford showed growth in their percentage of Pell-eligible students—and the increases were tiny: a half percent at Stanford, one fifth of a percent at Emory. Harvard and, among prestigious liberal arts colleges, Smith and Amherst have been trying to reverse the trend. But now that money is drying up, it remains to be seen if such efforts will continue. In the wake of the endowment meltdown, the Harvard admissions office has announced a 50 percent cut in its travel budget—meaning that recruiters will be traveling to fewer high schools outside the orbit of the usual “feeder” schools. In making the announcement, Harvard gave a “less is more” spin to the news: “Because we will be contacting people in a more robust way in the mail and online,” said the dean of admissions, “we believe we will be more effective rather than less effective.”¹⁵ We’ll see.

Last year, before the economy fell off the cliff, Harvard and Yale (followed by other Ivies) announced huge increases in the financial aid they intended to offer, beginning with the current academic year, to students from families with annual incomes up to $200,000. Given the price tag of the new policy (more than $20 million per annum was the early estimate at Harvard), Ivy League administrators may be having second thoughts. At the time, some critics doubted whether it was the fairest use of institutional resources in view of the greater need of less prosperous families and the inevitable pressure on less wealthy colleges to follow suit by reducing costs for relatively affluent candidates, leaving themselves unable to offer adequate scholarship support to needier applicants. “Affirmative action for the upper-middle-class” was what Richard Ekman, president of the Council of Independent Colleges, called the new policy. Theda Skocpol, a former Harvard dean, wondered why America’s leading universities chose to make “the annual cost for families up to the 95th income percentile less than half the cost of purchasing a new luxury car.”¹⁶

Favoring the rich is hardly an attitude exclusive to private institutions. At public universities, especially the flagship campuses where children of the affluent are most likely to go, the financing system is also regressive. Qualifying for state-subsidized tuition at UCLA or Berkeley requires no means-testing for California residents—with the result that the child of a public school teacher is likely to pay nearly the same amount as the child of a trust and estate attorney.¹⁷ All these distortions suggest that something is wrong with our system of higher education—starting, but not ending, at the top.

The fact is that America’s colleges —with notable exceptions including community colleges, historically black colleges, and a few distinctive private institutions such as Berea College in Kentucky (Berea charges no tuition but requires campus work from its students, who all come from low-income backgrounds)—have lately been exacerbating more than ameliorating the widening disparity of wealth and opportunity in American society. Too many students are unable to continue their education beyond high school, and of those who do, too many find themselves in underfunded and overcrowded colleges. A report released in January by the Lumina Foundation, “Trends in College Spending,” concludes that “higher education is becoming more stratified,” with enrollment growing in the institutions with the least resources—the public community colleges—as more and more students are “pushed out of higher-priced institutions.”

No doubt, much of the relative decline in America’s college-educated population can be attributed to poor preparation by K–12 schools, especially in inner-city and rural communities, and to social pathologies that leave young people—including, disproportionately, minorities—unready for, or uninterested in, higher education. But a great many gifted and motivated young people are excluded from college for no other reason than their inability to pay, and we have failed seriously to confront the problem.

4.

So what is to be done? The question, of course, has become more daunting since untold billions in institutional and family assets evaporated over the last few months. But there are signs of creative thinking among educators as well as in government—and some suggestions that barriers to educational opportunity must come down as a matter of national interest.

One approach is radical cost-cutting —and anyone who has spent time in academic institutions can sympathize with the view that waste and inertia are among their salient features. Colleges may be known as places where liberalism is the dominant political point of view, but they are tenaciously conservative with respect to themselves: once a program or professorial position or new facility is established, it is very hard to get rid of it. The current financial shocks could be salutary if they provoke serious review of what really matters on each campus.

But the economizing impulse carries hazards too. There is growing talk, encouraged recently by Senator Lamar Alexander, a former US secretary of education and president of the University of Tennessee, about cutting back the traditional four years of college to three. Much time is doubtless wasted in college, and the long vacation peri-ods that students expect, especially those from affluent families, are anachronistic holdovers from an era when seasonal rhythms required young men to go home and help with harvest or planting.

But the American idea of college has always made room for some form of liberal or general education before, or along with, specialized study—and squeezing out a year would leave students, who are already under immense pressure to equip themselves with marketable skills, less able to think about history, society, and the broader issues that are at the heart of liberal education. And while the idea of a three-year BA is picking up support in the United States, educators in other nations are moving in the opposite direction: Hong Kong, for instance, is expanding university education from three years to four in order to make room for compulsory humanities courses on the model of American universities such as Columbia and Chicago.¹⁸

More promising than the three-year college idea are the enhancements of student aid contained in the final version of the “stimulus bill” that emerged from the compromise between the House and Senate and was signed into law by President Obama on February 17. The bill contains expanded tax credits for tuition payments as well as increased funding for the Pell grant program. Moreover, the President and his education secretary, Arne Duncan, are pushing to make Pell grants into a true entitlement—a program, that is, which Congress is compelled to sustain and adjust annually for inflation, on the model of Social Security and Medicare. The stimulus bill also contains substantial new funding for job-training programs that provide vouchers that community college students can use toward tuition.¹⁹

Inside and outside of government, there is also growing awareness that the whole financial aid system must be overhauled—and that the barriers it places between needy students and college do not always boil down simply to a matter of money. The FAFSA (Free Application for Federal Student Aid) forms used by the Department of Education are notoriously complex and intimidating, and they discourage students from low-income families from applying to college. Children of such families are unlikely to accept the concept of deferring payment for education by taking on debt, and are likely to be in high schools with overworked and undertrained college counselors who have neither the time nor the expertise to help them.²⁰

Perhaps the most substantive response to these problems to date is a report released last fall jointly by the Spencer and Lumina foundations and the College Board entitled “Fulfilling the Commitment: Recommendations for Reforming Federal Student Aid.” Its authors call for elimination of FAFSA and for the IRS to report financial information directly to the Department of Education, thus cutting out entirely the requirement that families work through the maze of disclosure forms to determine their eligibility for federal support. Instead, every Pell-eligible family would automatically receive notification in the mail about how much the government would give toward college costs. The report also calls for changing loan programs so that debt incurred to pay the cost of education would be repaid on a graduated scale keyed to post-college income; and, perhaps most important, it calls for a federal program to establish education savings accounts for low-income families to be tapped at the time a child is ready for college.

These are not utopian suggestions.²¹ Nor are they fundamentally hostile to the prevailing system of American higher education: a mixed system of private, public, large and small, residential and commuter, religious and secular, nonprofit and for-profit institutions. Neither the enhancements put forward by the Obama administration nor the suggestions coming from policy analysts will eliminate—indeed, they hardly alter at all—the huge distinctions between, say, public community colleges through which students seek a foothold in middle-class life and private colleges where students take a junior year abroad in what Mitchell Stevens, in his book Creating a Class, likens to the nineteenth-century “grand tour” on which children of the well-to-do picked up some social polish in Europe.²²

5.

A couple of months ago I was asked to speak at a community college in a once-thriving, now-declining coastal town in southern New England. My subject was Abraham Lincoln, and I had no idea what degree of interest to expect from the students, many of whom were minorities, or recent immigrants, or the children of struggling blue-collar families. Even a year ago, I suspect, such a topic as Lincoln would not have attracted much interest. But the turnout on this occasion was surprisingly large and the students more than attentive. I sensed that the election of our first African-American president, his frequent invocations of Lincoln, and his own critical devotion to American ideals had encouraged these students —perhaps for the first time—to take a hopeful view of their own life chances and a real interest in the nation in which they found themselves coming of age.

Those who asked questions—ranging from a West Indian immigrant to a native New Englander—were astute and attuned to Lincoln’s struggle to reconcile his personal animus against slavery with his constraining sense of executive responsibility, to his changing views on the question of racial equality, and, above all, to his effort to defend and extend the idea of equal opportunity as the essential American promise. When I read aloud Lincoln’s words that “the leading object of government is, to elevate the condition of men—to lift artificial weights from all shoulders—to clear the paths of laudable pursuit for all—to afford all, an unfettered start, and a fair chance, in the race of life,” there was much nodding—not of the type that signifies the onset of sleep, but the type that expresses assent.²³

I came away that day—the college is facing severe budget cuts—with a painful sense of disjunction between rising hope and declining opportunity. I was reminded that we have in this country a highly stratified system of education in which “merit” is the ubiquitous slogan but disparity of opportunity is often the reality. Even with our best efforts, this fact is not likely to change fundamentally anytime soon. Indeed, the financial crisis has made it harder to change. But as we consider the future of the nation, which surely depends more than ever on an educated citizenry, it will be of great importance to keep in mind a point too little acted on during the boom years but now undeniable and urgent. John Adams put it succinctly some 225 years ago: “The whole people must take upon themselves the education of the whole people, and must be willing to bear the expense of it.”²⁴

— April 15, 2009