The Credit Crisis Hits Campus

October 06, 2008 09:51 AM
by Christopher Coats
While much of the national coverage of the banking and credit crisis has focused on its impact on Wall Street and Main Street, institutions of higher learning are also feeling the pinch.

Crisis Affects Endowments, Student Loans

Throughout the year, reports have arisen exposing the dismal state of student loans, with financial aid officers having more and more trouble finding lenders willing to supply students with loans.

This week, the crisis of confidence and credit spread to university investments, with the announcement earlier this month that the embattled Wachovia Bank would begin limiting access to an investment fund it hosted.

Wachovia hosted the money as a part of a working relationship with a Connecticut-based fund, Commonfund, made up of over $9 billion from over 1,000 American universities.

With the announcement, which initially allowed contributors to access no more than 10 percent of their investment, Wachovia caused a ripple of doubt to run through American schools.

The rate was raised to 37 percent a day later and may shift once again with the announced sale of the bank to Wells Fargo, and possible lawsuit from potential buyer CitiGroup.

While the restriction does not mean that investors would be unable to access all of their money at some point, it did mean those schools that depended on the fund to bankroll day-to-day operations, such as salaries, would be forced to look elsewhere.

This absence of liquid assets has sent some schools reeling as they try to balance their financial needs with a lack of credit.

Although they were not involved in the Wachovia-hosted fund, Boston University announced a hiring freeze among other belt-tightening measures this week.

“We have a lot of economic uncertainties that have to do with the national economy,” Joseph Mercurio, the university’s vice president told The New York Times, “and in light of those conditions we’re going to take some prudent steps right now.”
The volatile market and general unease in endowment investments has resulted in legal action on the part of some schools.

The University of Washington eventually filed a lawsuit against Northern Trust, an investment management service, to terminate their investments after reported losses of $7.5 million since April.

The service, which has a 20-year relationship with the school, acts as custodian to over half of UW’s endowment, valued at over $1.4 billion.

Opinion & Analysis: A silver lining?

For some, however, this economic tightening is not as dramatic and lasting as many reports indicate, and may even benefit the students in the long run.
In August, Insider Higher Ed reported that most of the reports detailing the disappearance of student loans overreported the crisis, creating a panic where there was none.

Echoed by the Higher Ed Blog at The New America Foundation, student loans were not drying up as much as lenders were becoming more prudent and selective in whom they distributed funds to—a necessary and financially sound development in their eyes.

Too often, they wrote, students were becoming the victims of predatory lenders, offering loans and rates that students would never be able to pay off.

“If there is a silver lining to the credit crunch, it is that for-profit colleges and loan companies, like Sallie Mae, are being forced to think twice before pushing high-risk borrowers to take on expensive private loan debt that they have little hope of ever paying back,” wrote Steven Burd.

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