Pulling Back From 'No Loans'

Who will be first?

That's the question many experts on financial aid have been asking for the last year, with regard to the "no loan" policies adopted by many colleges three years ago. For private colleges that announced some of the most generous policies, the timing couldn't have been worse. The plans were financed by endowments that had grown so large and so rapidly that members of Congress were demanding to see more spending. Then came the collapse of the stock market -- and deep declines in endowments. Not only did the endowment income disappear, but more students qualified for aid. As these very wealthy institutions found themselves suddenly cash-poor with regard to annual budgets, they have announced layoffs, program eliminations and salary freezes.

But the institutions didn't shift away from "no loans" -- at least not until Sunday. That's when Williams College -- which had a gold-plated no-loans, no income limit policy -- announced that it was shifting back. Williams will still have generous aid policies, with the lowest income students (probably up to around $40,000 but the figure hasn't been finalized) assured of no loans in their aid packages, and all students assured of limits on total borrowing.

The gossip about which college would abandon no loans hadn't focused on Williams, but some of its less well endowed competitors. But with some colleges' leaders saying privately that they didn't want to be the first to move away from no loans, but that they wanted to do so as soon as others led the way, most experts say Williams will soon be followed.

In fact, without attracting as much attention, some colleges have already adjusted their policies. Lafayette College, for instance, with an endowment worth less than 40 percent of the value of the $1.4 billion fund at Williams, recently considered ending its no loans policy, which applied only to families with incomes of up to $50,000. While that remains intact, the college raised the loan limit it pledged to students with family incomes of between $50,000 and $100,000 from $2,500 a year to $3,500 a year. (Both Lafayette and Williams are grandfathering in those who enrolled under the previous policies, so any changes will only affect future students.)

At other institutions, colleges that at one point considered their no-loans policies off the table have placed them on the table for possible changes. Dartmouth College has been explicit that it is looking at such a policy in its current budget review and press accounts of recent budget meetings have noted discussion of requiring loans again for those at certain levels now exempt from borrowing.

Lauren Asher, president of the Institute for College Access and Success, said that her organization has been checking in with colleges that have made no loans pledges and has been finding that institutions may not be formally changing their policies but they are increasing expectations for family contributions or summer work or any number of other factors that may make a no-loans promise more theoretical than actual. "No loan doesn't mean no cost or no borrowing," she said.

Asher noted that because of the vast differences in the income levels covered by various no-loan policies, simply saying that a college has one doesn't necessarily mean that the institution is doing what it should to help low-income students. She said that rather than asking if colleges have a policy on eliminating all loans, the questions to ask (for policy observers and parents) are: "Are the colleges prioritizing financial aid in the overall budget, and, within financial aid, are they prioritizing the students who are most needy?.... You need to look at the fine print."

And she said it was important to remember that colleges like Williams have provided generous enough grants that -- even if loans are resumed -- their graduates may not face overwhelming debts. At many colleges without comparable resources -- colleges that are more typical of those attended by most students -- debt burdens continue to rise, she said.

The message about fine print is one shared by many experts on student aid and the economics of higher education, a number of whom view the Williams announcement (and expected moves by other institutions in the months ahead) not as a calamity but as inevitable. (Others, however, think that the ideal of no loans was a worthy one -- and is being abandoned too quickly.)

First, the fine print on Williams....

The college is currently between presidents, and William G. Wagner, the interim president (and the permanent dean of the faculty) announced the change in aid policy in a period in which many cuts -- especially frozen faculty slots -- have alarmed some students, professors and alumni.

Wagner said that shifting the financial aid policy will slow, but not turn back, a substantial increase in spending on financial aid. Spending by Williams on aid has grown from $14.6 million in 2000-1 to $43.7 million in 2009-10. He said that the changes are expected to save $2 million annually when fully in place, which will await the graduation of current students and those being admitted this year. In an interview Monday, he said that "we are deeply committed to making Williams affordable and accessible," but "we need to try to adjust it in some way to preserve our high levels of aid." He said that the changes announced were a "prudent" way to do so.

While Wagner's announcement to the campus was vague on details, he said in the interview that the new policy would probably look like the approach Williams had in place before eliminating loans. Those up to $40,000 in family income had no loans, and there was a cap of $13,800 on the loans that could be included in a financial aid package, in total, over all four years. For many families, particularly those with some experience with debt, Wagner said he did not think this level would be burdensome. He added, however, that he was concerned about students from families without much experience with borrowing, who might be scared off by any borrowing, and he said the college would focus on outreach to such students and their parents.

Wagner said that the discussions of the policy change focused on what would be best for the college and its students going forward. Looking back at the college's decision to eliminate loans, he said that "clearly there was pressure at the time to emulate what some of the other institutions had done, but you also have to remember that it was a moment when we had substantially more resources, and a laudable desire to eliminate any disincentive to pursue any kind of career," he said.

Asked if the deliberations this year included discussion of whether the college's competitors would follow, Wagner said that "our primary objectives were focused on ourselves," but "I won't deny that the topic of what others may or may not do came up."

Several college officials who have talked (privately) about not wanting to be the first college to move away from a no loans approach were hard to reach Monday.

Brian Rosenberg, president of Macalester College, said he was "not surprised" by the Williams news as "I have been hearing a lot of rumors from meetings of campus CFO's and other financial people" who have noted that for many colleges, the decision to go no loans was "a multi-million dollar annual decision." While no-loans "is one of those decisions that once made is difficult to unmake, the financial pressures are severe enough that everyone has to look.... Now that Williams has gone first, I would be surprised if we didn't see, over the course of several months, other schools follow their example."

Rosenberg has been critical of no loans, arguing that it ends up helping some students who don't need it. "Does it make sense to give no loans to someone who graduates and goes on to Morgan Stanley, when that person is perfectly capable of paying loans back?" he asked.

The focus of aid policies, Rosenberg said, should be on keeping loans at a reasonable size and offering special assistance to low-income students or those who pursue low-income public service careers. Across-the-board elimination of loans, he said, limits the ability to pay for such commitments. He noted that Macalester graduates have lower average debts (around $17,000) than any other four-year college in Minnesota, including public institutions.

Some of the colleges that went no loans, he added, seem to have found the approach "more costly than expected," especially in light of the economic problems facing the country. A number of those institutions have been through rounds of staff layoffs. While Macalester has made budget adjustments, it hasn't eliminated anyone's job. "By preserving our financial aid policies as they were, we've avoided human pain," he said.

At some of those institutions, senior officials were reluctant to go no loans in the first place and were fairly frank (in private) that they were persuaded to do so by what their competitors were doing, not a certainty that this was the best (educational) strategy. And that may explain why so many experts on higher education economics were not terribly bothered by the move by Williams and the expectation that others will follow.

"From the standpoint of access and affordability, it's not as good, but to some extent these policies were competitive against other rival universities as much as really speaking to the ability of the good applicant to be able to afford to attend," said Charles T. Clotfelter, Z. Smith Reynolds Professor of Public Policy at Duke University. "I teach all about limited resources, and this is one of these things where universities are going to look to their right and left and say 'what can we scale back on?' "

If the result is more borrowing, Clotfelter said that "most economists would say that modest borrowing is not a bad thing."

There may also be an educational case to be made for modest borrowing. Robert J. Massa, vice president for communications at Lafayette and previously a senior official in enrollment and admissions at Dickinson College and Johns Hopkins University, said that there are definitely some low-income students for whom any loan may be a barrier to college. But largely, he said, "I think that when we have some skin in the game, we're more invested in whatever it is that we do. So from a philosophical point of view, I think it's important for colleges to ask: Should students be borrowing to finance some portion of their education?"

While Lafayette only eliminated loans for those with low incomes, some colleges (like Williams) eliminated loans for anyone eligible for aid.

Donald E. Heller, director of the Center for the Study of Higher Education, at Pennsylvania State University, said that when talking about families with $120,000 income or more, "students have enough resources" that modest loans should not exclude them from enrolling. "I would expect to see very little impact on the number who apply and attend."

Heller said that he was never convinced it was appropriate for elite colleges to be adding more help for students at the higher income levels. "It would be much better for institutions to focus their resources on truly needy students, and that's even more so today," he said.

Whatever the experts may be saying, some Williams loyalists are dismayed that the college is changing policies and say that eliminating loans sent an important message to prospective students about the college's commitment to them.

David Kane, an alumnus and the founder of EphBlog, which is devoted to Williams issues, wrote Monday that he wasn't surprised to learn that the college was being praised in some circles, given that "the people making these decisions and the people commenting on them travel in the same circles." Kane also rejected the idea that taking out loans can have a positive impact by increasing the engagement of students who borrow.

"If you believe that X is a good idea for non-rich students, you ought to believe that it is a good idea for rich students. If taking out loans is good for Sue, coming from a family of school teachers, then it is good from Sarah, coming from a family of investment bankers. Do the rich trustees of Williams make their children take out loans? Hah!" he wrote. He added that "making students take on debt causes them to make choices that are different, and generally less desirable, then the choices that would have otherwise made. By re-instituting loans, the Williams administration has demonstrated its priorities."

Despite that criticism, just about everyone who is part of the circle Kane criticizes thinks that the question has now shifted from "who will be first" to eliminate no loans to "who will be next?"