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'No Loans' Revisited

July 6, 2012

"No loans" policies were the hit of 2007 and 2008, as many of the nation's most elite (and wealthy) colleges and universities announced that borrowing would be eliminated from the aid packages of students with family incomes below certain levels.

But this particular movement in higher education took off just before the economic downturn hit in the fall of 2008, sharply reducing these institutions' endowments and forcing many of them into budget-cutting mode. Now, a few years later, institutions are taking steps that reflect very different financial outlooks than those before the downturn. In May, Wesleyan University ended its policy of need-blind admissions, a policy seen by many as (when combined with meeting admitted applicants' full need) the gold standard of private college admissions. This policy is supposed to mean that applicants can rest assured of their ability to attend if admitted -- and that lack of resources shouldn't stand in the way.

This week, Cornell University announced modifications of its "no loans" program for those eligible for aid. Instead of assuring a "no loans" package to everyone with family income of up to $75,000, Cornell will make that pledge only to those with family incomes of up to $60,000. (The changes will take effect with those enrolling in the fall of 2013, and will have no impact on those already enrolled or who will enroll this fall.) Those in the $60,000-$74,999 family income category will be assured of aid packages that don't have more than $2,500 a year in loans. For those in the family income category of $75,000 to $119,000, Cornell is increasing the loan share of aid packages from $3,000 to $5,000 a year, while those with family incomes of $120,000 and higher will still be assured of loan maximums of $7,500 a year (unchanged from the policy to date).

The issue of pulling back from some of the pledges made in previous years -- generally with much fanfare -- is a sensitive one for universities, especially those like Cornell and Wesleyan that would be the envy financially of 99 percent of research universities and liberal arts colleges, respectively, but that happen to compete with the 1 percent with greater resources.

But some experts on the financial aid packages of elite private institutions (who asked not to be identified due to their dealings with the various institutions) said that of the several dozen institutions that went "no loans," only a few -- Harvard, Princeton, Stanford and Yale Universities -- were truly in a position to make the pledges that they did. For a variety of reasons, these experts say, many of the rest of the colleges that adopted "no loans" policies may try to hold on to them, or to minimize shifts, but some may well follow Cornell's lead.

"There was this kind of reaction" when Harvard and others announced their policies, said one expert. "When the big boys did it, everybody else said, 'We should move in that direction as well,' and I think there was a less than fully analytical approach to doing it."

Cornell is in fact not the first institution to pull back on a "no loans" policy. In 2010, both Dartmouth and Williams Colleges -- about a week apart -- announced that they were limiting "no loans" policies to those at the bottom of the income distribution, and restoring loans to new students with slightly higher income levels. At that time, many speculated that more colleges would follow, but there was no groundswell. But of course in 2010, many hoped that a full economic recovery might be imminent, and they are still waiting.

The colleges that dropped loans largely say that the effects have been positive on students and their families, but that their institutional financial aid budgets have been increasing at too rapid a rate to be sustainable.

At Cornell, the university noted in its announcement that the percentage of undergraduates who borrow each year has fallen since 2008 from 43 percent to 34 percent. Further, the cumulative debt undergraduates had at graduation decreased from $24,000 for 2007 graduates (who didn't benefit from "no loans") to $19,000 for 2011 graduates (who did). But costs increased at a rapid rate. Cornell now spends $225 million annually on undergraduate financial aid. Since 2008, that budget line has increased by 20 percent a year.

Asked about how much money Cornell will save with these changes, a spokesman said that the university projects that financial aid budgets will continue to increase, but that these shifts will "slow the rate of increase somewhat." The spokesman acknowledged that average loan sizes for undergraduates, per year and cumulatively, are likely to rise "slightly."

While students are sure to prefer no debt to any debt, and smaller loans to larger, some aid experts said that the changes being announced at Cornell are inevitable and need not curb access. Ronald G. Ehrenberg, director of the Cornell Higher Education Research Institute, is one such expert, and stressed that he was speaking as a scholar of the economics of higher education, not based on any inside knowledge of Cornell's recent decisions.

"I think what is happening is that in response to what Princeton, Harvard, Yale and Stanford did, lots of institutions gave away the ship in making their financial aid policies much more generous than they could afford," and now they are finding their spending "out of balance" as aid budgets skyrocket while revenues increase as much slower rates.

For places like Cornell and Dartmouth and others that award aid based solely on financial need, there is "a commitment to social responsibility" in enrolling students from across the economic spectrum, while also a recognition that loans at reasonable levels need not hurt a young graduate's prospects. Ehrenberg said he saw the policy at Cornell (and others that have pulled back on their "no loans" commitments) of keeping those policies for those with family incomes under $60,000 as a sign that they wanted to continue to attract students who are eligible for Pell Grants (a proxy to many of attracting the lowest-income students).

He said that for those who will have to borrow, the cumulative debt will still be well below national averages. And Ehrenberg said that he believed the move not to increase the maximum loan for those at the highest income levels ($120,000 and up) reflected an appropriate belief that "loan burdens shouldn't influence occupational choice."

While Ehrenberg said that the ideals behind the moves to drop loans in a broad way were admirable, he said that reality has set in since 2008, and that colleges are not seeing their budgets and endowments increase as they were before then. "The business model is breaking down," he said.

 

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