Endowment may enable aid reforms

After Harvard’s announcement of its new and unprecedented financial-aid policy, all eyes are on Yale, one of the few institutions with the resources to match Harvard’s ante.

University President Richard Levin told the News on Monday that Yale will launch a “major financial-aid initiative” in January, but whether that announcement will match Harvard’s in its scope is unclear. Financial, the University could easily respond with matching reforms next month if it so chooses, according to interviews with several economists and an analysis of University budget documents conducted by the News.

Levin’s disclosure came several hours after Harvard unexpectedly unveiled a sweeping financial-aid initiative that will reduce the expected financial contributions from middle- and upper-middle-income families and completely eliminate student loans. The initiative appears to put Yale at a significant competitive disadvantage in wooing prospective students, making Levin’s announcement next month the subject of scrutiny and anticipation.

Financial aid was a major topic of discussion at this past weekend’s Yale Corporation meeting, Levin said, and the Corporation gave Levin the discretion to launch a “major financial-aid initiative.” Levin declined to disclose any details of the planned reforms and would say only that the changes will be announced next month after the University has worked out all the necessary details.

“We’re going to stick to that plan,” he said in a telephone interview. “Our timing is going to be early January. We’re not going to move reactively to Harvard.”

Levin said he will take Harvard’s new initiative into account in finalizing the details of the University’s January announcement.

The News reported last week that the Corporation would consider financial-aid reforms — including possibly reducing the required student contribution — at their meeting over the weekend. An announcement about new reforms was not expected until later this winter.

In the meantime, Harvard beat Yale to the punch.

Under the new policy, Harvard College’s financial-aid grant budget will rise to $120 million, an increase of $22 million — more than 20 percent. Harvard President Drew Gilpin Faust called the increase a “huge” but worthwhile investment.

By contrast, Yale will spend $62 million on undergraduate financial aid this year, according to University budget projections obtained by the News. That means Yale will spend $11,769 per student on financial aid, compared to $17,870 at Harvard under their new policy, more than 50 percent more.

The numbers beg the question: How hard would it be for Yale to match Harvard’s aid program?

Based on the size of the University’s endowment — a record $22.5 billion as of this summer — it would not appear very difficult, at least on the surface. But administrators caution that the math is not as simple as it appears.

For Yale to match Harvard’s per-student aid average, the University would need to raise its annual financial-aid budget to $94.1 million, an increase of $32.1 million, or nearly 52 percent.

Yale will spend roughly $843 million from its endowment — about 3.75 percent of its total endowment — to balance the budget this year. To cover the added financial aid, it would need to increase its draw from its endowment to about 3.9 percent.

This is a reasonable level of endowment spending, said Roger Kaufman, a professor of economics at Smith College and an expert on higher-education endowments.

“Could Yale afford it? The answer is yes,” Kaufman said. “Anything less than 4 percent shouldn’t be too worrisome.”

Perry Mehrling, a professor of economics at Barnard College, said Yale still has “plenty of room” to increase its endowment spending.

“It’s pretty clear the money to do this is there,” he said in an interview.

Last year, American universities spent an average of 4.5 percent of their endowments, according to a study by the Wilton, Conn.-based Commonfund Institute. Among the 10 universities with the largest endowments, Yale’s 3.8 percent spending rate was tied for the lowest, according to data compiled by the Chronicle of Higher Education. Even at 3.9 percent, the University would be tied with Harvard for the second-lowest endowment spending, according to the data.

But bolstering the financial-aid budget is not that simple, J. Lloyd Suttle, the deputy provost for undergraduate and graduate programs, said. Because Yale’s endowment is actually comprised of thousands of restricted funds, the University cannot simply withdraw an eight-digit lump sum, he said.

“We don’t have an endowment — we have 8,000 endowments,” Suttle said. “Most of them have certain restrictions on their use. The money is not interchangeable.”

But more than a quarter of Yale’s endowment is unrestricted, meaning it can be used in almost any way the administration sees fit, according to University endowment reports.

Harvard will pay for its added financial-aid budget through a variety of sources, including the presidential discretionary fund and Faculty of Arts and Sciences funds, the Harvard Crimson reported. At nearly $35 billion, Harvard’s endowment is about 50 percent larger than Yale’s, although the university’s enrollment, including graduate students, is also about 50 percent larger than the Yale student body.

Yale’s spending rule — which dictates the rate at which it can withdraw money from its endowment — applies equally to all of its endowment investments, regardless of whether they are restricted to being spent on library books or financial aid, for example, according to a Yale official who spoke on the condition that he not be named.

Because of that rule, the University does not typically dip into the endowment beyond the normal rate to pay for specific programs or resources, both out of concern for the University’s long-term health and out of fairness to other programs and departments that are limited by the spending rule, the official said.

“If we wanted to match Harvard, we’d have to figure out how much that’s going to cost us,” the official said. “If you take a significant extra withdrawal out today, that impacts the money you have to spend in the future. … It’s a really hard balancing act.”

In theory, Yale could match Harvard’s financial-aid policy by jettisoning the proposed residential-college expansion. That project — on which the Yale Corporation will vote in February — is estimated to cost $593 million in inflation-adjusted dollars over the next decade, according to University budget projections obtained by the News.

But again, the math is not as simple as it seems, since much of the college construction costs will come from donors who give to Yale specifically for the project. In terms of overall cost, however, that $593 million total spending would be roughly enough to pay for matching Harvard’s financial-aid program over the next 15 years or so.

Yale’s last major reform of its financial-aid policies came in March 2005, when the University eliminated the parental contribution for families making less than $45,000 and reduced contributions for families making between $45,000 and $60,000.

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