<p>As with other sectors of the economy, it will be interesting to see impacts to boardings schools' endowments and whether it will have impact on their ability to continue offering financial aid at current levels. </p>
<p>Additionally, what will the impact be on applications for new students or the ability of existing students to return in the face of job losses and diminished personal portfolios? Those $40+k tuition bills look larger than ever now.</p>
<p>The market will certainly have an impact on the schools' endowments. I am the Executive Director of a non-profit and our one million endowment is no longer at that level.<br>
HOWEVER....the policy of pretty much all non-profits, including schools, with endowments is to use a certain percent (usually around 5%) of the rolling 3-5 year average of principal. Typically, you invest for growth and your return in quite a bit more than 5%, so your principal is increasing annually, even more so with increases in the market. With these decreases, you'll have a year that brings the average down somewhat due to the value, but hopefully you'll have been adding unrealized gains to help make up for it. A few years ago we "dropped" a bad year and were very happy because our useable income rose quite a bit. You rarely have more than one "bad" year in the 3-5 year average, so as far as the available income to use for financial aid, operating funds, capital projects, etc, it will have some impact, but it should not be huge. </p>
<p>On the other side of the equation, anyone who may have been using appreciated stock to pay for tuition, may be having a problem (although it's much smarter to make charitable contributions with appriciated stock and pay for things like tuition with current cash, but that's another topic).</p>
<p>Then there are those who lived on a fixed income - trust fund or their own accumulated assets - and are having small panic attacks at the drop in their net worth and thus, forecasted earnings. Alas, what goes down must go back up - isn't that the saying???</p>
<p>I do agree with Linda on the school side/endowment. </p>
<p>However, on the applicant side for fall 2009 it may have an impact. More students applying for FA possibly - thus less full pay students. </p>
<p>I think it is too soon to tell what our portfolios will look like next summer. Therefore, interviews and applications will continue as usual.</p>
<p>Understand that falling endowments is not the only issue: Heating costs are up, food costs up, capital projects are more expensive. Brace for significant increases in tuition.</p>
<p>What I'm hearing from a school administrator is that they are eliminating the "fluff" instead in order to keep the budget at a reasonable level due the increased heating and other costs. Now that said, it was before the drop in the market, so that may change things. It all depends on how long the drop lasts, and at what point the schools use for their average. IF they use December 31 or if they use July 31 (most likely their fiscal year). I'm betting it is 7/31 since that is the figures that would be in the audit. Therefore, the market will likely be back up by then...who knows/</p>
<p>So, I get to be the voice of doom. I think this is a very big deal indeed, particularly for the boarding schools. The knock-on effects of a freeze in the credit markets are huge. If I were on the board of a boarding school, I'd be nervous. Trustees are tasked with protecting and supporting a school, which also means taking a long-term view of happenings. Tuition needs to be set in December or shortly after, I'd assume, to allow time to inform current students of next year's tuition. After all, it's only after you "count noses" of the returning students that you know how many spots you have to fill in 10th, 11th, 12th grade. You need to know this before March 10th, of course. Logically, you probably need to know this by the end of January, to give the admissions people time to do their job. </p>
<p>I assume that anyone currently enrolled in a school has already paid this year's tuition, so we aren't likely to see a wave of students returning home. However, there may well be a wave of applications for financial aid from current students, particularly from students who've never needed aid before. Does the institution choose to turn its back on current students, reserving what aid is available for new applicants and those currently on FA? I really can't see that, particularly as a student who's been sent home in that fashion will never, but never, be a grateful alum. As a matter of fact, in the long term, you really don't want generations of that student's family to be intoning, to anyone who will listen, "fine school, but it's a shame how they behaved in the crash of '08."</p>
<p>Also, the student population of leading boarding schools draws heavily on Wall Street and Greenwich. This financial crisis is affecting those families first. </p>
<p>Many schools have endowments, but very few have enormous endowments. The majority seem to strike a precarious balance between drawing on the endowment and relying on the tuition paid by full pay students. FA has been used to draw in very desirable students, who have talents which improve the school as a whole. If the endowment has decreased by a noticeable percentage, trustees will be wary of drawing it down further. Yields on bonds have dropped dramatically, and I really hope schools weren't caught up in the auction rate securities mess. </p>
<p>Linda S, foundations are required to spend at least 5% of their capital holdings each year, but I don't believe schools and colleges are required to. That's why the colleges get so nervous when Congress starts talking about overly large endowments. No one sitting around the table this December will say, "but the figures at the end of July are really good, and I'm sure they'll be great next July! Let's bet the school on it!" </p>
<p>In short, it's a good year to be a student who can pay full tuition. Your chances of admission have improved dramatically. For the schools, the bad side of this is that many families who could pay full tuition will decide to keep their children at home, and may decide not to return their children to boarding school. If you require FA, this pool has just become much more competitive.</p>
<p>"Alas, what goes down must go back up - isn't that the saying???"</p>
<p>Actually, it's "What goes up must come down", as the whole economic mess has proved.</p>
<p>If only those Wall Streeters could have broken "the surly bonds of earth" in their "creative finance" rockets, they could have been the exception that proves the rule -- and it would be bon voyage and good riddance too -- literally, they should be relegated to outer space.</p>
<p>I don't think we will see huge rises in tuition. We know that many of our families couldn't stomach that right now and we'd end up just giving out more FA. (The tightening of home equity credit is already having a huge impact.) I think we'll see a reduction in "fluff," as Linda put it. Keeping field trips closer to home, reducing the number of long distance athletics contests, looking at courses with consistently low enrollments, etc. I think some schools will decide that there's not a big difference between having 17 kids in a classroom vs. 14 as payroll is always our biggest expense. I also wouldn't be surprised if some schools raise their limits on Asian nationals as a way to balance the budget.</p>
<p>One silver lining is that our sustainability initiatives that were started for "green" reasons have now taken on added value and importance as good frugal planning. The Headmaster's Prius was the best purchase we made last year!</p>
<p>
[quote]
Linda S, foundations are required to spend at least 5% of their capital holdings each year, but I don't believe schools and colleges are required to.
[/quote]
I never said "required" I said as a matter of POLICY many schools do in fact spend between 3-5% of their endowment each year - on a rolling 3-5 year average. Because they invest for growth, the balance will increase as it will grow most years as more than 5% is earned even without any additional contributions. I have no idea about colleges, but I do have first hand knowledge of several schools and I do know that this IS their policy.</p>
<p>Investing for growth also means taking on a hefty amount of risk. Banks and financial stocks weren't seen as risky investments until recently. If the endowment is down 25% (or more) in a month, I would not assume that an endowment will keep increasing ad infinitum. As a matter of fact, if an endowment has decreased 25% in value, it's just lost more than 5 years of 5% growth.</p>
<p>Assume a school has an endowment of 100 million. (Round numbers for the lazy). Let's assume the endowment's down only 25%. Assume the endowment has little exposure to financial stocks, construction stocks, or any stocks dependent upon discretionary consumer purchases. (hmm.) The holdings in the stock market are still at risk from the knock on effects in those industries, and a declining faith in the market. 5% of 75 million is only 3.75 million. Working on rolling averages is fine, except when the average is subject to a sudden drop. Long term, investing in the stock market is the best way to invest for growth, but there have been long periods in which the average has not grown, or has been subject to a decline.</p>
<p>If you're sitting on a board, and your endowment's just declined by 25%, it doesn't really matter if you just came off of a long period of growth. You have to take into account the real risk of a continuing decline in the value of the endowment. You cannot prudently assume that next year will be better.</p>
<p>Sbergman, I also believe that this crisis will affect all schools ,whether public or private. Class sizes will not stay as low as they have been in competing public schools, either. Our state requires schools to offer class sizes of 35 or fewer. In recent years, it has been much fewer in the good publics, but I don't think that will continue, which means that the reasons to consider a private education will remain.</p>
<p>I actually logged on today to write a post on this very topic, so I'm happy to see it here. I think that the financial crisis is already having a HUGE impact on boarding schools.</p>
<p>As some of you may know, I work with many students involved with boarding schools, I'm not a parent. that's all I can say without getting banned though.</p>
<p>I started to notice during my May-June school visits that things weren't as the used to be. One top school mentioned that they had 3 kids being pulled out because of the Bear Stearns issue and were returning to public school, so they had those 3 spots open. During the summer, I received a good number of calls from schools telling me that they have spots and wondering if I have any students for them. This was the first time that had happened in my 8 years of doing this.</p>
<p>Now here it is October and I have found that my inquiries from new families, which used to be 10-15 a week, now average 1 a week. A colleague at a CT boarding school told me their interview visit calendar is running 30% less than this time last year. I also had one parent who was considering boarding school change her mind due to the money they lost in the last weeks and her husband's unemployment. </p>
<p>This is just my perspective, but I think this is going to be a tough year for boarding schools. The top schools will get all the "full pays" and the second tier is going to have a tough time making their budget. I think it will be easier to get into the top tier if you are a full pay. </p>
<p>I'm wondering if any of you have noticed anything different this year?</p>
<p>I agree with the sentiments expressed by newyorker and periwinkle. If your net worth has suddenly taken a hit (and unlike many past stock market downdrafts, bonds are getting hit hard as well) and you're worried about your job outlook and your costs are increasing due to food costs, gas, heating oil, mortgage costs, etc., it's easy to look upon boarding school as a luxury that can be forgone. People feel they HAVE to send their kids to college but BS is definitely more of a want than a need. </p>
<p>I expect alumni/parent fund drives for 08-09 will be much more challenging as well.</p>
<p>There is more than one topic here, but for annual fund drives, we have found (I'm in the field of development/fund raising) that in hard times the higher income folks do not significantly change their gifts. In fact, over the last 5-10 years the trend in philanthropy has been few givers giving more dollars. The people who can afford to give several or many thousands of dollars do not typically change that giving. It is the people who give under $200 or so that have the challenge when times are tough. They are the ones that $1000 to fill the oil tank is a huge problem for. They are the ones that may have to reduce their annual fund gift.</p>
<p>I think Linda's point on fundraising may have been true in the past, but not as much this year, with all that has gone on. As you said, the higher income folks don't change their donations, but many of those high income people are zero income people this year. 82,000 wall street people in the NYC area laid off--many of them used to be big donors. I hope I am wrong of course</p>
<p>I doubt that any endowment fund lost 25%. At most 10% in my mind... I cannot see the endowment funds investing in anything US treasurey bonds...</p>
<p>Tuition will not go up. Economic principle of purchasing power and the income effect:
-The Income Effect(negative in this case) influences the Purchasing Power of the household to an even greater degree than normal(normal meaning household expenses holding firm in both cases... The price of household expenses will increase which consumes even more of a limited capital stream coming into the household)</p>
<p>And most schools are not extremely pressed for cash(as far as I know)... I doubt that schools will bail on existing students on FA... Most likely FA will tighten up and POSSIBLY admission standards will go down... Instead of offering FA for that bright boy they might accept a little dumber version of him to get another 40 Grand.</p>
<p>MY ONE GUESS AT THE FUTURE:
If this lasts as long as some believe(3 years for a full recovery... I think this is a pretty big over statement). Many more(a 5-12% jump over the total period of recession BECAUSE of a weakening dollar) foreign students will apply with a weak dollar... cheaper tuition.</p>
<p>Correct me if I am wrong. Please don't verbally abuse me if any of this is wrong. This is an economic statement which is an educated guess at best.</p>
<p>You can find out pretty much EXACTLY what each and every school's endowment is invested in by fund by going on GuideStar</a> nonprofit reports and Forms 990 for donors, grantmakers and businesses and looking at their 990.<br>
I'm not up for it tonight, but if someone really wanted to you could find out what a given school had as of the last 990 (which posted on line is probably July 07 at this point, could still be July 06), figure out how many shares that was based on the value at that point in time and then see how much that is worth today. It is all 100% public information.</p>
<p>My perspective is probably a little different. Yes, our budget is tight this year. More families have requested and been given financial aid. However, I am sitting on the campus of a school that was founded in 1905 by a group of Episcopal monks from NYC who wanted to offer the "barefoot boys" of Appalachia a good education when no public education was available in the area. Although our students are no longer barefoot, we continue to provide 40% of our students with financial aid. We're mission driven and our mission becomes more compelling in tough times when more students need aid and education becomes an even more important (and smart) investment.</p>
<p>I think the schools that may be in the biggest trouble are the plethora of small day schools (particularly the Christian academies) that have popped up around the country and are completely tuition driven. The rest of us have weathered the Great Depression, world wars, and the Asian financial crisis. We know how to go lean when the times require it.</p>
<p>A reply to Post #15 by italianboarder. I can understand why you might guess that a typical endowment is in 100% U.S. government bonds but this is not the case. Endowments tend to diversify their investments and typically hold a combination of stocks, bonds, and other long-term investments (real estate, private equity, etc.). Many use hedge funds to manage their investments as well as more classic strategies that are similar to equity and fixed income mutual funds.</p>
<p>The reason for the a diversified approach to asset allocation is to meet the objective you mention in your second paragraph. Over time U.S. government securities have matched inflation, but exceeded. Given that schools want to withdraw money from their endowment fund, and keep the fund level or increasing on an after-inflation basis, risker investments are required.</p>
<p>But how much of their assets would be located in risky investments? My mind keeps telling me no more then 20%. I mean Bank of America Corporates pay at like 8% and the tax on those are just great... So if they use about 5% a year and are getting 8% return... PLUS donations...Wouldn't that be enough risk and possibly the most favorable investment of choice to combat inflation and the necessary withdraws?</p>
<p>I don't know... Risk is a touchy issue for schools. I can't see them taking aggressive standings that most hedge funds enjoy... I doubt they leverage also. So risk in that aspect has to be very low.</p>
<p>Linda S., I took a look at various schools' 990s on Guidestar. I'm very, er, frugal, when it comes to research, so I'm not signed up for "Guidestar Select." Thus, I could only access forms from '05 or '06. I was surprised by how much variation there is in schools' investment decisions. This probably reflects the investment acumen of business managers and trustees, and a school's own investment history. The very largest listed at least some investments in hedge funds or private equity. I only found one school which seemed to have a majority of their investments in savings bonds. </p>
<p>Newyorker22, at present the effects may be concentrated in the New York region? Even if parents of prospective applicants are employed, and able to afford boarding school, to witness so many of one's friends and neighbors losing jobs and savings all at once must have a chilling effect.</p>