Some Colleges Re-Evaluating 'No-Loan' Financial Aid Packages

Some U.S. colleges that replaced loans in financial aid packages a few years ago with outright grants that students do not have to repay are reconsidering that decision, reports.

More than thirty top-ranked private U.S. colleges — including every Ivy League school — adopted "no-loan" programs in 2007 and early 2008; the programs generally target students with family incomes between $75,000 and $150,000. For example, Swarthmore College replaced loans with grants for 50 percent of its 1,500 students in 2007. This year, however, the college has trimmed its budget by 7 percent, frozen salaries, and empowered a financial planning group to identify additional cuts, which may include the loan-free aid packages. "We'll be re-evaluating this like everyone else in the country," said Jim Bock, Swarthmore's dean of admissions and financial aid. "I can't promise anything past the [incoming] class of 2013."

According to Pennsylvania State University professor Donald Heller, schools that adopted the loan-free policy were driven by competition for students and spurred by criticism from members of Congress troubled by rising endowment values and soaring tuition costs. But, said Spencer Foundation president Michael McPherson, many schools may not have adequately assessed whether the policies were sustainable or developed contingency plans in the event of an economic downturn.

While schools such as Princeton, Harvard, and Yale are not thinking about scaling back their no-loan programs, such a move may make sense for smaller schools that are more dependent on tuition revenue to operate. Pomona College in Claremont, California, for instance, decided in December 2007, at a time when the value of its endowment was up some $500 million, to expand its no-loan program to include all students who qualify for financial aid. With its endowment down 21 percent from its peak, the expanded program is costing the college an additional $2.4 million annually.

"If we were making the decision in December '08 rather than December '07, would we do it? I think we probably wouldn't have," said Pomona College vice president and dean of admissions Bruce Poch, who noted that the college remains committed to the program. "We were looking at a different world. If we knew then what we know now, we may not have gone this route."

Janet Frankston Lorin. "Endowment Losses Threaten No-Loan Policies as Guarantees Vanish." 08/25/2009.