More Selective, Less Generous

The recession is hard on both people and institutions. As endowments decline, colleges struggle to continue operating while reducing expenses. It’s sort of conventional wisdom that colleges reduce financial aid in such trying times. It turns out that the truth is a little more complicated. A piece by Jacob Goldstein at NPR reveals that:

A group of economists wanted to know how schools deal with this boom-and-bust endowment economy. Among the questions they asked: What happens to financial aid after a school’s endowment goes way down?

As it turns out, the most elite schools cut aid, while less selective schools did not.

What’s more, when endowments rose, the less selective schools increased financial aid to freshmen. The most selective schools didn’t do that.

In fact, it appears America’s more selective colleges mostly adopted a policy of “generosity… when we can afford it.”

Goldstein reached this conclusion based on a paper by economists Jeffrey Brown, Stephen Dimmock, Jun-Koo Kang, and Scott Weisbenner, which looked at how colleges respond to “financial market shocks to endowments.” Among other things the paper revealed that:

Among more selective universities… [institutions with larger negative endowment shocks are relatively more likely to] reduce financial aid for students the following Fall and enroll fewer freshmen.

This is surprising information.

Daniel Luzer

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer