The recent economic downturn has left many scratching their heads and clutching their wallets.
Since January at least 14 financial institutions have collapsed under the weight of nation’s credit crunch and mortgage meltdown, according to the Federal Deposit Insurance Corporation. Financial giants, such as Lehman Brothers, American Investment Group (AIG), and Washington Mutual, have either been acquired by the government, other competitors, or filed for bankruptcy. The Down Jones Industrial Average lost 778 points Monday after the House of Representatives failed to pass a rescue measure.
Professor of Economics Frank Howland explained the situation as a vicious cycle.
“The basic story is that financial institutions borrow money short-term and lend it long term,” he said. “Right now, it’s just a big train wreck. But how big of a train wreck is going to be unclear.”
The crisis has gained national attention because of its possible impact on nation’s economy, but its ramifications have been felt as locally as the Wabash community itself. The college endowment has depreciated. Some private lenders have removed themselves from the student loan process. The college’s short-term investments have under-performed, and college officials are cautious about future revenue predictions.
“The endowment was significantly lower on June 30, 2008 than it was on June 30, 2007,” said Chief Financial Officer Larry Griffith. “The drop was somewhere around 50 million dollars. What this means is that we may not be able to increase our endowment draw to do some additional things we want to do in future years.”
Griffith said the endowment decrease could force the college to make tough decisions about future program funding, personnel costs, and maintenance and renovation project schedules.
“Fifty percent of our revenue comes from the endowment,” he said. “A third comes from our students, and about 17% comes from gifts, grants, and the federal government.”
Griffith said immediate impacts have been mitigated because of a built-in buffer. The percentage taken from the endowment is based on a twelve quarter rolling average, which means that it is neither harmed as much by a bear market nor helped as much by the bull market.
College Comptroller John Culley said the volatility in the market is having an effect throughout the economy but at Wabash as well. He said the college is being paid a lot slower, which means the college must finance more of its operations. He also said short-term investments are not doing very well.
“Someone is dropping sand into the gears of industry, and it makes them grind really slow and really hot,” Culley said. “We take whatever funds we have that are excess that we don’t need for the next couple of days and invest them short term. And right now we’re getting not very much income on them. Time was we could earn five to six percent a year on those funds. Now we’re earning next to nothing.”
Dean of Advancement Joe Emmick said his department, which includes alumni relations and giving, has seen the effects of price increases but not fewer donations. He expects some donors may put off decisions about major gifts in the future. However, he said recent donations have not fallen.
“I don’t think we’ve seen the effects yet, ”Emmick said. “Last fiscal year, we had a record annual fund of three million dollars. It’s too early in our fund raising cycle in this new fiscal year to draw any conclusions about he effect the markets had. But even in bad times, there are still people in certain businesses and sectors doing well and who are in a position to give. For those putting decisions on hold, we are still building and maintaining the college’s relationship.”
Though the effects of the recent bank failures are unclear for some sectors, nowhere has it had a direct impact more than student loans.
Financial Aid Director Clint Gasaway said two recent changes to the college’s student loan program have minimized the possible negative impacts of a soft economy. First, the college moved from the Federal Education Lending Program (FELP) to the Direct Loan Program last summer. Instead of dealing with many private lenders, which have now failed, financial aid officials now deal with the department of education and federal government directly.
The Wabash Signature Loan Program has also been replaced by the Wabash Subsidized Loan Program. Instead of relying on Sallie Mae and other lenders, the college now offers need-based loans from the College’s endowment funds. “We just got word from Key Bank that they are no longer going to do private loans,” Gasaway said. “They have been one of the primary players for Wabash for a long time with non-federal loans. I’m glad we made the decision to change loan program [earlier]. I don’t anticipate students are going to have problems getting their loans or making new loans if they haven’t already made them.”
Gasaway was quick to point out that the college remains committed to meeting 100% of students’ calculated need. Though students may not feel the negative impact of the market dip right now, imminent graduates are being advised to prepare for the realities of a constricted job market.
Career Services Director Scott Crawford said students will face fiercer competition in both the job market and graduate school. “Students are thinking ‘I’m not going to the job market this year. I’m going to grad school,’ ” Crawford said. “ When the economy goes down, applications for grad school skyrocket. I also think that some companies will be getting pickier with who they hire.”
Crawford said students’ worries may pale in comparison to those of alumni, who may already be suffering from layoffs and downsizing. He said some recent graduates have already contacted him to get advice about how to grapple with the current job market. Crawford also offered advice for students, such as polishing their resumes, applying for internships, gaining experience, and beginning job searches early.
“I think the biggest key is that students need to start now,” he said. “Juniors need to start talking to Mike Kerr about coordinating internships, so they can do something now before it possibly gets worse.”