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Elonomics

A layperson's guide to how the economic slide affects your wallet, your school and your future.

by Olivia Hubert-Allen,
The closing and sale of several key financial institutions has taken its toll on the American economy, sending it into the worst downfall since the Great Depression. Professors wear expressions of dismay, exhaustion and regret as the prospects of their 401(k)s and investments take a slide. And unless you’re packing some hefty investments of your own, it might be hard to relate to the concerns of the millions of “grown-ups” stressing about the economy. But, the economy affects — well, everything. So get ready. The seat belt sign has been turned on, there is turbulence ahead.


[The University]

The bad news: Tuition increases? Almost certain.
The worse news: Elon has lost 10 percent, or $8.5 million, of its $85 million endowment.
The good news: It could have been twice as much without a little luck.

Large institutions like Elon are not very different from large corporations. Several key things change during an economic downturn, such as the number of people who buy a university’s service, the amount of money earned from investments and the amount of interest the university must pay on debt. Elon has been affected by the economic crisis in four key ways.

1. Two small insurance companies that Elon uses were owned by American International Group, a company that recently received a bailout from the Federal Government.
Elon has dozens of insurance policies that cover everything from boilers to entire buildings. Two of those insurance policies were held with insurance companies that were owned by insurance giant AIG, which was brought back from the grave by the Federal Government with an $85 billion bailout. State regulations require all insurance companies to keep a cash reserve of the money supporting insured property, so Elon is still insured. But AIG will have to sell off some of the small insurance companies and Elon needs to ensure that the buyer of its insurance plans is still rated as highly as the previous companies were. It’s not detrimental, but certainly a headache to deal with.

2. Elon pays higher interest on existing debt.
Like any institution of its size, Elon has a considerable amount of debt from construction projects. When the university builds something on campus, it sometimes uses bonds that can be paid off in 20 or 25 years. Each week, the bonds the university has used are “auctioned off” and huge companies buy these bonds based on an interest rate that is set each week. So if the bond is $1 million and the interest rate is 4 percent, the institution that buys the bond stands to make $40,000 — not a bad chunk of change considering these types of investments are tax exempt. But now, many of these bond buyers are sitting on the sidelines and waiting to see what happens in the American economy. To attract buyers into the risky market, the university has to pay higher interest rates on these bonds. In short, a building that once would have cost Elon $12 million, now could cost several hundred thousand dollars more.

3. Elon’s endowment slips — but it could have been worse.
“I’ve often said that I’d rather be lucky than good,” said Gerald Whittington, vice president of business, finance and technology. “Good people get killed every day.”
During the month of September, Elon was lucky.
In a planned move, the university had pulled its money from the control of one set of investment managers and was planning to move it to another set of investment managers. Between the switch, Elon’s money was sitting in a protected account in cash. During two of the most volatile weeks in the American markets, parts of the university’s money was out of the market.
“Since the end of the last fiscal year our endowment is down 10 percent [$8.5 million,]” Whittington said. “Had we not been in cash during that most volatile time we could have lost 20 percent [$17 million]. We are not without good news — but it is the silver lining of a black cloud.”
Now the endowment is in the hands of the new managers and under the influence of the stock market.

4. Liquidity crunch has tied money in the market.
About 1,000 colleges and universities invest in the Commonfund, a large set of investment funds that only colleges and universities can use. The Commonfund outsourced creation and management of short term investments to Wachovia. On Sept. 29, Wachovia made a surprise announcement to the Commonfund saying that it was pulling out immediately.

After the news broke, every college and university would have likely wanted to pull all of its money out of the Commonfund. But, a significant amount of the money the Commonfund has is invested in short term investments, like 90-day treasury bills. In order to get cash, these short-term investments must be sold in a market. And surprise, surprise — nobody’s buying.

The Commonfund told the universities that they could only immediately withdraw 10 cents on every dollar that they have invested. Many colleges use regular withdrawal from the Commonfund to pay for things like payroll and operational costs. In Elon’s case, the 10 percent they were able to pull out wasn’t enough to cover immediate expenses, so Elon had to go to other investments to fill the gap. Other colleges and universities did not have extra liquid assets they could pull from, and some were forced to borrow money to make payroll.

“You are investing your money in something and then they are telling you that you can’t get it all back when you want it,” Whittington said. “That’s not quite 1929, but it’s reminiscent of it.”

Whittington said that the university plans to tread carefully into the future.
“Were we impacted? Yes. Are we all going to die? No. Do we have to manage our way through this in a very keen way? Yes, absolutely,” he said.

The university will be careful about any discretionary spending it does but plans to keep forward momentum at the institution. The renovations to the second floor of Powell in preparation for the incoming class of new interactive media graduate students are still planned to be done this summer, but the administration is keeping mum about other building projects.

One thing they aren’t hiding is the likelihood that tuition will take a hike next year.

“There’s no doubt about it. We’re a tuition dependent institution and if we’re going to have to cover an increased [operating] expense, tuition is going to be the principal means by which we do that,” Whittington said.
Last year tuition saw an 8.6 percent increase, or $1,910, from the 2007-2008 school year and room and board rose 6.4 percent, or $474.

[Career Prospects]

One of the biggest concerns that students have is the prospect of getting a job after graduation. With a rising unemployment rate and future job cuts a possibility, there is some reason for concern. According to the Bureau of Labor Statistics, 2.2 million more people are unemployed now than were unemployed a year ago. This reflects a 1.4 percent rise in the unemployment rate from 4.7 percent a year ago to 6.1 percent today. The hardest-hit industries are construction, manufacturing and retail trade. Growing industries include mining and health care.

Recent graduates may have to change their expectations for a first job if they are in a struggling industry, experts say. Students should also anticipate the job search process taking longer. Unlike in previous years, they are not only competing with other recent graduates, but also industry veterans who may have lost their jobs at another company.
“[Students should] be thinking, ‘I’m going to have to be faster, quicker, smarter and stay at it longer so I can differentiate myself from somebody else to get a job,’” Whittington said.

[Off-Campus Housing]

This entire economic crisis began with the bursting of the housing bubble in 2005 and 2006. Now, students who live in off-campus houses and apartments may have to shoulder some of the weight that the owners of their property are facing.
There are two different reasons that renters could see hikes in rent payments for next year.

1. Owners might be stuck in mortgages they can’t afford.
When buying a house, some people signed onto costly mortgages with the plan to refinance later, which would lower monthly mortgage payments. But with the housing bubble burst, homeowners are often unable to negotiate cheaper rates, forcing them to pay more each month than they can afford. If the owner of the property you live on is in that situation, they may raise rent prices to help defer the costs.

2. During the past few years the prices of utilities have risen.
Prices for house utilities like natural gas, water, cable/Internet and electricity have been on the rise during the past few years. Homeowners have been bearing a lot of extra costs, especially following a summer with some of the highest crude oil prices on record.

Students who pay a rent rate that includes utilities can expect to see some fluctuation in the rent rate to reflect the increasing utility prices.
Freeman & Company, the real estate company that owns 12 properties in Sheridan Place and all of Oak Hill, hasn’t had any problems with the mortgage crisis but have been hurt by rising utility costs.

“It’s possible that we may have to raise prices next year,” Sybil Holt, an agent at Freeman & Co. said, citing the prices of utilities as the reason. Though Holt doesn’t know for sure about rent rates, she was certain that the economy has taken a toll on the real estate industry.

Despite economic challenges, the owners and managers of off-campus properties don't anticipate a change in demand for housing around Elon anytime soon. They cite a growing student body and the need for independence.

Richard Parker of B.C. Parker Real Estate, which manages properties like New and Old Trollinger Apartments, West End Apartments and Partners Place among others, says his business has not had trouble filling its rentals.
"We have a really low vacancy rate," Parker says, "It's probably less than 5 percent."

[Financial Aid]

The interest rates of unsubsidized federal student loans are fixed at 6.8 percent, after a bill that was passed in July of last year. It would take an act of Congress to raise or lower the interest rates of those loans. Subsidized Stafford loans are actually on a timetable that will see the interest rates of those loans decrease during the next four years, eventually dipping to 3.4 percent during the 2011-2012 school year.

Other federally funded student loans like the Perkins program will also stay at the fixed rates that were established by Congress.

But not all is constant in the area of student loans. Private loans, which are often taken out by people who don’t qualify for need-based aid, have fluctuating interest rates to reflect the economic climate. Hard times will call for increased interest rates.

Also, the number of private loan companies is getting smaller since many loan companies have consolidated or closed. Though the major lenders that Elon recommends such as Wachovia, Bank of America and Sally Mae are still around, smaller companies like My Rich Uncle and Student Loan Express have had to stop lending to students.

“Their source of money is drying up so they just can’t afford to stay in the game anymore,” said Pat Murphy, director of financial planning.
To compete for the private loans that are available, students and their parents are going to have to demonstrate a higher creditworthiness than they would have in the past.

“There are some people that may have been able to get a private loan that won’t be able to now,” Murphy said. “That problem is very school-specific, and it depends on the clientele that the school is catering to. It’s not been that much of a problem here at Elon.”

Some news reports have misleadingly stated that federally sponsored loans were going to see increases in interest rates. But what is really going on is loan companies are giving students fewer ways to lower the interest rates on those loans. For example, the College Foundation of North Carolina used to offer an interest rate below the federally set 6.8 percent if a student would pay the loan back early. Programs like this will dwindle, but the interest rate will not “rise” it will only return to the normal rate.

[Admissions]

Growing numbers of applications and improving class profiles has been the hallmark of Elon admissions for the past decade. Students who apply to Elon also apply to some of the most competitive public institutions in America — like UNC Chapel Hill, College of Charleston or James Madison University. Typically, Elon does well to compete for students with these institutions, but the economic slump could change that.

“Families will look at the change in the resources they have and see if they need to look at a private school or a public school,” said Susan Klopman, vice president of admissions and financial planning. This year, Klopman predicts that Elon will lose more applicants to public schools.

Elon's closest public rival, UNC Chapel Hill, offers in-state tuition for $5,397. But, for out of state students, Elon tuition is currently competitive, only charging $1,781 more than Chapel Hill's $22,295.

Despite economic challenges, Elon admissions had received more applications by September than they had at the same point last year. The school also had a historically high number of visitors, in spite of the Southeastern gas crunch. But the application process may not be where people are crossing private colleges off the list.

“It’s late spring [after financial aid is offered] when families will look at the bottom line,” Klopman said. A tightening loan climate will make getting money for college more difficult, primarily for families that don’t qualify for need-based scholarships.

To adapt to the economic challenges, Klopman predicts Elon will accept a higher number of students with the expectation that fewer will choose to enroll.

“The next class might have a different academic profile from previous years,” Klopman said. “But it won’t be dramatically different.”

Admissions will monitor the economic situation through the spring to regulate how many students to accept. Though the current situation looks grim, Klopman said she is thankful that there is time to prepare for the changes.

“Thank heavens it’s October and not March,” she said.

[Your Wallet]

If your checking and savings accounts are in an FDIC insured bank, then you are protected up to $100,000.

If your cash is in a money market or mutual fund then you don't have FDIC protection and you may risk losing a few cents on the dollar. You may also have limitations on how much money you can withdraw at a time.

If your credit card company fails, you still must pay your bills because those loans will be taken on by another lender. Banks looking to increase profits may issue more credit to you if you have a good credit score. But be wary of letting your spending limit get the better of you because you might have trouble paying those debts back in a struggling economy.