A undated file photo shows the one of the buildings in Harvard Universtiy.  Harvard University is considering spending cuts because the economic slowdown may reduce federal grants and the school's substantial endowment, President Drew Faust said Monday.

Harvard University is considering spending cuts because the economic slowdown may reduce federal grants and the school's substantial endowment, President Drew Faust said Monday.

Harvard's endowment posted an 8.6 percent return and grew to $36.9 billion in the fiscal year that ended June 30. The school, however, lost 12.7 percent on its U.S. stock portfolio and 12.1 percent on its foreign equity portfolio during that time.

Still, Faust warned in an e-mail to faculty, staff and students that "we must recognize that Harvard is not invulnerable to the seismic financial shocks in the larger world. Our own economic landscape has been significantly altered."

"We need to be prepared to absorb unprecedented endowment losses and plan for a period of greater financial restraint," she said.

Harvard's is the nation's largest university endowment and provides about a third of the annual operating budget. Faust said the school is looking at ways to cut spending and will review compensation costs, which account for nearly half of the budget.

Harvard also is reviewing its ambitious expansion program, including plans announced early last year to expand across the Charles River from its Cambridge campus into Allson, she said.

"We will need to plan and act in ways that reflect that reality, to assure that we continue to advance our priorities for teaching, research and service," she said.

The school intends to implement initiatives to make education affordable to students from low- and middle-income families, and will ensure that those with income below $60,000 will pay nothing to send children to Harvard College. Those earning up to $180,000 can expect to pay no more than about 10 percent of their income, she said.

Harvard's efforts to address the economic downturn mirror what is happening elsewhere in the country, including other Ivy League schools. While wealthy schools can fare better in a downturn, they are also seen as vulnerable to prolonged market slumps because they tend to fund a greater portion of their budget from their endowment.