NEW HAVEN, CONN. - An investment fund that serves about 1,000 colleges and private schools partially froze withdrawals this week amid the credit crunch, forcing colleges to develop new plans to pay bills.

Wachovia Bank, trustee for the $9.3 billion Short Term Fund offered by Commonfund, said Monday that it was terminating the fund and establishing a process to ensure the orderly liquidation and distribution of the fund's assets. Wachovia initially told investors Monday that they could withdraw only 10 percent of their money, but that figure was increased Thursday to 37 percent.

Commonfund, a Wilton, Conn., nonprofit that advises colleges and schools on money management, also said Thursday that it put a 30 percent limit on withdrawals from its Intermediate Term Fund after investors in the Short Term Fund tried to withdraw money from that fund, said managing director Keith Luke.

About 200 colleges and universities have about $1 billion in the intermediate fund, which is used for long-term needs, such as equipment plant purchases, he said.

"We just didn't have the liquidity in the fund to do that," Luke said. "We will relax that as soon as market conditions permit."

Partially freezing the Short Term Fund as officials prepare for liquidation prevents a run on money and protects investors, said Laura Fay, a Wachovia spokeswoman.

"It was not something we took lightly," Fay said. "In this environment, we felt this was the best way to proceed."

Wachovia's move prompted college officials to tap other accounts and raised concern schools may not have enough cash to pay bills.

Elon University had $46 million in the Short Term Fund as of three days ago, and was forced to dip into other funds.

"We are going to use the liquidity we have elsewhere to supplement what redemptions we were able to get to pay the bills we need to pay for," Gerald Whittington, vice president for business, finance and technology at Elon, told Bloomberg News.

Some colleges are securing lines of credit because of the restriction on accessing money from the short-term account, said Matthew Hamill, senior vice president of the National Association of College and University Business Officers. That means borrowing costs that effectively reduce their rate of return in the original investment, he said.

Hamill said that he does not expect the issue to affect students and their families and noted that the crisis has eased somewhat with a greater percentage of cash allowed to be withdrawn.

"I think most institutions are feeling far more confident in the short run the fund will be there for what its needs are," Hamill said. "The remaining question on everyone's mind is exactly when the remaining balance in the account will be available."

The fund provides returns slightly above U.S. Treasury bills. About 85 percent of the fund was invested in high-quality commercial paper from blue-chip companies, while the rest is in securities backed by mortgages and other assets, Luke said.

Amid the housing industry slump and turmoil affecting banks and credit markets, such investments have become increasingly unpopular as investors seek safer options such as Treasury bills.

"Credit markets have frozen, which has made trading of even the highest quality short term financial assets impossible at virtually any reasonable price," Commonfund wrote in a letter to clients Wednesday. "In light of these markets, we believe that the trustee feared that a sudden increase in redemptions could force a liquidation of securities in a frozen market and decided to take pre-emptive action."

Fay said Wachovia's decision was not affected by last week's announced $2.1 billion deal for Citigroup to buy Wachovia's banking operations.

Wachovia's decision to slowly liquidate the fund is designed to prevent a rush by investors. When a fund sees such a rush, fund managers must sell assets -- typically at a loss when it must be done quickly, and especially amid the recent market turmoil.

A slow liquidation helps protect investors' returns and ensure each investor is treated equally.

Congressional lawmakers are working on a financial rescue package. If it passes, advocates say, that would allow frozen credit to begin flowing again and prevent a serious recession.

By the end of the year, investors in the Short Term Fund will be able to withdraw at least 57 percent of their money, Luke said. Asked if investors will ultimately get all their money back, Luke said, "We certainly expect that."

Commonfund is working with the colleges and schools to help them find alternative sources of financing, Luke said.

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