In periods of crisis, we often look to history to guide us. Throughout the COVID-19 global pandemic, experts have drawn comparisons to the 1918 influenza pandemic, the Great Depression, and most recently, the 2008 Great Recession. Given its recency, many in the higher education community rely on their experiences in the Great Recession to both project the financial consequences of the widespread disruption of COVID-19 and to seek inspiration for effective responses. Now that we have officially entered an economic recession, these comparisons feel all the more appropriate.

Yet, as the global pandemic continues, the playbook that the higher education sector used to recover from the Great Recession feels increasingly less relevant. Today, the compounding effects of the pandemic’s economic, social, and health emergencies not only deepen higher education’s financial hardships, but also introduce unprecedented restrictions and challenges. Revenue sources once considered secure are now in jeopardy, and to return to campus, institutions will have to spend significant amounts to create safe learning, living, and working environments for students and staff. In this post, we explore how today’s crisis deviates from the Great Recession, and why these circumstances render the Great Recession playbook obsolete. The crisis facing institutions of higher education today necessitates a bold federal response and institutional innovation, the likes of which we have not yet seen.

In 2020, the higher education sector’s starting point is different

The higher education sector entered the Great Recession in a relatively stable position. Although state funding slightly declined throughout the early 2000s, enrollment steadily increased, bolstered by the large millennial generation. Unlike recent trends, public confidence in higher education was steadily high. As the Great Recession unfolded, higher education also benefited from a counter-cyclical increase in enrollments (i.e., when the economy declines, enrollment increases), which meant that colleges and universities were able to boost revenues through enrollment and tuition price increases, thereby countering declines in government and private support.

When the COVID-19 pandemic and corresponding financial crisis struck in early 2020, however, both institutions and students were still feeling the effects of the Great Recession more than 11 years later. Since the Great Recession, list tuition prices have risen more rapidly than the average net price, or total cost minus grant aid, at both public and private colleges. This trend reflects an increase in tuition discounting, whereby colleges and universities offer more need-based aid to low- and middle-income families to offset list price increases. Rising prices also dilute the Pell grant, which despite a 12 percent increase in the maximum award between 2008-09 and 2018-19, now covers a smaller percentage of average tuition.

At public institutions, reductions in government support and rising prices have increasingly shifted the burden of paying for college from the state to students and their families. The share of revenues at public institutions coming from students and their families rose to 46 percent in 2019 from 36 percent in 2008. In Delaware, New Hampshire, and Vermont, students and their families are paying more than 75 percent of the higher education revenues. Yet, at a time when students and their families are contributing more, family resources have still not fully recovered from the effects of the Great Recession.

These price increases have had notable impacts on both degree attainment and debt levels for students, exacerbating prior inequities. Since the Great Recession, bachelor’s degree attainment has risen much more sharply for students in the top two income quartiles than students in the bottom two, and Black students have continued to graduate at lower rates than their white peers. As these gaps in attainment levels persist, so do disparities in student debt levels. On average, Black families lost close to half of their net worths in the Great Recession, widening the already staggering Black-white wealth gap. Further disadvantaged by racial wealth disparities, Black students are more likely to rely heavily on student debt, and on riskier forms of debt, than white families, and Black students that borrow drop out of college at higher rates than white students that borrow. These myriad racial disparities are compounded by the disproportionate infection rate of COVID-19 in Black communities, leaving Black students even more vulnerable to the spillover effects of the pandemic.

The circumstances of the pandemic require a different financial response

Fundamental differences between the Great Recession and today’s global pandemic mean that the financial levers used by institutions during the Great Recession to maintain solvency may not be effective in today’s environment. Below, we outline three of the levers that institutions pull to address financial challenges, describe how institutions used those levers to respond to the Great Recession, and discuss why those responses are misaligned with current circumstances.

Financial lever #1: Increase revenues to offset widespread declines.

What was the strategy after the Great Recession?

Following the Great Recession, many colleges and universities increased net tuition revenue to counter declines in state funding, endowment values, and donations by raising tuition prices, and/or maintaining or increasing enrollment.

Why do those strategies not apply in 2020 and beyond?

The context of the last 11 years is just one of several reasons why institutions face significant headwinds in raising tuition prices as a strategy for bolstering revenue like they did in 2008. Fears of weakening demand at high-priced, four-year institutions are inducing institutions to offer tuition waivers, freezes and additional scholarships. Students—particularly those at four-year, residential institutions—may not be willing to pay the same high price for online or hybrid learning, as indicated by lawsuits filed this spring demanding tuition refunds.

In addition, the extent to which institutions can rely on a counter-cyclical increase in enrollment to supplement tuition revenue is still very unknown. Even before the pandemic hit, the enrollment picture for many colleges and universities looked bleaker than before. Demographic projections through the end of this decade estimate a greater than 10 percent reduction in traditional-age students.

The global pandemic introduces a host of unanticipated enrollment challenges. While some community colleges and public institutions may see healthy enrollment as traditional-aged students opt for lower-cost alternatives, early indications suggest shifts in enrollment patterns for many institutions:

Financial Lever #2: Cut spending to lower budget deficits.

What was the strategy after the Great Recession?

Many colleges and universities sufficiently decreased expenditures by suspending new faculty hiring, enacting salary freezes, and—particularly at public institutions—relying heavily on part-time or adjunct faculty.

Why do those strategies not apply in 2020 and beyond?

Early indications show that numerous institutions have adopted similar cost-reduction strategies to those used after the Great Recession. Many colleges have implemented furloughs, hiring and salary freezes, and early retirement incentives. Yet, the global pandemic imposes distinct spending and staffing demands on institutions that challenge their ability to cut costs meaningfully:

Financial Lever #3: Rely on diversification of revenue streams for sustainability.

What was the strategy after the Great Recession?

Many colleges and universities—especially those that are primarily residential—leveraged auxiliary revenues and other revenue streams to bolster institutional finances.

Why do those strategies not apply in 2020 and beyond?

For many institutions, auxiliary enterprises like facility rentals, intercollegiate athletics, and room and board, provide significant revenue to the operating budget. During and immediately after the Great Recession, auxiliary revenues remained a steady source of funding for many colleges and universities. Today, the global pandemic poses a distinctive threat to almost every auxiliary enterprise. Four-year, residential institutions that rely more heavily on these revenue streams may be hit particularly hard by these losses. Already, many institutions have lost millions of dollars by offering prorated room and board refunds to students for the spring semester and canceling on-campus summer programs. The extent to which the revenues from these enterprises decline will hinge on whether colleges are able to resume in-person, on-campus activities in the fall. Sources of auxiliary revenue that currently hang in the balance include:

  • Room and board: If institutions remain online in the fall, or adopt distancing measures that limit the number of residents on campus, they will face further reductions in revenue from housing and dining, a phenomenon that will hurt small, residential colleges acutely.
  • Athletics: Athletic events and programs will likely be interrupted by the pandemic. Major athletic programs may find ways to play, generating some revenue, but smaller programs may lack the necessary resources to do so. At these institutions, where athletics largely serve as an enrollment draw, discontinuing programs may have adverse effects on enrollment.
  • Medical Centers and Services: For a minority of four-year institutions, revenue from medical services at affiliated hospitals and centers supplements auxiliary revenue. Medical providers have been stretched in both directions, sacrificing revenue from elective surgery to provide sufficient capacity for COVID-19 treatment, and increasing expenditures on necessary items such as PPE and COVID-19 testing. A second wave of COVID-19 could prolong these effects.

The state and federal government response will be crucial—and needs to be sufficient

The magnitude of the financial fallout from COVID-19 for colleges and universities necessitates bold federal intervention that surpasses federal and state responses to the Great Recession. Today, state governments, which provide the largest share of government appropriations for higher education, are facing severe revenue losses and expecting cuts to higher education appropriations far greater than those enacted during the Great Recession. To mitigate these losses, states—which cannot run deficits or borrow money—need the federal government to step in. So far, the federal government has invested $14 billion in higher education emergency relief funds through the CARES Act and has distributed $3 billion to governors and state governments to support in-state K12 and postsecondary institutions. These funds represent a small fraction of the losses experienced by institutions today.

Many would argue that state and federal investment after the Great Recession was insufficient, which led to an increased burden on students to fund their education and ballooning student debt levels, conditions that exacerbate the severity of our current crisis. After the Great Recession, the federal government infused approximately $30 billion of additional funds into higher education through various channels, including increasing the maximum Pell grant and overall Pell expenditures, providing stimulus funds to colleges through the American Recovery and Reinvestment Act, and augmenting federal budgets in 2009 and 2010.[1] Yet, this stimulus failed to counter precipitous drops in state spending. Declines of 29 percent (in real terms) in state funding per student between 2008 and 2012 significantly undercut the 15 percent increase in federal spending per student during that same period. While state funding levels have begun to slowly rise since 2012, in most cases, they have not yet returned to pre-recession levels.

To avoid these same pitfalls, federal support for higher education must be bigger and bolder. Higher education advocacy groups have requested an $47 billion in stimulus funds, in addition to the $14 billion in CARES Act funds, to address near-term campus financial needs, while experts propose congress provides double that amount to institutions, both to accelerate recovery and make the necessary investments to kickstart innovation and promote cross-sector collaboration. The HEROES Act, which passed the House of Representatives in May, would allocate an additional $37 billion for colleges and universities, but there are no guarantees the bill will pass the Senate. These funds would provide a critical lifeline to colleges and universities, particularly public institutions, but may not be sufficient to ensure that higher education survives the pandemic.

In response to COVID-19, the path forward for all institutions will depend not just on the state and federal fiscal response, but also on the public health response. Unfortunately, in both cases, early indicators suggest that these responses have been insufficient so far. Insufficient public health responses prolong the pandemic, which, in addition to inflicting individual harm on hundreds of thousands of Americans, lengthens and expands the pandemic’s economic harm and makes reopening college campuses more difficult.  And much like the Great Recession, insufficient fiscal responses, especially from the federal government, will negatively impact higher education affordability, quality, access, outcomes and much more.

Government and higher education must collaborate and innovate

The public health and fiscal challenges facing higher education have no historical precedent, not the Great Recession or any other period. The expected revenue losses—both from tuition, auxiliary, and government sources—will most likely be deep and prolonged. And, the strategies for addressing those losses must meet the uniqueness of the moment: federal investment in higher education and its students and families must expand materially, federal and state governments must coordinate to coherently address public health, state governments must raise new revenues and make smart investments, and institutions must innovate to reduce costs, protect public health, and maintain quality.  The challenges are immense, but with sufficient government support, may be surmountable.

What are some other ways that the pandemic circumstances have changed the higher education response? Let us know in the comments.

 

[1] The $30 billion increase in federal funding for higher education represents the sum of net increases in funding for federal Pell grants, federal research grants, and federal veterans educational benefits between fiscal years 2008 and 2010, as presented in the Pew Trust’s “Two Decades of Change in Federal and State Higher Education Funding.”