Finding Solid Ground: College Finances in Changing Times

However, no one has a crystal ball, and in fact, some of the current news is positive. The best strategy for colleges is to plan for different possible scenarios: financially, in enrollment numbers, in state funding, and in how budgets may need to change.

Flexibility has been the name of the game for institutions during Covid, and in finances, this is also true. Cutting budgets without damaging the institution’s reputation or core programs is hard, so careful consideration of the impact of cuts is required. Keeping enrollment healthy is challenging during such massive shifts, but tuition revenue is an integral part of the equation. Understanding an overview of higher education financial scenarios can help all departments, especially admissions, think deeply about what they can do to help shore up institutional finances.

Tuition as a Revenue Source

For private 4-year colleges, net tuition revenue is the largest source of income, and it is a close second for public 4-year institutions. During recessions, schools have raised published tuition rates, yet the amount of aid given to students has also gone up, meaning very little of that increased tuition sticker price has ended up in coffers. The enrollment crunch has been decreasing enrollments overall, and this is exacerbated unevenly by the pandemic. While 4-year institutions have not seen a precipitous drop in enrollment, 2-year colleges have seen a more significant drop during the pandemic. During previous recessions, enrollment has increased, especially at 2-year institutions, but it has been different this time around with the economic downturn caused by the pandemic.

Government  & Donor Funding Trends

Though funding levels have gradually increased, it has not erased the drastic cuts to state and local support for public higher education that happened after the Great Recession of 2008.  Per-student funding rose almost 3% in fiscal year 2020, yet Covid-19 put further strains on state budgets, causing some to cut assistance to higher education in 2020 and 2021. However, federal relief made up some of those shortfalls for many institutions. If past recessions are any guide, higher education may see more cuts in the near term due to pandemic downtrends in state revenues. Still, there is some hope that a quick recovery from the pandemic will lift state budgets and higher education reasonably quickly thereafter.

Private nonprofit colleges get nearly one-third of their funding from returns on endowments or gifts, and this is a volatile funding source that fluctuates with the market. Public institutions are less reliant on this type of income source. Most endowments spend about 4% to 5% of their value every year, and most schools do not plan to raise that amount to fill shortfalls in other revenue sources. This income has remained relatively stable throughout the pandemic.

Trouble for Auxiliary Funding

Auxiliary funding sources include dining, housing, athletics, hospitals, and other on-campus revenue streams not associated with learning or research. Private liberal arts colleges typically derive 20% or more of their revenue from these services.  Hospitals account for a large part of the revenue for large institutions with attached hospitals, such as Temple University, Ohio State University, and Stony Brook University, among many others, receiving at least half of their revenue from hospitals. These normally stable auxiliary sources of income took major hits when campuses closed down in the spring of 2020. Colleges had to refund money paid toward housing and dining, plus shutter athletic facilities. In addition, hospital revenue was down due to the cancellation or postponement of elective and nonessential procedures, which generate a significant part of their proceeds.

Higher Ed Budgeting in Uncertainty

According to Paul Friga, writing in The Chronicle of Higher Education, the average decrease in revenue for 107 of the top 400 colleges and universities was an estimated 14%. Not only did colleges have declines in enrollment and need to provide tuition discounts, but the pandemic brought on many additional costs.

Though the finance picture is not entirely bleak due to federal dollars to support institutions, many are feeling the budget crunch. With students struggling to pay tuition, some institutions cut tuition prices to bolster enrollment, calculating that it will pay off in the long run. Others are freezing staff hiring or cutting programs and looking for efficiencies to help them deal with budget shortfalls.

With the pandemic closing campuses, many of the furloughed employees were in dining and other service jobs, which have higher concentrations of POC workers. Staff cuts that primarily impact POC send a negative message about the institution’s support for diversity in the workplace. While some institutions are looking at cutting costs through shedding faculty, this is sensitive as well.

The problem with cutting departments and programs, even ones that aren’t real money-makers, is that it can harm the institution’s reputation. Even if philosophy is not projecting many jobs for graduates, having a solid philosophy department can be the difference between a school heading towards being a trade school and one continuing in the tradition of education as a broad benefit to society and individuals. So any cuts need to be done carefully.

The Upshot

The financial future for higher education is still unpredictable, though one solid prediction is that balancing budgets will continue to be a challenge. Many sources report alarming forecasts, but there is hope that the worst-case scenarios are unlikely to play out. The pandemic changed so much about education, and figuring out how these changes will affect finance is complex, with individual institutions finding different solutions to fit with their priorities and realities on the ground. The best practices for budget planning now are to lay out multiple possible future scenarios. Numerous options for budget changes can help institutions be as prepared as possible for the uncertain future and keep our valued educational institutions a thriving part of the economic recovery.