Earlier this year, the start-up college advising company Edmit analyzed the financial health of 937 private institutions that participate in federal student loan programs. Taking into account the impacts of COVID-19, the company categorized 345 of those institutions (47%) as “low financial health” meaning the institutions are at risk of depleting their net assets.
To be sure, it has been a challenging year for higher education institutions, particularly the many private colleges and universities that depend, in part, on private contributions and endowment distributions to fund operations.
Washington is well aware of the fiscal crisis facing both public and private higher education institutions. Regardless of the ultimate outcome of legal challenges to the presidential election or senate runoff elections in Georgia, it seems likely that the coming year will include significant funding increases to address what the Chronicle of Higher Education characterizes as “Deep financial problems stemming from enrollment drops and increased expenses (which) have forced thousands of layoffs and left an unknown number of colleges teetering on the brink of failure.”
Based on our most recent interactions and conversations with higher education institutions, and what we are hearing from Washington, we’ve put together the following list of the major concerns we see facing institutions of higher education, whether public or private, over the next year, along with some financial strategies that may be helpful as you address each.
Challenges that Colleges and Universities are Facing
1. Planning for Changes in Federal Funding
Assuming Mr. Biden is inaugurated on January 20, 2021, “The Biden Plan for Education Beyond High School” provides a glimpse into the changes the new administration would like to see in the area of policies and funding for higher education.
Among these are significant investments in community colleges and incentives for students attending these institutions, increased funding for both public and private institutions serving low income or minority student populations, additional opportunities for student debt repayment and forgiveness, an increase in the maximum Pell Grant, and a “prioritization of work-study funds for job-related and public service roles.”
While these and other changes described in the Biden Plan will not take place overnight, management teams at each institution should immediately begin assessing how changes to federal policies and funding may impact enrollment and program delivery.
2. Federal Stimulus and Related Reporting Requirements
Earlier this year, all institutions that receive Title IV student aid funds were eligible to receive a minimum of $500,000 from the Higher Education Emergency Relief Fund (HEERF) and/or other grants to cover a portion of program delivery and IT infrastructure changes needed to continue operations in a post COVID-19 world.
However, as the first semester of the 2020 – 2021 school year draws to a close, it’s obvious that the actual costs for this new delivery model far exceeded these grants and other funding received, and it did not begin to cover the additional costs of social distancing and other safety measures taken in student housing, dining and other auxiliary operations.
As I am writing this article, the current administration and both houses of Congress have expressed a desire to pass another COVID-19 stimulus package before year end that is sure to include a second round of much needed stimulus money for higher education.
Each COVID-19 related grant or loan includes specific, seemingly ever changing compliance requirements that must be met by all recipients. In an attempt to assist institutions in understanding the compliance requirements, the Department of Education has issued a series of constantly evolving Frequently Asked Questions (the third round of these questions was published in October).
Therefore, regardless of whether additional funding is provided, institution administrators must be ever mindful of additional information that may be forthcoming from the Department of Education.
3. The Impact of a Fluctuating Stock Market
While the stock market has recovered since its meltdown following the coronavirus outbreak and a global price war over oil, there’s no telling what the upcoming year will bring.
According to the National Association of College and University Business Officers, nearly three-quarters of the $630 billion in endowment funds at U.S. universities and colleges is invested in stocks.
As a result, if the market takes another downturn, endowments could suffer significant losses this year, possibly impacting spending policy distributions that many institutions depend on, along with federal and state grants and student tuition and fees, to fund operations.
4. Potential Decreases in State Funding and Funding from Private Foundations
Cuts in state funding and decreased allocations from lottery proceeds for higher education has pushed more of the cost of a college education onto students, at both public and private institutions, long before the coronavirus pandemic. To illustrate, according to the Center on Budget and Policy Priorities, overall state funding for public two-year and four-year colleges in the 2017 – 2018 school year was more than $6.6 billion below what it was in 2008.
The coronavirus pandemic and resulting economic fallout are sure to lead to lower tax and lottery revenues for states and further decreases in state subsidies for higher education.
5. COVID Related Loss of International Student Enrollment
According to the 2019 Open Doors Report on International Educational Exchange, a publication of the Institute of International Education and the U.S. Department of State’s Bureau of Educational and Cultural Affairs, in 2019 more than one million international students were enrolled in America’s public and private institutions, “making up approximately 5.5% of the total U.S. higher education population.”
While the annual growth in the number of foreign students has slowed in recent years because of federal policies that discouraged foreign students from coming to the United States, most institutions have become increasingly reliant on revenue from these students to fund operations.
With the additional restrictions on international travel caused by COVID-19, many institutions saw further decreases in international enrollment (and corresponding revenue) in the fall of 2020.
Critical Financial Strategies for Higher Education Institutions
To ensure stability in the short term, institutions will likely need to restructure certain operations quickly. Here are a few recommendations to consider.
1. Focus on Cash Flow
Create a cash flow budget that defines the inflows and outflows of cash through the next year. For some, this may be easily accomplished within your financial accounting software or through use of a simple Excel schedule. For others, sophisticated financial modeling will be needed to project cash needs.
Regardless of the sophistication of your budgeting model, make sure that it covers various scenarios, such as refunds, cuts in federal and state funding, unexpected decreases in enrollment and dollars already committed to fund capital projects. The plan can be continually adjusted throughout the school year as new data comes in.
Once a cash flow budget that is flexible enough to address known and likely changes to revenue streams and other fixed costs has been established, the administration, board and faculty can begin working together in responding to any needed budget revisions and potential cost cutting measures.
2. Rethink Endowment Spending
Most institutions have an established endowment spending methodology that provides for an annual draw based on some established metric (such as average market value over a set number of quarters).
Market volatility could impact the draw available to fund current operations and, in an effort to cover short-term operational deficits, some boards may choose to permit draws in excess of their established spending policy. In making this decision, institutions will need to weigh the short-term benefit of excess draws from accumulated earnings against the potential erosion of the overall endowment fund.
In extreme circumstances, institutions may also consider borrowing from their endowments to shore up liquidity or reach out to donors of restricted funds for help. If a donor gives permission to unrestrict an endowment, the institution is free to use these funds to cover deficits or provide additional liquidity resources.
3. Look for New Revenue Opportunities
Some universities have found new revenue opportunities by offering empty dorm rooms for use as temporary hospitals or housing for healthcare professionals. If the campus is forced to close, new revenue opportunities can help offset refunds.
4. Ensure Refund Policies Address School Closures
Most institutions have policies in place that cover refunds when a student withdraws, but few have ever contemplated the need for policies to address refunds when the school is forced to close due to the spread of a virus or is required to close by the state.
In these uncertain times, administrators should consider reviewing all existing policies and discuss revisions with legal counsel as needed.
If the campus must close for a semester, administrators should explore the possibility of offering credits of non-federal payments received from students rather than refunds.
To illustrate how this may work, last spring, the University of Alabama offered a prorated refund for room and board and parking. Students could take a cash refund immediately or receive an additional 10% account credit if they applied it to the fall semester.
Connect with an Advisor for Financial Strategies Tailored to Your Higher Education Institution
If planning for these uncertainties leaves you questioning what your next move should be, Warren Averett’s trusted advisors can help. Contact your Warren Averett advisor today to get the conversation started or ask a member of our team to reach out to you.