The coronavirus pandemic has unleashed financial pain onto colleges across the U.S. that could cost up to $100 billion over the next five years, according to a new study by the Federal Reserve Bank of Philadelphia.
On top of losses in state and local appropriations from declining enrollment and revenue as colleges pivoted to remote learning, the discussion paper estimated that the cumulative revenue loss could be between $70 billion to $115 billion over the next five years.
"The extent of revenue losses depends crucially on assumptions about the pace of the economic recovery," the report stated. Losses were estimated to be most severe at schools with fewer than 1,000 students, Historically Black Colleges and Universities (HBCUs), and certain for-profit institutions while public, private non-profit, and rural colleges were estimated to experience moderate losses.
In doing the study, "our motivation really was to try and shine a light on how much [fiscal] pressure colleges are going to expect, and also how pain is distributed across different types of institutions," Dubravka Ritter, an adviser and research fellow at the Consumer Finance Institute at the Federal Reserve Bank of Philadelphia, told Yahoo Finance.
"And it's been a bit of a shock to us all, looking at the enrollment drops and how those might flow to net tuition revenue, and then the reduction in activity on campus and spending on higher education that we take as indicators of reductions in the auxiliary revenue," Ritter, who co-authored the report, added. "When you think about $100 billion for an industry, that's quite a significant number."
'Colleges and universities already have really slim margins'
Colleges have three key revenue sources, the study noted, which vary significantly depending on the institution: Net tuition revenue, which is tied to enrollment; state and local funding; and revenue from auxiliary sources, such as residence halls and events.
Using historical data on how states have dealt with previous downturns combined with pandemic-induced trends, the authors arrived at the billion-dollar estimates.
The study acknowledged that some schools benefit from private gifts and endowment returns, revenue from the federal government, or from its hospitals. But these "play a lesser role for public institutions, which tend to have significantly smaller per-student endowments than private colleges," the researchers stated, and endowment assets "are heavily concentrated at a small number of universities, with just five institutions holding more than one-fifth of all endowment dollars in the United States."
For the rest of the country, the losses will be felt more acutely, Ritter said.
"Colleges and universities already have really slim margins," she explained. "We're talking very low single-digit margins, if they're lucky. And a lot of them are already running deficits, even in 2019, before any of this started."
According to an S&P Global Ratings report published on Thursday, while two-thirds of the colleges they cover experienced enrollment declines, only 32 schools — which were mostly private, and five public colleges — saw severe declines of 10% of more.
Even though many colleges had access to federal aid from the coronavirus relief packages, which "definitely helped," said Ritter, it obscured the real losses the schools are likely to confront in the coming months and years, so "it's almost like it's painting a rosier picture than it really is," she added.
'Just piling on'
When it comes to schools that will likely be hit the hardest, it was a mix, the study found.
Some private colleges have their endowments as a buffer, along with significant donor support, but the smaller non-profits will face a tough road ahead, Ritter said.
While the study didn't look at community colleges specifically, "it's a fairly similar effect" to four-year public colleges, she said, and given that they rely on nontraditional students, "it's just a perfect storm" because the students have experienced difficulties with income and childcare.
Colleges with less than 1,000 students are more likely to be hit with losses, as well as HBCUs — nearly half of which are projected to have 25% or more cumulative six-year losses. The study attributed the loss to HBCUs pivoting to remote learning for the 2020-2021 academic year.
Rural colleges, on the other hand, are likely to fare much better, since many operated via in-person classes throughout the pandemic.
"We can't look at the sector as a monolith," Ritter said. "We have to think about these disparate impacts and unfortunately, HBCUs and the general schools that serve first-generation and minority students tend to be located in areas that have been harder hit by COVID and their students and their families have been harder hit by COVID. So it's just piling on in an already really difficult situation for the school."
And while colleges are responding to this financial pressure with cost-cutting measures, such as closing programs, the future isn't a bleak spate of closures.
"We always over-predict college closures and mergers because we see institutions in a precarious financial position and in any other industry, that entity wouldn't be able to survive," she explained. "But in higher education, we sort of understand that universities and colleges and all post-secondary education has a social value beyond an individual value."
And if a college does end up in a precarious position, "sometimes the local community or the local government, or philanthropy steps in and prevent that closure," she added. "So our models are just not very good at picking that up."
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Aarthi is a reporter for Yahoo Finance. She can be reached at aarthi@yahoofinance.com. Follow her on Twitter @aarthiswami.
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