Study: Amid Pandemic, U.S. Colleges More Financially Vulnerable Than International Peers - Higher Education

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Study: Amid Pandemic, U.S. Colleges More Financially Vulnerable Than International Peers

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U.S. colleges and universities are more vulnerable than international peers to financial hardships caused by coronavirus-related shutdowns, says a new report. 

Though schools across the globe are expected to see lower enrollment and lost income from ongoing campus closures, U.S. institutions will likely experience more stress due to their reliance on state funding, endowment investments and international students, according to a new report by Moody’s Investors Service, a bond ratings agency.

Moody’s is forecasting a 2% contraction in U.S. GDP in 2020, which means states’ revenue will likely take a significant hit in the near future. When it comes to appropriations, states may have to prioritize other priorities, such as healthcare, before education. 

As a consequence, public universities in the U.S. will be particularly vulnerable, as they will likely see funding from states dip. “State funding cuts represent an immediate risk for some U.S. universities,” says Moody’s.

In fact, some states are already moving in that direction.

New Jersey, for instance, on March 23  announced a budget freeze of $900 million, which includes university funding. Likewise, Missouri has frozen $180 million in planned spending, restricting $61.3 million from four-year higher education institutions and $11.6 million from community colleges.

Some state schools are bracing for predicted funding cuts.

The University of Colorado system’s leaders decided earlier this month to not vote on the system’s 2020-21 budget — which includes student tuition and fees as well as employee pay — after forecasts predicted the state will see a $2 billion shortfall, with a 10% and 20% reduction of state funding at each campus. Meanwhile, Arkansas’ 12 public four-year universities and 22 public two-year colleges face a projected loss of roughly $23 million in state student support.

State budget freezes can be especially bad news for public HBCUs (historically Black colleges and universities), which remain “woefully underfunded,” despite the passage of the FUTURE Act in December.

Compared to their non-HBCU counterparts, public HBCUs rely more heavily on federal, state and local funding. In fact, according to the American Council on Education, 54% of the overall revenue for public HBCUs is comprised of government funding as opposed to 38% for other schools.

In response to state budget freezes and impending cuts, Dr. Robert E. Anderson, president of the State Higher Education Executive Officers Association, wrote a letter last week to House Speaker Nancy Pelosi, House Minority Leader Kevin McCarthy, Senate Majority Leader Mitch McConnell and Senate Minority Leader Chuck Schumer, urging “immediate action to stabilize state investments in public higher education stemming from the economic fallout of COVID-19.” 

As one course of action, Anderson recommended that Congress “direct grants to governors with funds specifically earmarked for public higher education in the next stimulus bill.” 

The letter comes after many higher education groups criticized the previous $14 billion earmarked for colleges and universities in the coronavirus stimulus package as insufficient. 

Not only are U.S. higher ed institutions more vulnerable to government funding cuts than other countries, such as Canada and the U.K., they are also more vulnerable to the weakened financial markets, says Moody’s.

That’s because American educational institutions, unlike their international peers, rely more on endowments, which are invested in equity markets. According to the ratings agency, investment income comprises 9% of total revenue for private universities and 2.5% for public universities. 

In fact, last month, The Hechinger Report reported that roughly 75% of the $630 billion in endowment funds at U.S. universities and colleges is invested in stocks, which have plummeted as a result of the pandemic. This could be bad news for universities who rely disproportionately on their endowment investments. It could also bring bad news for U.S. schools that tend to depend more on gifts, which may decrease as donors watch their dollars.

For that reason, the report forecasts that universities with “more diverse revenues, higher margins, stronger expenditure flexibility and stronger liquidity” will fare better than schools with weaker credit profiles.

Meanwhile, U.S. universities are also more dependent on international students than many of their international counterparts.

Currently, the U.S. hosts roughly a quarter of the world’s international students, more than any other country. International students comprise 5.5% of all university students in the U.S. That number is significant is because they typically pay full tuition rates, contributing more to a university’s bottom line than a domestic student does.

In the coming year, Moody’s expects the international student population to likely decline, given that the coronavirus will hamper the global economy, thus raising the study abroad price tag, and creating general unease about venturing far from home. And if countries such as China — which accounts for 23% of the international student population worldwide — aren’t able to remove travel restrictions soon enough, mobility itself may remain a barrier. 

Fewer international students could create significant challenges for systems like the University of Washington, whose Seattle campus is home to more than 8,000 international students, most of whom pay tuition that’s three times higher than what in-state students pay.

The report says the impact on a country’s international student population could also vary greatly depending on how international students perceive a given government’s response to the outbreak. 

“If the U.S. response to the outbreak leads to a more widespread and prolonged outbreak relative to other key international markets, leading to a perception that it is less safe than its competitor countries, students may instead opt to study in Australia, Canada, or the UK,” states the report. “Over the next year, international student demand will be even more affected by national reputations.”

Analysts at Moody’s said that all economic projections still depend on the severity and length of the pandemic, which, as of Monday, has led to 1,860,011 positive cases worldwide, 557, 590 of which are in the U.S.

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