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The Financial Pressures of COVID-19 on Higher Education

Aug 3, 2020

In his Wall Street Journal op-ed, John Hasnas, Georgetown University professor, made some interesting points in defense of his intention to hold in-person classes this fall: “For the past four months, I have watched people younger than myself risk infection for my benefit. People have kept grocery stores open for me, cooked and delivered food to my home, worked in warehouses, loaded and driven trucks to deliver packages to me, worked in meat-processing plants and other links in the supply chain to ensure that I have what I need for a comfortable life and worked in hospitals so that I can get treatment if I get sick.”

For John, teaching in-person is the best learning experience he can provide, a personal responsibility on par with what others have been willing to sacrifice for him. Nonetheless, John does not have ultimate authority over his institution’s re-opening plans and most likely will not be held responsible if there is a coronavirus outbreak on his campus. Ultimately, it will be his employer who has to answer questions as to whether or not reasonable care was taken to protect others from harm. This leads to thorny questions for educational institutions going forward. What steps can they take to balance their various responsibilities and commitments to staff, students and the public, how can they manage expectations, and what is reasonable care during a pandemic?  

Surveys indicate that many parents and students alike are unwilling to pay standard tuition, room and board for online learning—especially in an out-of-state scenario. Equally challenging, no institution can provide certainty as to its ability to provide an on-campus experience, since state and local governments may compel them to move to online learning if new cases surge. 

Inside Higher Ed reports that nearly half of high school seniors are likely to defer enrollment or transfer colleges if faced with remote learning this fall. Others may take a gap year until full campus access and live instruction can be assured. How a school responds to the challenge of diminished demand and excess supply may depend on its financial strength. Since colleges and universities are required to submit financial reports to the U.S. Department of Education Integrated Postsecondary Education Data System (IPEDS) annually, this information is publicly available online through the National Center for Education Statistics. Data sets include breakdowns of each school’s revenue by funding source, spending by functional classification, assets, liabilities, as well as performance metrics such as retention rates and number of degrees awarded by program. In the case of institutions that are funded primarily through earnings on endowments versus tuition and fees, there is more flexibility. However, institutions that depend heavily on auxiliary service income from sources such as room, board and sporting events will face greater challenges. These anticipated revenue losses threaten the traditional higher education business model. Students and parents alike will want to be aware of how financially prepared an institution is to handle disruption. Just last fall, Moody’s downgraded the entire education sector stating that "over 30% of public universities and nearly 30% of private universities are already running operating deficits, and slightly over 5% of private colleges across the nation have 90 days or more of cash on hand to absorb any short-term losses.” Furthermore, the National Association of Independent Colleges and Universities has asked the Department of Education to stop publishing reports identifying colleges at risk of bankruptcy, which amounts to an estimated 30% of private universities.

In the face of declining enrollments, colleges are considering mergers. For example, Marlboro College transferred its assets to Emerson College in July. Other options include reducing staff and programs or simply dissolving. Such was the case of MacMurray College, a 174-year-old college that permanently closed in May after negotiating transfer agreements for its students with other institutions including Blackburn College, Eureka College, Greenville University, Illinois College, McKendree University, Milliken University and Monmouth College.

Even well-positioned schools with large endowments, such as Princeton University, are cutting budgets, freezing salaries, and not renewing contracts in response to declining revenues. As an indication of just how dramatically conditions have changed, Johns Hopkins University went from projecting an $82 million surplus for the next fiscal year to seeking budget cuts in hopes of mitigating a $100 million projected deficit.

Facing financial pressures, colleges and universities will have to provide clear and measurable opportunities for students that go beyond online courses in order to keep students. Educational institutions will want to be aware of and consider any practices essential businesses have in place to protect staff and students so that they may keep as many facilities open as possible. Networking opportunities, meaningful participation in research, publication credit and internships will have to be part of the package. Administrations, professors and teaching assistants will be expected to proactively reach out and connect with students at frequent and regular intervals. Students and parents alike will want to give careful consideration to an institution’s finances, transparency and demonstrated commitment to going beyond pre-packaged remote course offerings in weighing the cost versus benefit of college during a pandemic.  

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Susannah Prill

Susannah Prill is a Director in the firm. Her focus has been on business valuations in the context of, shareholder disputes, matrimonial and estate litigation.

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