Higher education financing has faced monumental challenges from the COVID-19 pandemic and the resulting economic disruption. State budgets experienced a $22 billion shortfall last year, and higher education funding often ended up on the chopping block. At the same time, postsecondary enrollment declined by almost 3% and institutions faced increased pandemic costs. As policymakers confront these challenges, there is an opportunity to prepare for future periodic recessions. Only a solution that proactively addresses this reality can ensure consistent funding, through thick and thin, for the higher education system and the students it serves.
The story of state higher education finance over the past few decades is ripe with déjà vu. As states have struggled to maintain consistent per-student resources, institutions have become more reliant on tuition revenue. This dynamic drives up tuition prices and contributes to a lack of affordability for students.
Recessions punctuate this pattern and heighten these funding challenges. Because states have balanced budget requirements, when a recession hits, they pull back on their spending, and postsecondary education is often among the early cuts. Institutions have historically relied on the increase in enrollment that typically occurs during a recession to generate additional tuition revenue to smooth funding gaps. But this stopgap is not guaranteed: Enrollment actually declined during the COVID-19 pandemic.
During the past few recessions, the federal government stepped in to provide emergency support for postsecondary institutions. Following the Great Recession, higher education received $10 billion in relief, just a fraction of the $54 billion allocated in response to the COVID-19 pandemic.
Policymakers rightly acted to support a system in crisis, but these pricey Band-Aids are not a sustainable solution. They leave the system—and students—susceptible to the political winds. Moreover, this emergency spending is difficult to calibrate in the moment. Only a long-term strategy to support consistent state investment in higher education can break the cycle of recessionary cuts and expensive emergency spending.
BPC’s Task Force on Higher Education Financing and Student Outcomes proposed creating a rainy day fund to mitigate this issue. States participating in a new federal matching grant program would have a portion of their matching funds set aside to be drawn upon in the event of a recession. This would both relieve pressure on state budgets during recessions and ensure states continue to qualify for additional matching funds.
This is one approach, but there are other proposals that achieve similar aims. For example, The Institute for College Access & Success recommends providing states that maintain funding during recessions with a more generous federal match. Likewise, the America’s College Promise Act and the House-passed Build Back Better legislation would decrease the required match for states during recessions while maintaining federal funding.
Establishing a new financing relationship between states and the federal government would allow for meaningful investments to improve college affordability. Recessions—and their impact on state higher education budgets—are a predictable reality, and policymakers should account for them in any effort to provide students with more affordable college prices. A countercyclical mechanism would break the cycle of governing-by-crisis and ensure these investments are sustainable in the long-term.
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