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Higher Education Funding Takes a Hit During Recessions. But It Doesn’t Have To.

COVID-19 has dramatically increased public health costs, and the pandemic’s economic fallout has depressed tax revenues. Under increased financial pressure during recessions, states—nearly all of which face balanced budget requirements—have to make tough tradeoffs, which is why funding for higher education tends to get squeezed. These cuts are often shouldered by students and families, as institutions raise tuition to fill their budget gaps. This pattern has repeated several times over the past 25 years, underscoring the need for a policy solution to mitigate state disinvestment. The unique nature of the current crisis has added urgency to the mix.

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A pattern of recessionary cuts

State higher education funding is often the first spending category to be cut during recessions. Other state priorities—including K-12 education and Medicaid—have ballooned since the mid-1980s, forcing states to find other areas to reduce spending. Recessions exacerbate this trend, as tax revenues fall and states are forced to make choices between competing priorities, increasing the challenge of maintaining consistent funding. This relationship between economic conditions and state funding for higher education yields a pattern that mirrors the business cycle, rising during upturns and falling during recessions. Per-student funding over the past quarter-century has ranged from a high of $8,803 just prior to the 2001 recession to a low of $6,026 following the Great Recession, on an inflation-adjusted basis (Figure 1).

Figure 1: State Support for Higher Education Falls During Recessions

Note: State support per full-time equivalent student excludes American Recovery and Reinvestment Act funds and appropriations for research, agriculture, and medical operations.  

Source: Author calculations of State Higher Education Executive Officers, State Higher Education Finance: FY 2019, 2020. 

Cuts are passed onto students through tuition hikes

Higher education institutions often use tuition revenue as a crutch during economic downturns, passing funding gaps onto students through tuition hikes. Without tuition hikes, institutions would struggle to maintain consistent per-student resources during recessions. This is because the demand for a college education tends to increase following a recession at the same time state support declines, with individuals seeking to develop their skills in a tough labor market. Easy access to credit through the federal student loan system enables this dynamic; students and families can take on additional debt to meet rising tuition prices. Faced with increased costs and greater debt burdens, students ultimately bear the brunt of state budget cuts.

The evidence is clear: Between 2008 and 2012, enrollment at public institutions rose by 11.5%, with the recessions in 1990 and 2001 generating a similar pattern (Figure 2). During the Great Recession, the share of education revenues paid by students rose from 36% in 2008 to 47% in 2012. To put this in terms of cost to students: average public four-year in-state tuition and fees increased by 23% over this same period—from $7,620 to $9,400 in constant 2019 dollars.

Figure 2: College Enrollment Increases Following Recessions

Note: Public enrollment measures the net full-time equivalent enrollment at public institutions. 

Source: Author calculations of State Higher Education Executive Officers, State Higher Education Finance: FY 2019, 2020. 

Funding shortfalls are getting bigger and lasting longer

Higher education funding challenges have worsened over the past three recessions. Following the 1990 downturn, state funding for higher education fell by 12% on a per-student basis. During the 2001 recession, state higher education funding fell 15% from its pre-recession peak and a staggering 25% in the aftermath of the Great Recession. As these gaps have grown, states have struggled to return to pre-recession funding levels before the next crisis hits. Per-student funding only fully recovered following the 1990 decline (Figure 3). The COVID-19 recession may be the worst yet; the crisis begins while per-student funding remains 8% below its 2008 level.

Figure 3: Funding Often Fails to Recover Before the Next Recession Hits

Note: Percentage change represents the change in per-student state funding for higher education from the peak prior to the most recent recession, in constant 2019 dollars. 

Source: Author calculations of State Higher Education Executive Officers, State Higher Education Finance: FY 2019, 2020. 

Why this recession is different

Because of the global pandemic, this recession poses an extraordinary dual threat to institutional finances: falling state education appropriations are occurring alongside declining enrollment. Specifically, the undergraduate student body decreased by 4% this fall, as public health concerns and online learning have made college less attractive in the COVID-19 era. Without increased enrollment to fill the gap caused by falling state funds, institutions are cut off from the tuition revenue lifeline they have come to rely on.

A rainy day fund to promote consistent state investment

Intermittent recessions will remain a reality of our economy, yet no mechanism exists to ensure adequate higher education funding when these downturns put pressure on state budgets. BPC’s Task Force on Higher Education Financing and Student Outcomes proposed implementing a federal-state partnership with a recessionary trigger to provide automatic additional support during recessions. States that increased higher education spending during good times would receive a generous match from the federal government, a portion of which would be set aside in a rainy day fund. These resources would be used to mitigate the cycle of disinvestment and smooth over funding shortfalls, reducing the need for colleges to raise tuition and thereby lessening reliance on student debt to plug state funding gaps.

Conclusion

Cuts to state higher education funding have been a persistent and growing feature of recent recessions, increasing schools’ reliance on tuition and ultimately leading to higher costs and elevated debt burdens for students and families. As the COVID-19 crisis continues, policymakers should work across the aisle to lay the groundwork for a sustainable long-term solution to these financing challenges.

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