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Practical Credit Crisis Tips for Colleges and Universities

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The following discussion provides a few practical steps colleges can take to deal with the impact of the credit crisis on their finances. It is also helpful for disaster planning for possible worst-case scenarios.

The Chronicle of Higher Education and Moody's Investors Service conducted a survey of college responses to the recession (January 9, 2009).

Impact of the Credit Crisis on Colleges

Colleges are feeling financial pressure from several sources, including:

  1. Endowment losses of 15% to 30% compared with steady double-digit gains in previous years.
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  2. A significant decrease in the number and size of charitable gifts and increased difficulty in fundraising. Some philanthropists are backing away from previous commitments because of stock market losses.

  3. Bonds and other debt instruments (typically used for building projects) resetting to higher interest rates and converting from long-term debt to short-term debt. New bonds are also costing more due to higher interest rates.

  4. Changes in the liquidity of investments affecting the ability of the colleges to access their funds (e.g., a short-term liquidity freeze in the Common Fund for Short Term Investments).

  5. Delayed disbursements on student loans.

  6. Increases in the number of applications for student financial aid. During the first half of the year, the number of FAFSAs submitted increased by 16.3% nationwide as compared with the previous year. In some states the number of applications increased by 32%. Colleges are also reporting an increase in the number of families seeking a professional judgment adjustment. (Several colleges have reported that some families are seeking a PJ review because of a sharp decrease in the value of the family's 529 college savings plans.) Increases in the demand for student aid mean a decrease in the college's net tuition revenue.

  7. Declines in state support of higher education (either a current decrease or an anticipated decrease). During a recession and for several years afterward, state governments experience a decrease in state income tax revenue. One of the first budget areas they cut is state support of higher education, both direct to colleges and through reduced student aid funding. Public colleges are going to be especially hard hit and many will have no choice but to implement double-digit tuition inflation.

  8. A decrease in federal research grants (anticipated). The concern is that federal spending on TARP and pressure in other areas on the federal budget may lead to flat or negative growth in federal funding of academic research.

Chronicle Research Services, a division of the Chronicle in Higher Education, issued a report on December 4, 2008 entitled Financial Uncertainty and the Admissions Class of Fall 2008. The report found that 56% of colleges reported that "more students than usual are asking for additional financial aid". The report also found that changes in family financial circumstances (76%), the drop in the value of family homes (58%) and the availability of student loans (50%) were having an impact on admissions yields. 64% also indicated that some students were switching from 4-year institutions to community colleges.

How Colleges are Dealing with the Pressure

Fundamentally, there are two main ways to deal with a budget shortfall: reduce spending and increase revenue. The main sources of revenue (endowment, tuition, gifts, research, auxiliary services) are all under pressure. So most of the suggestions focus on cutting costs. The following list summarizes some of the practical steps colleges are taking to address the budget squeeze.

Cutting Costs:

  1. Cut staffing costs by reducing the number of faculty and staff and cutting salaries and benefits.

    1. Suspend new hiring of faculty and staff, except those funded by grants, third party reimbursement or restricted endowments. Also, restricting hiring to "mission-critical" positions.

    2. Layoff existing faculty and staff. Offering early retirement. (Early retirement offers sometimes backfire with critical staff retiring, so colleges are making more targeted buyout offers.)

    3. Substitute temporary workers, consultants and independent contractors for staff and hiring more part-time lecturers. This can sometimes save money on benefits, but may impact the quality of the education program.

    4. Freeze faculty and staff salaries. Implementing voluntary faculty and staff pay cuts (1%) or furloughs (unpaid leave of a few days but with full benefits) in lieu of layoffs. A 5-day furlough is the equivalent of a 2% pay cut. Ask faculty and staff to accept a delay in part of their compensation.

    5. Reduce support staff by increasing the number of faculty and administrative managers each support staff person supports. Centralize support staff for related departments.

    6. Centralize administrative services such as purchasing, human resources, printing and computer resources to reduce redundancies and improve efficiencies.

    7. Create a one-stop shop for the front end customer service operations of student facing administrative offices, such as the registrar, bursar and financial aid office. There are some tricky aspects due to the separation of duties regulations, but there are effective workarounds. Cross-train the staff who work in the one-stop shop so that students can get all of their concerns addressed by speaking with just one person instead of several people.

    8. Reduce retirement and healthcare benefits.

    9. Flatten the organizational structure by increasing the number of staff supervised by each manager.

  2. Consider ways of increasing student retention. Conduct exit interviews with students who withdraw to identify the reasons for their withdrawal, and also correlate the withdrawals with various demographic factors. Consider solutions that address the problems identified by these interviews and analyses. Increasing the retention rate reduces recruiting costs.

    Require students to attend a financial literacy minicourse. Improving their financial management and budgeting skills may reduce withdrawals due to financial problems. It is surprising how many people do not know how to create a budget or balance a checkbook.

    Note that it is a prohibited inducement to provide bonuses to staff involved in admissions or financial aid for increasing enrollments, per section 487(a)(20) of the Higher Education Act of 1965. So care must be taken to remain within the safe harbors in the regulations at 34 CFR 668.14(b)(22). However, one could provide supplemental financial aid to departments who are successful in fulfilling retention goals or one could base bonuses on success in graduating students.

  3. Cut inessential expenses.

    1. Eliminate underutilized or inessential services, such as a campus shuttle or pool.

    2. Reduce employee travel for professional development and conferences.

    3. Cut photocopying, printing, publication and postage costs.

    4. Cut back on support services. For example, some colleges are cutting back the hours at the college library.

    5. Focus funding on the college's core mission.

    6. Cut phone lines.

  4. Optimize facility costs.

    1. Switch from a 5-day class schedule to a 4-day class schedule. This can help commuter students save on gas. It can also help colleges save on utilities.

    2. Shut down the campus during the winter recess to save on utility costs.

    3. Adopt green technology to reduce energy costs, such as compact fluorescent light bulbs, motion sensor light switches in bathrooms, waterless urinals, insulation, window shades and centralized HVAC control. Conduct an energy audit of every building. Consider adding solar panels and windmills.

  5. Cut the frequency with which committees meet and the size of the committees. Committee meetings are rarely productive. The purpose of a meeting is to make decisions after brief discussion and answers to clarifying questions. If the discussion is extensive, it is a sign of inadequate preparation for the meeting.

  6. Renegotiate debt, seeking a lower interest rate. Lenders would rather modify a loan than see the borrower refinance at lower cost with a competitor. Increasing the loan term should be avoided. While increasing the term of the loan may cut the monthly payments, it also increases the total interest paid over the life of the loan.

  7. Switch from a defined-benefit pension plan to a defined-contribution retirement program.

  8. Broad budget-cutting initiatives.

    1. Review, freeze or cut operating budgets and discretionary spending across campus. In some cases the colleges are implementing across-the-board cuts. In other cases the cuts are more targeted.

    2. Review, suspend or delay capital projects, such as renovation, new construction, technology and infrastructure. Deferring noncritical maintenance projects. Suspending major equipment purchases. Renegotiating vendor contracts.

    3. Seek alternate financing and debt restructuring. For example, substitute endowment spending for bonds when the rates on the bonds are too high. Avoiding high interest bonds is the equivalent of getting a big return on investment by avoiding the expense. Focus on fixed rate bonds instead of variable rate bonds.

  9. Rank all majors by the cost per degree attained and identify majors with a high cost but low student population for possible cuts. These fields of student may not be central to the college's core mission. If they are not revenue centers and do not bring prestige to the university, they are candidates for cost-cutting.

Increasing Revenue:

  1. Increase tuition rates. In some cases implementing a mid-year tuition increase.

  2. Increase the student-faculty ratio through increased enrollment and heavier teaching loads.

    A bigger class size means more net tuition revenue. There is a countercyclical effect where enrollment increases during economic downturns as people who are laid off choose to go back to school for retraining or advanced training to make themselves more employable. So while some students will drop out or transfer to less expensive colleges for financial reasons, there are also some enrollment increases. The net effect of these cross-currents is an enrollment increase, especially at lower cost colleges.

    Heavier teaching loads will increase faculty productivity. Objective metrics can calculate the total revenue generated by each faculty member by combining research grants with a proportionate share of tuition revenue and other institutional charges based on the number of students taught. Per-faculty metrics can be combined to yield totals for each department.

    Also consider not granting teaching load credit to faculty when they teach classes with less than a dozen students. Faculty can continue to teach such seminars if they wish, but it should not count toward their teaching load.

  3. Some colleges are also looking at changing the demographic mix of their enrollments, admitting more students who need less financial aid. In most cases they are pursuing this through student recruitment and not by changing their admissions preferences. But several need-blind colleges have warned that they may need to abandon that policy in the current financial environment.

  4. Protect the financial aid budget. While this may seem to be an expense, every student yields additional revenue to the college even if that revenue is discounted by financial aid. It may even be worthwhile to offer slight discounts to wealthy students who do not demonstrate financial need, since the net revenue will exceed the average revenue per student. You will need to study whether offering such discounts leads to an overall increase in enrollment or not, and whether the increase in enrollment compensates for the cost of the discounts.

  5. Increase recruitment of international students. The decline in the value of the dollar as measured against other currencies makes a US education comparatively less expensive despite tuition increases.

  6. Rent campus classroom, dining and recreation facilities to local businesses when they are not in use by students, such as on weekends.

  7. Increase the number of students living in college dorm rooms to increase revenue from auxiliary services.

  8. Schedule weekend classes to maximize the use of current facilities. (Or, alternately, compress the class schedule to four days instead of five, to reduce energy costs by one day a week. Commuter students will appreciate saving on transportation costs, and residential students and faculty will appreciate the extended weekend.)

  9. Schedule the winter break when HVAC costs are highest, and shut down nonessential buildings by adjusting the thermostat to the minimum levels necessary to avoid frozen pipes.

  10. If parking facilities are underutilized, lease parking spaces to local businesses for their employees.

  11. Delay or accelerate fundraising campaigns. Some colleges are delaying the campaigns because it is a bad time to ask for money. Others are accelerating the fundraising efforts because of the increase need for support and because donations tend to recover quickly after a recession. Fundraising efforts may also vary depending on geography, since some areas of the country were harder hit than others. Some colleges are soliciting faculty and staff for donations to the endowment.

  12. Increase endowment spending to the extent possible. Part of the purpose of an endowment is to help colleges endure feast-famine cycles.

    Most colleges use a moving average as the basis for their endowment spending, since this smooths out the volatility in endowment returns. For example, if a college has had a 25% drop in its endowment, but uses a 5-year moving average, the drop will translate into a 5% reduction in endowment spending. However, the 5-year moving average means that the endowment losses will require a 5% reduction in spending for the next 5 years. Moreover, if there are further endowment losses during the next year, there may be the need for additional cuts.

  13. Try to increase tuition revenue by encouraging members of the local community to audit classes on a non-credit or continuing education basis. Perhaps offer a slight tuition discount as an incentive, since these students do not use campus facilities to the same extent as regular degree-seeking students.

  14. Try to attract nontraditional students through programs tailored to their needs, such as evening and weekend classes, intensive mini-semesters during the summer, and distance learning programs.

Other Approaches:

  1. Increase investment. The market overreaction to the subprime mortgage credit crisis represents a buying opportunity. There are a lot of bargains on both Wall Street and Main Street now. For example, real estate is much cheaper now, so this would be a good opportunity for colleges to acquire land and buildings adjacent to campus. The fear, of course, is that we have not yet reached the bottom of the market so that these investments may lose value shortly after the college closes on the acquisition. But it is very difficult to identify a bottom (except in hindsight), and colleges can afford to take a long view.

  2. Solicit innovative ideas from faculty and staff. For example, eliminating trays in campus cafeterias reduces waste (and waist) by discouraging the piling up of food. A similar idea involves using smaller plates and dishes as a form of portion control.

Steps Colleges are Taking to Protect Families

  1. Limiting tuition increases.

  2. Discounting tuition for alumni who have lost their jobs (e.g., Lawrence Technological University and St. John's University).

  3. Increasing institutional student aid funding.

  4. Establishing or increasing emergency grant and loan funds for students. (This is especially true at colleges that experienced delayed disbursements of education loans.)

  5. Replacing loans with grants in the financial aid packages.

  6. Decreasing the self-help level.

  7. Offering tuition installment plans to help families stretch their budgets, especially families that are ineligible for the PLUS or private student loans.

  8. Encouraging all students to submit the FAFSA, even if they don't think they will qualify. Hold workshops on completing the FAFSA. Increase outreach to feeder high schools to teach the students how to complete the FAFSA.

  9. Joining the Direct Loan program to provide a safety net. (There is no requirement that a school certified for Direct Loans actually originate any loans through the Direct Loan program.)

  10. Increasing institutional loan programs. While this may have a negative impact on cash flow (i.e., replacing up-front funding with 1% of the outstanding principal per month after the borrower enters repayment), the college may be able to sell the loans a few years after the borrower has graduated, when their credit scores have improved. This will yield a shorter repayment pipeline for the school.

    Alternately, establishing a well-funded independent organization to guarantee private student loans to the college's students against default.

  11. Peer-to-peer lending by alumni to current students.

  12. Increased counseling of students on smart borrowing and searching for scholarships. Encourage families to borrow federal first and explain that the unsubisidized Stafford loan and the PLUS loan are available without regard to financial need. Even wealthy families can get these loans, so you don't have to be "poor" to qualify.

  13. Lobbying Congress to increase the maximum Pell Grant and to expand the unsubsidized Stafford loan limits even further.

NAICU Survey

The National Association of Independent Colleges and Universities released a related survey on December 18, 2008 about the economic concerns of private college and university leaders. The survey found that the endowments, fundraising, demand for student aid, institutional debt liquidity and cost, education loan availability and student enrollment had been affected or significantly affected at most private colleges and universities. The organization also surveyed the college presidents on about a dozen areas targeted for cost savings, similar to those mentioned on this set of practical tips. The survey respondents demonstrated almost complete agreement that the federal government could help by increasing the Pell Grant by $500, increasing federal loan limits, making PLUS loans easier to borrow, and increasing the student loan grace period from 6 to 12 months.

 

 
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