Practical Credit Crisis Tips for Colleges and Universities
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
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:
- Endowment losses of 15% to 30% compared with steady double-digit
gains in previous years.
- 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.
- 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.
- 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).
- Delayed disbursements on student loans.
- 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
- 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.
- 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
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.
- Cut staffing costs by reducing the number of faculty and staff
and cutting salaries and benefits.
- 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.
- Layoff existing faculty and staff. Offering early
retirement. (Early retirement offers sometimes backfire with
critical staff retiring, so colleges are making more targeted
- 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.
- 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.
- Reduce support staff by increasing the number of faculty and
administrative managers each support staff person supports. Centralize
support staff for related departments.
- Centralize administrative services such as purchasing, human
resources, printing and computer resources to reduce redundancies and
- 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.
- Reduce retirement and healthcare benefits.
- Flatten the organizational structure by increasing the number
of staff supervised by each manager.
- 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
- Cut inessential expenses.
- Eliminate underutilized or inessential services, such as a campus
shuttle or pool.
- Reduce employee travel for professional development and
- Cut photocopying, printing, publication and postage costs.
- Cut back on support services. For example, some colleges are
cutting back the hours at the college library.
- Focus funding on the college's core mission.
- Cut phone lines.
- Optimize facility costs.
- 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.
- Shut down the campus during the winter recess to save on
- 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.
- 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.
- 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.
- Switch from a defined-benefit pension plan to a
defined-contribution retirement program.
- Broad budget-cutting initiatives.
- 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
- 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.
- 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.
- 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.
- Increase tuition rates. In some cases implementing a mid-year
- 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
- 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
- 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
- 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
- Rent campus classroom, dining and recreation facilities to
local businesses when they are not in use by students, such as on
- Increase the number of students living in college dorm rooms to
increase revenue from auxiliary services.
- 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.)
- 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.
- If parking facilities are underutilized, lease parking spaces
to local businesses for their employees.
- 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.
- Increase endowment spending to the extent possible. Part of the
purpose of an endowment is to help colleges endure feast-famine
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.
- 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.
- 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.
- 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.
- 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
- Limiting tuition increases.
- Discounting tuition for alumni who have lost their jobs (e.g.,
Lawrence Technological University and St. John's University).
- Increasing institutional student aid funding.
- Establishing or increasing emergency grant and loan funds for
students. (This is especially true at colleges that experienced
delayed disbursements of education loans.)
- Replacing loans with grants in the financial aid packages.
- Decreasing the self-help level.
- Offering tuition installment plans to help families stretch their
budgets, especially families that are ineligible for the PLUS or
private student loans.
- 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.
- 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.)
- 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
Alternately, establishing a well-funded independent organization to
guarantee private student loans to the college's students against
- Peer-to-peer lending by alumni to current students.
- 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.
- Lobbying Congress to increase the maximum Pell Grant and to expand
the unsubsidized Stafford loan limits even further.
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.