Coronavirus Upends Colleges' Financial State

How hard is the new coronavirus outbreak hitting college and university finances?

It’s actually not the most urgent question at the moment for many college leaders who have been scrambling with clearing out campuses, mass migrations to online or remote learning delivery, and various other steps that need to be taken to minimize harm from the spread of COVID-19. They’re doing what they have to do in a crisis, and they’ll tally up the bill later.

But the question still looms over everything colleges are doing. The U.S. higher education system had already been showing signs of stress, including relatively flat net tuition revenue at many institutions, a lack of growth projected among the high school graduates that make up the bulk of students and anemic growth in lucrative international enrollments in recent years. Now add to the mix the sudden operational jolts and likely global recession being prompted by the pandemic.

Colleges and universities will be paying a set of short-term costs, according to higher education leaders and financial experts interviewed both on the record and on a condition of background. Those experts are divided over the significance of those costs, however. Some predict an uptick in closures or major cost-cutting, while others expect a difficult few months in which those who lend money to colleges are going to be more accommodating than usual.

Longer-term financial impacts are even less clear. With plunging markets and travel uncertainty around the globe, it’s possible students start staying closer to home at the exact moment college and universities have fewer endowment assets to cushion major financial shocks like changes in enrollment patterns.

One thing is certain: it’s going to be a bumpy few weeks.

“There’s a lot of situational uncertainty,” said Barbara K. Mistick, president of the National Association of Independent Colleges and Universities and former president of Wilson College. “It’s all over the ballpark.”

Liquidity, Liquidity, Liquidity in the Short Term

In the immediate future, a slew of relatively small expenses will accumulate, college leaders say. Some colleges are planning to continue paying student employees who have been sent home as if they were still working in order to provide a form of financial support, show good faith and hopefully improve retention. Dormitories and other campus facilities need to be cleaned and sterilized -- especially in cases where some students or employees are remaining on campus.

Vendors will need to be paid as learning shifts to remote and online delivery. Even in cases where colleges can limp along using a suite of free options, they may have to pay for students, faculty and staff who don’t have adequate technology at home to acquire it.

And then there are refunds. Many colleges are working to refund room and board on a prorated basis, giving students back fees they paid for the weeks in which they won’t be allowed to live on campus.

Whether or not those incremental expenses combine to cause a crisis at any institutions depends on when the bills come due, how much cash is on hand and how much lenders are willing to provide.

“Right now it’s all about liquidity, liquidity, liquidity,” said one capital markets analyst speaking on a condition of background.

It’s not the worst time for these additional expenses to be adding up. Many colleges have already collected the bulk of the money they’ll receive for the 2019-20 fiscal year as students paid tuition and fees. And the campus closures come early enough that expenses can be cut if need be.

And the spring is packed with costly events at many colleges and universities. Commencement costs money to stage. So do alumni reunions and parties for seniors. The smaller an institution, the higher the relative cost may be.

Many colleges have announced in recent days that they are postponing or canceling commencement and other gatherings. Health considerations may be driving those decisions, but the financial savings could be real.

The savings could also be coming at a good time.

“My experience as a college president is that the most difficult cash-flow period is usually summers,” Mistick said.

But colleges and universities can’t escape some costs. Many colleges have contracts with food service vendors or physical plant managers that can’t be exited on short notice, for example.

It’s hard for institutions to reduce their cost of labor. Yes, staff members and some faculty members might be able to be laid off or furloughed. But that’s impossible in some cases without a declaration of financial exigency. And in a high-touch industry like higher education, it can also erode an institution’s ability to deliver a quality education for its students -- especially with a mass migration to remote learning under way.

That’s one of the reasons refunds are so critical. With costs relatively fixed, it can be even more damaging when an institution is forced to give back revenue.

Room and board is a relatively small percentage of overall revenue. S&P Global Ratings rates about 400 colleges and universities. At the median public institution in its portfolio, auxiliaries like room and board make up about 9 percent of revenue. At the median private institution, auxiliaries are 11 percent of revenue, said Jessica Wood, a senior director at S&P Global, during a Thursday webcast.

Estimates of how much room and board refunds will cost are hard to come by, if they even exist at this point. Partially refunding tuition would be a bigger hit, but institutions have thus far dismissed that idea.

For example, Tufts University is among those issuing prorated housing fee refunds.

“The University will not be issuing refunds for tuition as classes and instruction will continue through the end of the Spring 2020 semester, and credits and grades will be assigned normally,” a Tufts spokesman said in an email.

Smith College is another institution offering room and board refunds.

“Smith College will issue prorated refunds for room and board to students who do not remain on campus. There are no plans to issue tuition refunds,” a spokeswoman said in an email.

It all means that the colleges and universities that were already stressed are going to find themselves under even more strain in the near future.

“Many weaker and more regional institutions have already been experiencing operating pressures, and this pandemic sort of exacerbates these pressures,” Wood said.

Length of Disruption and Enrollment Issues in the Long Run

Looking ahead, it’s hard to say exactly how college finances will be affected without knowing the length of the coronavirus-related disruptions.

It’s important from an economic standpoint -- if large gatherings are banned for only a few more weeks before the economy comes roaring back, it’s likely to be good for donations, endowments and family finances. If the pandemic grows and people grow more and more isolated in their homes, the psychological and personal finance aspects grow more and more important.

“The way you initially ask the question, I think, is how much is this accelerating financial issues for families and institutions,” said Beth Paul, president of Capital University in Ohio and the future president of Nazareth College, in Rochester, N.Y. “The unknown length of this is very unsettling to everyone, especially to families. You listen to economic experts brazenly say the financial stress is going to be very short-lived, and as soon as the virus is conquered, it’s going to come raging back and we're going to have this healthy economy. Maybe, and maybe not.”

Other potential costs that are hard to measure include fixes for hastily prepared online programs and stress on institutional loyalty if students and alumni feel they aren’t treated well during this time of crisis, according to Larry Ladd, senior consultant at the Association of Governing Boards of Universities and Colleges.

Even if the virus is vanquished in a relatively short period of time, the events of recent weeks could very well change student behavior. Enrollment leaders are concerned as in-person admissions events have been scrapped and uncertainty reigns.

“It’s going to wreak havoc on yield projections for the majority of U.S. colleges and universities,” said Robert Massa, an adjunct professor at the University of Southern California and vice president emeritus of enrollment at Dickinson College, in Pennsylvania. “Your regional publics are going to continue to draw from their regions. Your public flagships will draw from the state, and those that have a national reputation are going to continue to draw from contiguous states. But the small private colleges are going to be hard hit.”

Enrollment of domestic students and international students, who tend to pay more in tuition, will be important to watch, experts stressed. So too will retention. Several experts worried that at-risk, first-generation and low-income students who are sent home will be less likely to re-enroll in the fall.

The patterns of where students enroll will also be key. Will the experience of being sent home on short notice affect the likelihood that students will travel long distances to college? In the insecure time following the Sept. 11, 2001, terrorist attacks, students tended to stay closer to home, Paul said.

The Strong Survive

No matter which mix of short-term and long-term pressures mount, experts predict the institutions that are already relatively weak will be most likely to be hit.

“If I live in Northern California and I got into Harvard or Princeton, I’ll fly the plane if I have to,” Massa said. “But you know, if I got into -- pick a school -- I probably don’t want to go all the way.”

Ladd, of AGB, put it differently.

“The colleges and universities with financial assets and strong brands will weather these challenges,” he wrote in an email. “It is the weaker institutions that are vulnerable. We will see more college closings than we would otherwise have seen, and the velocity of those closings will accelerate. There may be less mergers because there will be less time to navigate a merger before the cash runs out.”

Others disagreed with the idea that more closings are likely, even if institutions are forced to break bond covenants requiring a certain amount of cash on hand or other marker of financial health.

“I worry about the ability of a lot of institutions that don’t have the strength of a balance sheet to absorb this,” said Charles Kim, managing director of the consulting firm Kaufman Hall’s higher ed practice. “There might be a lot of defaults on principal interest payments in the near term. There are going to be smaller institutions that were on the fringe of liquidity issues potentially getting to the edge of that cliff.”

Still, it’s likely creditors and bondholders will provide waivers, Kim said, because circumstances are unique.

Some remain optimists about small and stressed colleges. Many such colleges have been operating efficiently, with a small number of employees for key functions. That is a source of risk if any such employees become ill during the outbreak, said Mary B. Marcy, president of Dominican University of California.

It can also be a source of strength.

“The single points of failure are real,” Marcy said. “The flip side of it is we’re pretty nimble and much more used to adapting than a place that may have layers of people to do the work but also layers of bureaucracy.”

Marcy’s fellow president, Paul, has been encouraged by how quickly small colleges have been able to go through the triage of sending students home, cleaning campuses and pivoting to entirely remote learning. That’s evidence they can overcome other challenges, she said.

“Look at what we have accomplished in a week,” Paul said. “Why can’t we do some of these other things?”

Massa remains skeptical.

“I’m not so convinced,” he said. “I know firsthand how tight a budget is. And when you’re running deficits on an annual basis, and then you have to turn around and give refunds for room and board, it will have a devastating impact on colleges that are operating on the edge.”

Each institution will have to navigate the financial pressures in its own way.

“Each institution will be different,” said Larenda Mielke, vice president in Kaufman Hall’s higher education division. “In the big picture, they need to go back and decide what’s important to them.”

They’ll be doing it in uncharted waters.

“I’ve seen a lot of things,” said Mistick, of NAICU. “The 2008 recession. Sept. 11. I’ve been through all of these events. This feels different to me.”