College Business Blog

College students are big winners in the compromise stimulus package

markh — Tue, 17 Feb 2009 19:59:00 GMT

College students are big winners in the compromise stimulus package

The dust is beginning to settle on the final stimulus bill (officially the American Recovery and Investment Act, or ARIA) that President Obama signed today and higher education is one of the big winners. It appears the bill will help soften the blow of state budget cuts but there is a lot of discretion on how the money will eventually be spent. Nevertheless, students and institutions should get some direct relief in the form of loan programs, infrastructure, and overall budget support. Here is a brief summary of the primary higher-ed related items in the final $787 billion bill:

Increased Pell Grants: The popular grant program gets a boost of $15 billion. A combination of ARIA funding and previous congressional action will increase the maximum Pell Grant amount by $1,000 to $5,350. The pool of eligible students will grow by an estimated 800,000.

Stafford Loans: ARIA increases the annual limit for the unsubsidized Stafford Loan for undergraduate students by $2,000 and the aggregate by $8,000.

Tax Credit: The Hope Scholarship tax credit for the 2009 and 2010 tax years grows to $2,500, a $700 increase.

Federal Work Study: ARIA increases funding for FWS by $490 million. This yields $613 million in additional funding for FWS and, when the institutional matching funds are included, enough funding for an additional 200,000 recipients.

Aid for States: $39.5 billion for “backfilling” of state budget cuts including facilities modernization. In addition states will receive $8.8 billion for governors to award for “high priority” needs, including education.

Research: Portions of the ARIA funding provided to the National Institutes of Health ($1.5 billion), National Science Foundation ($100 million) and others are designated for university research programs.

Over all it looks like a big win for colleges and college students.

It’s never as bad (or as good) as we think it is

markh — Tue, 10 Feb 2009 15:01:00 GMT

Don’t believe everything you hear about the economy, good or bad. When was the last time you heard an economist predict the future and be right about it…consistently? They all have their moments and they make sure you know when they got it right. But where are they when they got it wrong? There usually is an excuse along the lines of, “Well, no one could have foreseen the scale of the mortgage problem…” Which is exactly the point! No one can reasonably foresee all of the changes that will take place in an extraordinarily complex global economy over the next 6 months. Some really smart people try to do it every day. A few succeed…most don’t.

Is the current recession the end of the road for the dominant U.S. economy? Highly doubtful. Daniel Gross has an excellent article in the February 16th issue of Newsweek entitled “Decline? I’ll Decline. Our best days aren’t necessarily behind us.” As an example of past doomsday scenarios he cites the respected historian Paul Kennedy who argued in 1987 that “America's best days were behind it, thanks to imperial overreach, excessive debt and an epic financial bust.” His book ‘The Rise and Fall of the Great Powers’ was a bestseller when it was published “and went into paperback just as the U.S. was beginning to emerge from the Cold War as the world's only superpower and the hub of a global integrated trading system.”

“Economic prognostication is hamstrung by a tendency to extrapolate from recent trends endlessly into the future. It happens at the top of a cycle—the Dow is going to 36,000! Housing prices never fall!!—which helps explain how we find ourselves in this particular pickle. And it happens when we fall into a ditch.” The upside is seldom as good as the optimists predict. Likewise for the doomsayers when we hit a downturn. Remember, the pundits are getting paid to have an opinion…that doesn’t necessarily mean they’re right.

Read Gross’ complete Newsweek article here.

Higher education budgets likely to be tight for 2-3 years

chrisn — Mon, 12 Jan 2009 14:59:00 GMT

A coming issue for a lot of us in higher education is that the effects on colleges of the economic slowdown tend to lag the overall economy. In other words, the economic impact on campuses follows the changes in the larger economy. The reason is that economic downturns ultimately result in reductions in two of the primary funding sources for universities: State tax revenues and endowments.

Public universities obviously get a significant percentage of their funding from state governments. As someone who spent eight years in a major state university system I can tell you that states are not renowned for their advance planning. They tend to be very optimistic about revenuesâ€¦saves politician from making tough when budgets are being developed. States seldom project a reduction in year-to-year revenues so when the economy goes bad they are stuck with massive shortfalls.

We have officially been in a recession since December 2007 but the effects on state revenues have hit hard in just the last few monthsâ€¦I realize this is not news to many of you. According to NACUBO, 21 states have already implemented cuts to higher education ranging from 5-15 percent of previously appropriated funding. For most states the worst will hit in the 2010 fiscal year (beginning July 2009) when they are facing shortfalls from the current year and, almost universally, projected shortfalls for 2010. It may be very ugly. A lot will depend on steps taken by the Obama administration to bail out the states and whether we see a modest economic recovery in 2009.

Historically, state and local support for higher education has rebounded once the economic growth resumes, but there is often a significant delay. An examination of state higher education funding following the 2001 downturn shows flat public support through 2004 so expect some lean years ahead even if there is a recovery sometime in 2009.

Private colleges are tied to â€œspending policiesâ€ from their endowments. For the (gratefully) uninitiated, most colleges have a formal policy to spend a specified percentage of their endowment each year to fund normal operations. For example, a college may spend 4.5% (the current national average) of its total endowment value each year on the assumption that the overall value of the endowment will grow by more than 4.5%. The average annual endowment growth from 2003-2007 was 11.5%, so even if you spend 4.5% your overall endowment fund is still growing by 7%.

Now imagine that your endowment shrinks 20% this year. Oops. You are now spending 4.5% of a much smaller pie. Most schools use some sort of moving average to determine their endowment spending so they minimize the immediate effect of reduced endowment values, but the loss will figure into spending calculations for 3-5 years. It also becomes more difficult for senior administrators to convince Trustees that it is a fiscally sound idea to spend from endowment funds that are shrinking rather than growing. The recent crisis at Harvard provides a sobering reminder of what can happen to even the wealthiest schools in a poor economy (Harvard letter on its endowment).

Remember, this is not the first recession we have faced. Try to find out how your institution and department responded to previous recessions (2001, 1991). Did the strategies work? Will they still work?

Thanks to the National Association of College and University Business Officers (NACUBO) for some the financial data used in this entry.