From The Chronicle of Higher Education

Economy's Troubles Could Hit Colleges Unusually Hard


Prolonged recession might force some private institutions out of business, experts say.

Financial experts everywhere agree that the economy appears headed toward a recession. The question is how long it will last and how deep it will be.

The last recession, in 2001, lasted less than a year. Most sectors, including higher education, shrugged it off.

During lengthier downturns, colleges have often benefited from increased enrollments. What better place than an ivy-lined campus to retreat, or to stay put, when the job market goes south?

But for some institutions, those enrollment increases are not a panacea. And if this recession lasts as long as some economists fear, colleges of all kinds could experience a variety of problems, finance experts and campus leaders said in e-mail and telephone interviews.

"Economic downturns trigger a debilitating circumstance of increased enrollments and decreased funding," says Eduardo J. Padrón, an economist and president of Miami Dade College. "Low-income students at community colleges bear the brunt of this paradox."

When state finances tighten up, support for higher education often dwindles. In the past, many colleges have helped overcome those shortfalls by raising tuition.

But the public's increasing frustration over rising tuition costs — and families' inability to pay more during sharp downturns in the housing and stock markets — will make that increasingly difficult.

"Families are having a harder time finding money for higher education," says John D. Walda, president of the National Association of College and University Business Officers. "That could affect applications, and that will certainly make for more competition among institutions."

Colleges are also on the hot seat to increase student aid. But as Mr. Walda points out, that's hard to do when investment income erodes.

Who Will Suffer Most?

Evidence from past economic slides suggests that higher education is "not entirely immune" to problems in the overall economy, says Peter R. Orszag, director of the Congressional Budget Office, "though the effects varied by institution."

Wealthy private colleges can often sidestep problems by tapping into their multibillion-dollar reserves and hedging their investments. Big public institutions usually have enough diverse revenue sources, including federal research grants, to stay out of trouble.

But many experts fear that state support and federal research dollars will decline for the foreseeable future. As a result, even big public institutions could face problems, says James J. Duderstadt, a former president of the University of Michigan at Ann Arbor.

"Aging populations are rapidly shifting the priority for state tax dollars away from education and toward the needs of the elderly," he says. "It seems quite likely that most public research institutions will see stagnant or declining state support for as much as a generation."

At the same time, he says, those institutions will be expected to expand enrollments to meet local work-force needs and build competitive research programs to stimulate regional economic growth. "Oh, yes," he adds, "they will also continue to be preyed upon by wealthy private institutions attempting to raid their best faculty and students."

The picture is even bleaker for private colleges without big endowments or research support to pad them.

"If the downturn is extended, some financially weak private schools will be forced out of business," says Arthur J. Rothkopf, senior vice president of the U.S. Chamber of Commerce, and a past president of Lafayette College.

What worries some campus leaders most about an economic downturn is how it will affect student access. At a meeting last month, the Board of Trustees at Ursinus College, in Pennsylvania, committed an extra $250,000 to the college's financial-aid budget, says John Strassburger, the college's president.

But with over 6,000 applications to fill an entering class of 475, he worries that "in the face of recession, we may not be adequately upping our aid for as many high-need students as in the past."

Student populations are expected to become more diverse and more dependent on aid in coming years, while traditional students will continue to demand more services, says John A. Mattie, national practice leader for higher education at PricewaterhouseCoopers LLC.

Those changes alone could lead to big cost increases for institutions. But in combination with a weak economy, declining federal grants, and increased competition for talent, they could prove more ominous, he says: "This creates somewhat of a perfect storm for higher education."

http://chronicle.com Section: Money & Management Volume 54, Issue 29, Page A17