Federal cuts push higher ed finances from bad to worse

Columbia University
An entrance to Columbia University. The Trump administration cut $400 million of funding for the school for its failure to combat anti-Semitism on campus.
Bloomberg News

Higher education institutions have faced a lot of pressures, from operating costs to the demographic cliff, which were exacerbated by the pandemic. 

Now the federal government is creating additional problems for the sector — cutting NIH grants, putting political demands on individual universities, and throwing other funding into uncertainty. 

These issues will hit large and elite schools, which were less affected by the prior strains on the sector, analysts say.

The Trump administration notified Columbia on March 7 that it would cut around $400 million of grants and contracts from the university, claiming the school failed to combat anti-Semitism. 

On Thursday, the administration sent a letter to the university outlining what it would need to do to reverse the cuts, demanding suspensions and expulsions for students involved in pro-Palestinian protests, abolition of the university's judicial board, enacting a mask ban, and placing the Middle East, South Asian and African Studies department under academic receivership for five years. 

The White House called these actions, among others, a "necessary precondition for continued negotiation" and said they must be completed by March 20.

"We are reviewing the announcement from the federal agencies and pledge to work with the federal government to restore Columbia's federal funding," a university spokesperson said in a statement. "We take Columbia's legal obligations seriously and understand how serious this announcement is and are committed to combating anti-Semitism and ensuring the safety and wellbeing of our students, faculty, and staff."

On Friday, the administration announced investigations into more than 50 universities for "racial discrimination" as part of its fight against diversity, equity and inclusion efforts. 

Most of the investigations involve partnerships with a nonprofit that "helps students from underrepresented groups get degrees in business," the AP reported. The other investigations are for awarding "impermissible race-based scholarships," in the Department of Education's words, and one college is being accused of racial segregation. 

"Linking funding to compliance with a growing and changing litany of policies that are preferred by the administration is concerning," said Lisa Washburn, managing director at Municipal Market Analytics.

Meanwhile, Washburn said, many more universities are slowing spending, freezing hiring and rescinding PhD offers due to proposed cuts to the National Institutes of Health.

The Trump administration is seeking to cap NIH reimbursements at 15% for research-related overhead expenses. Many universities receive far higher rates — Harvard's is 69%, for instance — and some would stand to lose hundreds of millions of dollars if courts allow the caps to go through, according to Jessica Wood, managing director for S&P Global Ratings.

Some schools face another looming threat: the government may increase the tax on endowment returns in the upcoming budget. The tax was created in 2017 and currently only impacts around 50 institutions, Wood said.

"We're looking at a sector that was already under threat," Washburn said. "Oversupply, weakening demographics, higher operational costs, new costs that they have to comply with, like cybersecurity."

S&P's sector-wide outlook for higher education, released in December, found the sector was highly bifurcated, Wood said. Although every school in the country is facing pressures, larger and more elite universities had enough name recognition, diversified revenues and flexibility to continue business as usual. 

These new pressures are different, she added. The schools in the bottom half of S&P's rated universe were never big enough to receive NIH funding, Wood said; on the other hand, many of the schools receiving significant federal grants and research funding are highly rated. 

"They tend to also benefit from significant financial flexibility and liquidity in the form of diversification of revenues, large balance sheets, large fundraising capabilities," Wood said. "So in our view, that offers some financial flexibility to sort of work through short-term disruption."

But the federal government has other ways to worsen conditions for strong and weak schools alike. 

If the federal government cuts state funding in its next budget, said Washburn said, those states may adjust by cutting their funding to public universities. An inflationary environment and tariffs could also impact the smaller, more financially challenged schools, she said.

Wood expects the administration's immigration policies will cut international student enrollment, which declined during President Donald Trump's first term. Most of the elite schools that Wood rates did not see international enrollment decline as much as the rest of the sector in 2017, she said, but some larger public institutions saw considerable drops. 

If the Trump administration changes policies around Pell grants and student loans or dismantles the Department of Education, the sector could see drastic consequences. 

Last year, problems with FAFSA hurt enrollment at schools with lower-income populations or higher reliance on Pell grants, Wood said. 

"To the extent that we have more delays or less information [about student loans or aid], or less people to provide information to would-be students," Washburn said, "that could impact enrollment. Again, that's more on the margin, but certainly, for those schools that can't afford to lose 10 students, that's a big deal."

These problems have tails, Washburn said. The students who don't enroll would have paid tuition for four years; the PhD candidates and studies that will go unfunded would have lasted years as well. 

So far, universities have attempted to comply with Trump's demands, such as increasing disciplinary action, but simultaneously froze hiring and looked to cut spending. 

The University of Pennsylvania, in an announcement to students and staff, described "painful" measures to curtail its budget, including scrapping capital spending, slashing non-compensation expenses, and freezing hiring and mid-year raises. 

"The scope and pace of the possible disruptions we face may make them more severe than those of previous challenges," the university's provost wrote, "such as the 2008 financial crisis or the COVID pandemic."

The Trump administration's impact on higher education wasn't totally unexpected by S&P, Wood said. So far, the situation has not inspired any rating actions, but it eventually could. 

"Anytime there's some type of significant financial loss to an institution, there could be a potential rating action," Wood said. 

"There's an increased cost associated with having to fight all of the actions that are coming out of D.C.," Washburn said. "I often worry [about] the cost of the fight and the distraction."

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