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Podcast

Will the CARES Act Save Higher Ed?

Episode 2

April 7, 2020 28 minutes

Summary

This episode of Office Hours features EAB Senior Director Kaitlyn Maloney and Associate Director Michael Fischer discussing the recently passed CARES Act, and the likely impact on higher ed.

They discuss why the roughly $14 billion in economic aid is a stop-gap measure at best. They also explore whether higher education is “too big to fail.” In other words, if we allow scores of colleges and universities to fail now, do we risk doing irreparable harm to the students and communities those institutions serve?

Transcript

00:16 Matt Pellish: From EAB, I’m Matt Pellish, and this is Office Hour, a podcast from the leader in research, technology and services for education. At EAB, we’re privileged to work with leaders from more than 1,700 colleges and universities. That gives us this unique window into what they care about, what they’re thinking about, what their concerns and challenges are. In Office Hours, we’re gonna discuss what did we learn from talking to all those chancellors, and presidents, and provosts, and other leaders, along with a little of our research, analysis, and sometimes our opinions. In a time of social distancing, a lot of us are reading more, but I’m guessing most of you haven’t found the time to sort through the roughly 335 pages of HR 748. Don’t worry. In today’s episode of Office Hours, my EAB research colleagues, Michael Fischer and Kaitlyn Maloney, our finance and operations leaders, they’re gonna spend some time unpacking the CARES Act, and it’s roughly $14 billion for higher ed. It’s called a stimulus, but saying “stopgap” might be a better way to look at it. Also, they’ll discuss whether higher ed is, borrowing a phrase, throw it around from the last recession, too big to fail. In other words, if we let dozens of schools fail now, will we cause greater harm to the students and communities they serve in the long run? Thanks again for joining us, and welcome to Office Hours with EAB.

01:42 Michael Fischer: I’m Michael, and I am a researcher at EAB. And I’m joined today by Kaitlyn Maloney, a researcher as well, who specializes in university administrative and financial issues. Kaitlyn, thanks for being with us.

01:56 Kaitlyn Maloney: Hi, Michael, glad to be with you today. Excited for this conversation. Coming at you from downtown Washington DC, my kitchen table, the apartment that I share with my partner, who is a Senate staffer. So I’m excited to talk about the stimulus bill ’cause this is probably the first time that our professional worlds have ever collided.

02:15 MF: I was gonna say, you are right in the heart of the action with the passing of the Coronavirus Aid, Relief, and Economic Security Act, which I’m pretty sure they named so that they could get the acronym CARES, and reference that for all forseeable future references.

02:31 KM: Definitely some reverse engineering there, yeah.

02:34 MF: Absolutely, absolutely. Well, the CARES Act is a big deal, and there’s a lot that could be discussed on in higher education, specifically about $14 billion of funds allocated to it. Kaitlyn, give us a sense of what was the breakdown of what those funds are and where universities are allowed to spend them.

02:54 KM: Yeah, I’m happy to break it down for you. It’s a slightly complicated formula. I’ll try to simplify it as much as possible, but, yes, $14.2 billion in total fund. The majority of that, a little over 88%, $12.56 billion total, is going to institutions themselves to support students and the institutions navigate the disruptions of COVID-19. That’s going straight to the institutions. The remaining pot, about $2.9 billion, is going to state governance. They’ll be able to direct that funding to either colleges, or universities, or K-12 systems in their state at the state’s discretion. So, schools are automatically getting about $12.5 billion straight to institutions. Take that pool, the way that that’s being allocated is based on enrollments, 75% based on the number of Pell recipients enrolled at the institution prior to the outbreak, the other 25% based on total in-person enrollments before the shift to online.

03:58 KM: That’s what dictates how much schools will receive. Then schools will take that money and they have to automatically send 50% of it straight on to the students, to support the expenses that the students have had to incur as a result of the outbreak. And schools could keep the remaining 50%. They’ve got a lot of flexibility with what they can do with it, but it is earmarked to cover expenses incurred through COVID-19. Could include costs incurred in shifting to online instruction. It excludes certain things, like payment to the marketing vendors that might be helping them recoup lost enrollments from the outbreak. They also can’t spend it on all capital expenses.

04:38 MF: So, given the breakdown of the funds and how they’re being allocated to different institutions, are there certain types of institutions that benefit the most from the CARES Act, and are there other ones that are gonna feel more pressured or more strained even with this relief packet?

04:54 KM: If you think about that formula, 75% is dictated by the number of Pell recipients enrolled at the institution. Pell recipient usually used as a proxy for low-income students. So, the schools that enroll the most low income students are going to get the largest relative share of the funds. That’s typically our regional public institutions. That other 25% is based on overall enrollment, so that’ll benefit the biggest schools. The biggest, largest research institutions will come out winners there. But I’ll note that the funds that will be awarded aren’t nearly enough to cover the expenses incurred by institutions through this outbreak regardless of institution type. So, I don’t think any school really feels like a winner or a loser necessarily in this formula, but it does direct the most amount of funds to large research schools and schools that enroll the largest percentage of Pell students.

05:46 MF: Yeah, $14 billion, seems like a drop in the bucket, especially even compared to the total amount of money being distributed by the CARES Act, which is closer to $2 trillion. Higher education is getting only a small fraction of that. Given the limited pool of resources available for an institution, what would you recommend that they allocate that money to first, or how should they spend it to best serve their campus’s needs?

06:11 KM: Well, remember that 50% of it has to go straight to students, so what we’re telling our partners right now is “Tend to that portion first.” Students and their families are going to come to realize that these funds are coming. They might start to figure out what they’re eligible to receive, and they’re gonna be holding schools accountable to getting those funds as quickly as possible. I’m sure peer institutions will be publishing statements on when those funds… Policy documents about when those funds could be expected to receive, so schools are going to be compared by their students on how they perform here. That should be their top priority. That also makes the most sense. Students that are hurt by this crisis don’t have access to lines of credits with banks or other funding mechanisms to give them some cushions to cover expenses through the crisis, like institutions themselves do, so it’s important that schools are putting their students first here.

07:03 KM: After that, it’s really going to be up to the institution when they look at the costs incurred, but again, that remaining pool is not going to even come close to covering expenses that schools have incurred. A lot of schools, as they’ve started to calculate what they’ll receive and the expenses that they’ve incurred, have announced that the funds that they’ll be able to keep from the CARES Act won’t even cover 50% of room and board refunds, so 50% of just one type of expense that they’ve incurred, not even considering the expenses they may have incurred in standing up remote instruction, and decontamination, and overtime or hazard pay for critical employees and so on.

07:44 MF: So, these stories that we’ve been hearing about institutions having to consider wage freezes, hiring freezes, furloughs, the CARES Act isn’t going to resolve those issues? Those are still gonna be important considerations, weighty decisions that institutions are going to have to wrestle with?

08:02 KM: Mm-hmm. I’ll say the CARES Act does stipulate that schools that accept the refunds should attempt, they’re encouraged to maintain all of their staff on payroll, but there’s no legal mandate, per the bill, that they do so. Congress is giving these funds with the intention that schools, to the best of their ability, keep paying their staff, but again, there’s no requirement to do so. We’ve already seen schools announcing hiring freezes, announcing non-essential spending freezes, deferring vendor payments, doing what they can to contain costs right now to defer some of those bigger and harder staffing decisions like furloughs, like layoffs. Every school is gonna have to make some difficult choices about how they cut and contain costs now. We do expect that some schools are going to have to make those decisions, but hopefully this funding, plus some of the other cost containment measures that they’re working towards, will be able to delay and minimize that to the fullest extent possible.

09:03 MF: I was actually surprised, Kaitlyn, reading about the CARES Act, but this was the third federal stimulus intervention related to the coronavirus outbreak, and we’re already hearing rumors of a fourth stimulus being prepared in the background. Is this something that we should expect that the federal government will continue to intervene in higher education with additional dollars moving forward? Or from their perspective, are we hearing that they think the answer has been given to higher ed and they have other sectors of the economy that they have to worry about?

09:35 KM: That’s a great question, Michael. I’ll start by noting, you used the phrase, or the words, “stimulus bill.” That’s the relief package that was issued during the Great Recession, was a stimulus bill. It was encouraged, or it was issued, to jumpstart businesses, build new infrastructure. This is what we call a relief bill right now. It’s not meant to stimulate growth of college campuses or stimulate students and their families to re-enroll, to continue to support those institutions. It’s purely to relieve students and institutions for some of the costs that they’d have to incur, some of the ways that they’ve suffered so far. And it was really written with students in mind.

10:18 KM: The reason that so many of these funds are flowing through the institution is because the federal government has determined that that’s the easiest way to get the dollars to the students that need it most. Schools know who the poor recipients are, there’s already mechanisms, processes set up for schools to receive Title IV funds from the Department of Education. That’s the existing processes that these funds are flowing through. So really, higher ed institutions weren’t the primary beneficiary of even this relief funding. The relief funding that institutions are receiving is really to refund them, to help them recover the expenses incurred in taking care of students. This is a “students and families first” bill.

11:01 KM: We’re hopeful that lobbying agencies are on top of Congress, on top of their representatives, making sure that they’re aware of the additional losses that are incurred by institutions, the additional ways that they’ll be harmed going forward. This bill covers existing expenses incurred. It doesn’t begin to account for the revenue losses that schools are going to see across the summer and into the fall. Schools are already anticipating losses of summer term revenues, all the summer camps that schools host, summer conferences, ways that they’re using their campuses to generate alternative revenues. The auxiliary revenues that they generate over the summer are only a tiny fraction of their overall operating budget, but many schools do rely on those to subsidize the cost of education and research across the general academic term.

11:53 KM: Looking beyond that, we’re looking into the fall. Even if students are able to return to campus, institutions are planning for fewer international enrollments, from travel bans that continue or students that weren’t able to complete the necessary… Just might be afraid to leave the country given everything that’s going on, as well as students that don’t come back in the fall because they’re having to deal with unforeseen circumstances of the crisis, whether it’s health-related or financial-related. Those revenue losses are really going to hurt institutions in the months and years ahead. This relief bill doesn’t do anything to address that yet, so we’re hopeful that the more schools are able to pivot to thinking forward and thinking longer term, communicate to their representatives, that these losses are going to continue and these institutions are going to continue to need help, that we’ll see more attention to higher education in future funding bills.

12:46 MF: Institutional budgets were already tight. Most of the CARES Act resources are going directly to students, and even that is not enough to cover, as you mentioned earlier, the refunds for housing and dining plans that most institutions have incurred from sending students home. And there aren’t a lot of those traditional revenue sources in the near term, auxiliaries, summer camps, etcetera, for institutions to rely on to try to offset this loss. What’s left in the institutional toolkit? Are there still wrench places, pivots, that can be tightened, or are there alternative revenues that haven’t been pursued yet that institutions can rely on? What are we seeing institutions thinking about?

13:33 KM: In the short term, institutions right now are just worrying about covering their expenses, paying their bills, paying their employees at least through the end of the semester or whatever promises they’ve made to date. Right now, we’re looking at schools looking at different tactics to increase their institutional liability, to access cash essentially. Schools are looking to their banks, to their lending agencies, to open new lines of credit, tap into existing lines of credit. Good news is they have options to help them cover their cash bases in the short term. I think it’s… Once we get into the summer, after this immediate crisis response is finished, and schools hopefully have a little bit more breathing room, a little bit more time to plan, that we’re going to see them looking towards a bit more dramatic solutions, cost containment measures. Remains to be seen what that will look like.

14:27 KM: Labor comprises 60% to 70% of every school’s operating budget, so surely we’re looking at things beyond just hiring freezes. Maybe at certain benefits reductions. Some schools have admirably already come out and said that their senior leadership team has determined that they will take salary cuts for the next six months. I think some have said Cornell is a good example there. Some schools are making quick and urgent campaigns with their donor base. A lot of the immediate campaigns that we saw were directed at students, again, “Hey, alumni, help us pay for our students, the cost of their emergency flights to get back home, the cost to clear out their dorm rooms and ship their supplies back to campus, that cost you… Pay for laptops for students that don’t have laptops to take part in remote instruction back home.” I think we’ll see more of those shifting to appeals to alumni to help just keep the institution afloat through this critical period.

15:24 KM: I wouldn’t be surprised if we see some schools get creative. It’s the desperate times, desperate measures adage, for sure. The good news is, is I’ve talked to campuses, they do seem to be looking for the silver lining in all of this. They feel really empowered as a leadership team right now, that even less than a month into this, they’ve been able to come together and make some big changes really quickly. That kinda goes against everything we’ve believed about higher education for so long, and slow, slow decision-making. So, I think schools are feeling empowered right now is the good thing– to think creatively and to come together to find the right solutions to help them stay financially afloat through these difficult times.

16:07 MF: Absolutely. I think one of the common complaints that’s been heard from people outside of the higher education industry, unrelated to the CARES Act and other higher ed-related activities given this crisis, is that given the size of some of the endowments at some of the premier institutions in the United States, you can think of them, imagine them coming to your head… Given those sizes, why can’t they just tap into those to help offset the wages for frontline employees or pay back students for tuition incurred? What’s the limitations or restrictions around some of these funds that universities have but can’t seemingly use for these?

16:50 KM: I’ll disclaim that I am not a lawyer here, but there are a lot of legal stipulations around uses of endowment funds. A lot of those massive, massive endowments that you’re referring to are earmarked for specific purposes. And a lot of the funds that institutions are legally allowed to spend are the funds that they drive on their own through their investment decisions, the investment managers making prudent investments and generating positive returns that then the institution can spend a bit more discretionary in most cases. Those are the funds that are being hit right now, too, by the economic environment. So, not only are these big endowments largely earmarked for specific purposes, so they can’t just use them to pay staff salaries or pay for student financial aid as they will, the portion of those funds that are discretionary are the ones that are taking the biggest hits right now. And a lot of finance managers and endowment managers are rightly saying it’s not in the institution’s best interest overall to sell some of those assets at a loss right now, given the current state of the markets.

17:58 MF: One of the most popular insights articles on our website, EAB.com, right now related to the coronavirus crisis is one that actually you wrote, Kaitlyn, about institutions thinking of the short, mid, and long-term impacts of this crisis on their institutional operations and strategy. Based on your conversations with chief business officers, presidents, provosts, what are institutions, maybe not thinking about as much, because there’s so much on their plate right now, that’s going to be important for them moving forward in the weeks and months ahead?

18:36 KM: I’ll reframe your question a little, where when I first heard you what I thought of is… Not what schools aren’t thinking about, but what they don’t know. I think that schools are getting to the place if they know they have to do these longer-range scenario planning, maybe making some of the decisions and having the conversations that they didn’t have time for two, three weeks ago, when they were putting out the theoretical fires on campus.

19:03 KM: Right now, schools are thinking about, “How is this going to impact all of our major revenue streams?” Enrollment is the biggest one for most institutions, both international, domestic, first-time full-time students as well as returning students, how it will affect retention. Fundraising and annual giving is a big one for the reasons we just mentioned. Donors and community members are feeling the hit of the crisis just as much as institutions are right now. We currently have a team that’s been doing a lot of research, looking at giving patterns during and immediately following the Great Recession to try to generate some assumptions that institutions can be making about how their annual giving might take a hit here. For public institutions, state appropriations are a really big if at this point.

19:55 KM: The State of Illinois, just this week, put out a statement saying that organizations… The state budget should be prepared to be even more greatly affected than it was during the Great Recession. So, even bigger hits to higher education, and Illinois has already been hit quite hard with state funding cuts. Same for our Canadian and UK institutions, thinking about funding that they might receive from their provinces or governments. The whole laundry list of auxiliary revenues, of course, is a big one. Institutions that may have planned on, even if their enrollments don’t suffer that much in the fall, even if students are able to come back to campus, a lot of institutions have issued room and board refunds for this current spring semester in the form of credits for the fall semester. So, even if the same number of students come back, they’re only going to be able to get half of the room and board revenues from those students because they’ll be crediting for the second half of this current spring term.

20:57 KM: Add to that, some of the others will vary by campus. The large research schools are worried about loss of NCAA funding for both the spring tournament, but looking at what if college football doesn’t happen in the fall. But the same could be said for our smaller and more regional partners who recruit a lot of students on the basis of, “Hey, we want you to come play for our volleyball team. We want you to come play field hockey.” If those sports aren’t happening in the fall, those students might think twice about whether or not they wanna come.

21:25 KM: There’s big open questions about how the big online providers might jump in and try to poach students in this moment, very rightly acknowledging that we are the institutions that are positioned to deliver online education right now. This is our bread and butter. This is what we do well. If students aren’t able to return to in-person instruction in the fall, there’s big questions of if they will choose to go to those institutions, or take a gap year, or pursue work or professional training altogether. So, lots of big open questions. I don’t think I’d characterize it as what schools aren’t thinking about right now. It’s more they don’t know what they don’t know, and just the number of assumptions they need to make is astounding right now. This is truly a critical moment, where I don’t think any school has had to think about something affecting their operations on every single level like this is. It’s truly transforming every element of a university’s operation.

22:24 MF: There is no question, just everything that you’ve listed out there, a large complicated problem. Universities are also at the core of many of their communities. The largest employer brings so many students in and drives so much economic activity for their communities. Is higher education too big to fail? If institutions begin to feel the strain, if this crisis continues to go on and on, will it be necessary for further intervention by either state or federal governance? And if not, what will be the consequences on those communities?

23:00 KM: It’s too big to fail, yeah. That’s an interesting question. Yeah, you’re making the right considerations, the communities, the families. I’ll get to those in a second. I wanna start by thinking through how that this could impact students first. You know that a lot of folks have been predicting a large-scale contraction of the higher ed industry for a while now, so some of them might think that this COVID crisis will just cause institutions, that were already going to close, to close sooner. But there’s a difference between a few institutions making a strategic, very deliberate decision to close every year and a ton of institutions closing all of a sudden, especially when you think about who is most likely to close here. It’s not going to be our only research universities. It’s going to be our regional institutions, schools that serve a disproportionate amount of adult learners, of Pell Grant recipients, of students of color.

23:54 KM: Okay, what happens if we suddenly have dozens of those schools closing across the next few months? From a federal government’s perspective, legally when a college closes, its students are entitled to having their federal loans forgiven. So, they’re looking at discharging millions of debt, in that they’ll have to determine the relative value of discharging that debt versus just providing additional subsidies to keep these schools afloat. But more importantly, for us as an industry, we need to think about the thousands, if not hundreds of thousands really, of students that will be unable to finish their degrees if a number of schools were to close.

24:31 KM: A lot of those… If we look at history of college closures across the past decade or so, a lot of the schools that affected, when those schools closed, the students don’t end up transferring to other institutions for any number of reasons. They might not transfer because they don’t have advisors or financial aid counselors anymore to help them navigate the complexities of the transfer process. Or maybe their existing school, they might see it as the only viable option for them, close to their families or to their jobs. Or some might just be too frustrated with the closures and give up trying altogether. To me, that’s the more important situation for us to avoid. The federal government is never going to let the whole industry fail, but there is a world, again, where they do let dozens of schools fall back into this current crisis. Again, using that it was all inevitable or long argument.

25:28 KM: But I think, and this is only my opinion, we need to focus on avoiding that from happen, just stop mass stop-outs as a result of unanticipated closures. We need to protect our students. Again, in particular, our low-income students and our adult learners who have already sacrificed so much to start their degrees. And, of course, to your earlier point, we need to think about the faculties, staff, the communities that these schools are going to. I particularly think about rural institutions, where those institutions support so many small businesses in those college towns who are dependent on the college students and the faculty. Again, I’m not saying that the government should support all institutions forever, but the economic impact of mass closures would be devastating, particularly in our already fragile COVID economy.

26:20 MF: This has been a weighty conversation, the CARES Act crisis, lots of uncertainty in the future. As you speak to our partners across the United States, across Canada, across the United Kingdom, what’s giving you hope? Where are you finding that silver lining in the midst of all this uncertainty and turmoil?

26:41 KM: I think our campus partners ourselves are giving me hope. Every time I have a conversation or have had a conversation with leaders of higher ed institutions across the past few weeks, I’m almost expecting some gloom and doom, I’m expecting sour spirits. They have every right to feel a bit gloomy and a bit wearisome right now. But the partners that I’ve spoken to have been so optimistic, almost energized by this moment, especially now, like I said, a few weeks in, having seen the changes that their schools have been able to bring about in a short amount of time, having seen the way their communities have rallied to support their students, to support their faculty, their staff, and their communities at large.

27:24 KM: I hear so many stories beyond just tending to the day-to-day, but thinking about, “How can we redeploy our researchers, our research labs to make PP&E for hospitals?” Or, “Can we open our dorms to serve as makeshift COVID treatment centers or to house doctors and nurses on the frontlines who can’t go back home to their families because they’ve been exposed to a virus?” Schools are not just rallying around taking care of their own right now, but are thinking creatively and so generously about how they can support their broader communities during this critical moment. And that’s given me a lot of hope.

28:04 MF: In this evolving situation, I’m sure that the next time we speak there’ll be even more of these great stories to share. Kaitlyn, thanks so much for being with us today.

28:14 KM: Thanks for having me, Michael.

28:22 MP: Thanks for listening. Join us again next week for Office Hours, when Michael returns to talk with our friend Melanie Ho about the leadership traits needed to weather an extended crisis. Until then, I’m Matt Pellish for EAB.

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