US debt pact throws campuses back into crisis

Biden ends months-long Republican showdown by accepting budgetary freeze that will tighten institutions’ budgets and likely hurt students with the greatest need

June 12, 2023
A giant Kermit the Frog balloon with helium is low on the ground at Macy's Thanksgiving Day Parade n New York City to illustrate US debt pact throws campuses back in crisis
Source: Getty images

The US is returning to an era of sharp fiscal restraint after its debt-ceiling showdown, forcing higher education institutions to look again at making efficiencies, with experts warning that large numbers of lower-income students are at risk of being excluded.

Joe Biden accepted a compromise this month to bring to an end the political drama that began in January when congressional Republicans refused to take the routine step of raising the nation’s legal borrowing limit.

The negotiated outcome includes two years of virtually no increases in non-defence federal spending, which, several experts agreed, almost ensures that US colleges and universities will see little or no extra funding during the coming two years in critical areas such as federal student tuition aid and federal grants for scientific research.

For a large chunk of US higher education, said Emily Wadhwani, a senior director for US public finance at the credit rating agency Fitch Group, the deal inaugurates a period in which institutions will again be forced to trim their operating expenses – although for some, she said, this might be beneficial.

“There is a healthy amount of flexibility with regard to cuts that can be made across the sector,” Ms Wadhwani claimed.

But for certain categories of institution – and especially for lower-income students more broadly – she and other analysts expect tough conditions under the federal spending freeze, especially as the expiration of federal Covid relief funding already meant many state governments were heading for financial struggles.

“There will be some pain”, as Ms Wadhwani described it, “at the bottom end of the credit pool.”

The usual suspects for consolidations or even closures, said another expert, Nathan Daun-Barnett, an associate professor of educational leadership and policy at the University at Buffalo, remained mid-tier public universities and smaller tuition-dependent colleges, which tend to rely more heavily on federal aid.

“Institutions tend to be pretty resilient places,” Professor Daun-Barnett said. “Yet I am still worried about the precarious position that some of our higher education institutions are in.”

The institutions themselves have few illusions about what awaits them. With economists still debating whether the nation is headed toward recession, the trillions of dollars in federal Covid aid are now gone, to be suddenly replaced by legally enforced austerity, said Jonathan Fansmith, the senior vice-president for government relations at the American Council on Education.

“You don’t have the option you had before of the feds taking up the slack from the states,” said Mr Fansmith, whose group is the main US higher education alliance, representing more than 1,700 colleges and universities. “The pressure on the states will have a much more significant impact as a result.”

That said, experts see a wide range of directions in which the coming two years could go. The US stock market has shown signs of resilience lately, on top of historically low unemployment rates, despite persistent predictions of an economic downturn as policymakers work on tamping down inflation.

A strong economy typically means lower college enrolment rates, although it also could have the advantage – in the upcoming federal retrenchment – of reducing the number of low-income students and the extent of their need.

A new recession, on the other hand, could boost enrolments, Mr Fansmith said. But that also would fall hardest on the students and families with the greatest need, at a time of declining state and federal support. “That's a bad recipe,” he said.

Mr Fansmith said it was “awfully hard to say” what the economy would do and which direction was potentially most beneficial to higher education. “Because the flip side of this”, he said of the economy’s generally upward direction, “is that we’re in a highly inflationary economy, which means everything colleges and universities do costs more.”

The terms of the debt-ceiling agreement between Mr Biden and congressional Republicans largely hold overall non-military spending flat for the coming fiscal year and limit it to just a 1 per cent increase – almost certainly well below the rate of inflation – for the following year.

That covers most research spending at US universities, at a time when the Biden administration and its allies in Congress had been promising substantial increases, in part to meet a bipartisan sense of escalating scientific and military competition from China.

A significant share of US academic science does involve the military. And the terms of the Biden deal with Republicans leave room for budget increases in some non-defence areas as long as they are accompanied by cuts elsewhere. To that end, Mr Fansmith made clear that his organisation planned to battle to win its share.

In these fights, academic research might fare better than most because of the tradition in Congress of showing bipartisan support for science. Already, in the debt-ceiling agreement itself, Mr Biden convinced Republicans to keep a $5 billion (£4 billion) allocation, known as Project Next Gen, to develop new coronavirus vaccines and drugs.

For many US faculty, however, a flattening of federal investment in science could mean major professional changes, such as teaching more classes.

“Maybe not as much research is being done, so we use their time in other ways,” Professor Daun-Barnett said. “It means we’re going to have to redistribute some of the work in our institution.”

Administrators were especially likely to feel the pressure to justify their existence, said Amy Li, an assistant professor of educational policy studies at Florida International University. “There’s definitely areas where they could trim the fat,” she said.

Ms Wadhwani agreed, but to a point. The quick budgetary and staffing adjustments by many colleges and universities in the first few months of the Covid pandemic – before the large-scale federal aid began rolling out – showed that they often had organisational flexibilities that even they did not realise they had, she said. But much of the excess padding of staff, Ms Wadhwani said, had now been eroded, meaning that federal and state funding cutbacks in the coming two years could mean an acceleration of institutional closings or other emergency measures.

One problem in assessing that risk, Ms Wadhwani said, was that such existential troubles were more likely among smaller institutions whose operations were far less transparent to outsiders, because they were less likely to pursue large-scale investments that would subject them to independent financial assessments. That meant they could collapse with little advance notice, she said. Nevertheless, before they took the step of shutting down, she said, such precarious institutions typically signalled stress by finding assets they could sell off, such as excess land or buildings.

Among its other provisions, the debt-ceiling agreement between Mr Biden and the Republicans also put a firm date of August for ending the pause in federal student loan repayments started by the Trump administration in March 2020 as a pandemic relief measure. Loan collections and interest accumulation have been frozen during that period, and the Biden administration has been reluctant to end it, especially as it awaits an imminent US Supreme Court ruling on the constitutionality of the plan it announced last August to cancel up to $20,000 per borrower in federal student loan debt.

Mr Biden announced that plan just ahead of the 2022 congressional elections – in which the Democrats performed surprisingly well – as a way of helping many of the 45 million Americans owing an estimated $1.8 trillion in student loan debt. But he based his authority to act on a federal law granting US presidents such discretion in the case of a national emergency, and his opponents have argued to the courts that the action represented a vast overreach.

Colleges and universities would not be surprised if Mr Biden were to lose the case, especially given the political alignment of the Supreme Court, and they did not expect to face any serious decline in student enrolment interest if he did, Mr Fansmith said. Resuming the student loan repayments, therefore, seemed reasonable, he added: “It would be hard to justify another extension at this point.”

Mr Biden and his allies had argued that the nation’s huge student debt levels created a drag on the US economy by restricting the ability of younger Americans to buy houses and make other purchases. But now, Professor Daun-Barnett said, the resumption of student loan payments might even have a beneficial effect for the economy, given the current policymaking focus on trying to bring down inflation. “So there might be a silver lining to that, even though it’s going to be a jolt to some folks,” he said.

Professor Li offered a harsher assessment, suggesting that Mr Biden ultimately knew that his plan for wide-scale student debt forgiveness was impracticable in its size, but put it forth anyway – both as a promise in his 2020 presidential campaign, and as a formal initiative in 2022 after months of publicly teasing the idea – as a means of cultivating votes.

“I really think it was a political move by the Biden administration to rally people for the midterms,” she said. “Because, in practicality, it’s not a very feasible plan to forgive that much in student loans.”

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