How the Pandemic Could Alter Government Higher Education Spending

Historical trends suggest state dollars will drop as federal share increases—but the impact will depend on critical decisions at both levels

How the Pandemic Could Alter Government Higher Education Spending
Education
Nathan Dumlao

If past recessions are any guide, the economic challenges resulting from the coronavirus pandemic will  likely accelerate the major shift in government support for higher education that has been playing out over the past two decades. Overall, state dollars for colleges, universities, and students have fallen since 2000 while federal funding has risen, after adjusting for enrollment changes and inflation. But there is a great deal of uncertainty, and the actions of both state and federal policymakers will shape the amount and type of public support for students and institutions going forward.

Among the key factors:  

  • Higher education frequently bears the brunt of state cuts in downturns, but the level of cutbacks will depend on the size of state budget gaps and choices by policymakers.
  • Federal aid can mitigate the need for states to make cuts.
  • And funding for federal support for students—the largest category of federal spending on higher education—has tended to increase in recessions.

State allocations often cut during downturns

In past downturns, state higher education funding has been a major target of recession-driven budget cuts, but the extent this time will depend on the size of the challenge that states face and the actions that policymakers take to address their budget shortfalls.

When the economy weakens, states see revenues drop, creating gaps between the amount of money they take in and the amount they need to sustain services. Policymakers must fill these holes and in past downturns have relied heavily on spending cuts to do so. And higher education has often taken the biggest hit.

Most recently, state higher education spending fell sharply in the wake of the Great Recession, dropping by 29% per student—adjusted for inflation—between fiscal year 2008, when the recession began, and fiscal 2012 (not including student loans and tax benefits that offset higher education costs).

COVID-19 could present a greater threat to state budgets. The pandemic has already created fierce economic headwinds that are driving down revenues as states face significant additional expenses in responding to the public health emergency and its economic ripple effects.

A few states, including Nevada and Ohio, have already acted, or considered plans, to cut higher education spending.

But the overall size and scope of any cuts will depend on the scale of state budget shortfalls and policy decisions at the state and federal levels. Although the outlook for states appears ominous, policymakers don’t yet have the data they need to know the depth of the revenue holes they face. States also can mitigate the need for sudden spending reductions in a downturn through policy actions such as tapping  rainy day funds.

Level of cuts will depend on the amount and nature of federal aid

In recent recessions, the federal government has provided assistance, including money targeted to higher education, to bolster state budgets and economies and lessen the need for state tax increases and spending cuts.

As part of the American Recovery and Reinvestment Act (ARRA), Washington provided roughly $40 billion between 2009 and 2011 to bolster state K-12 and higher education spending. To receive this funding, states had to maintain their education spending at a minimum of 2006 levels. Cumulatively,  they used about $8.3 billion in federal dollars to sustain support for institutions of higher education.

The federal government also provided other support to states in the aftermath of the last recession, most notably by increasing federal funding for Medicaid, the health care program for low-income Americans jointly funded by states and the federal government. Such additional funding can help states pay for health care while also freeing up dollars that can be used to meet spending needs and plug holes elsewhere in their budgets—including higher education.

In response to the pandemic, Congress provided $30 billion in aid specifically targeted to education in  the recently enacted coronavirus relief package. Of that total, $14 billion will flow directly to public and private postsecondary institutions to help address costs associated with the coronavirus in the current and next fiscal year. And at least half of that money must be spent on emergency grants to students.

Most of the remaining aid will go to K-12 education and flow through the state governments. To draw down that funding, states must maintain most of their K-12 and higher education spending at the average level of the last three years. Secretary of Education Betsy DeVos can waive this requirement for states facing big revenue drops.

In addition, the federal government provided states and localities with $150 billion specifically to help them address the increased costs of responding to the COVID-19 public health emergency—but not their revenue shortfalls. Congress also boosted states’ Medicaid funding again.

State decision-makers expect to need more help that directly addresses their revenue shortfalls. For example, the National Governors Association recently called for an additional $500 billion in federal aid to respond to the expected budget challenges.

Federal funding often rises during a downturn

Federal support for higher education programs has tended to increase as state spending has dropped following recent recessions. In part, this happens automatically as a result of the design of federal programs, but policymaker choices have also played an important role.

As states cut back during the Great Recession, federal support for postsecondary education spiked.  Overall, spending per student rose by 15% between fiscal 2008 and 2012 (not including student loans or tax benefits that offset higher education costs, and after adjusting for inflation).   

Financial assistance to students and families to help pay for higher education amounts to the largest category of federal support. Pell Grants, the American Opportunity Tax Credit, veterans educational benefits, and federal student loans—which, unlike the other programs listed, must be paid back—are among the biggest examples in dollar terms.

Each of these programs saw significant growth following the Great Recession. In part, this happened in response to trends such as rising enrollments and increasing student financial needs. Higher education enrollment tends to surge during recessions, but the nature of the pandemic has introduced significant uncertainty about whether that will happen this time, particularly in the short term.

Federal policy choices also influence these trends. For example, around the time of the Great Recession, policymakers in Washington expanded who was eligible for, and the amount of aid students could receive through, key programs aimed at helping Americans pay for higher education. All of this suggests a continuing shift from state to federal funding for higher education in the near future, at a time when postsecondary institutions and students face unprecedented challenges. Still, much is unknown about how this will play out.

Phil Oliff is a senior manager and Laura Pontari is an associate with The Pew Charitable Trusts’ fiscal federalism initiative.

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