The old college try The old college try http://www.federatedinvestors.com/texPool/static/images/texpool/texpool-logo-amp.png http://www.federatedinvestors.com/texPool/daf\images\insights\article\university-small.jpg August 6 2020 August 6 2020

The old college try

Back to school won't be business as usual this year.
Published August 6 2020

Bottom Line Unlike the trial-by-fire triage that universities were forced to endure when Covid-19 arrived in spring, schools have had a few months to prepare a thoughtful approach on how to re-open this fall.

College drop-off will be more than a little different this year. Move-in dates have been staggered over a week or so to reduce crowding among students, and many schools are restricting or eliminating parental involvement in the process. Semesters abroad have been canceled, and many schools are following Notre Dame’s back-to-school lead. Students will start classes in August and go hard into Thanksgiving with no fall break. After turkey day, they’ll stay home and submit their final papers and exams remotely in early December. The spring semester won’t start until late January or early February, and students will skip spring break and finish up in early May.

So what can students and parents expect from this year’s college experience, and what’s the financial outlook for families and universities alike?

Delicate balancing act On the one hand, U.S. colleges are charged with ensuring the health and safety of more than 20 million students, faculty and staff, according to the Wall Street Journal. But on the other hand, there are billions of dollars at stake, from tuition, room and board, campus bookstores, football and basketball programs, and alumni donations.

Students and universities take the pledge Students are promising to wear masks, practice social distancing, use hand sanitizer, stay on campus, take shorter showers and only brush their teeth when the bathroom sinks aren’t packed. For their part, schools are canceling big lecture-hall classes, implementing aggressive testing and contact tracing, and rotating student groups on campus. Duke, for example, plans to limit on-campus housing to freshman and sophomores; Stanford will alternate groups of students by class year for each 10-week academic quarter; Harvard will only permit freshman on its main campus; and MIT plans to allow only seniors on campus.

According to a recent poll conducted by the Chronicle of Higher Education, 49% of schools plan to bring students back for in-person classes, 13% will offer only online classes, and 35% will offer a mix of both. This situation is potentially fraught with financial peril for colleges, however, as they risk seeing some of their students transfer to another school if they’re offering too much remote learning or not enough.

While President Trump has been encouraging schools to reopen amid the pandemic, states and universities are gauging outbreaks of new cases and progress made on vaccine development. With the availability of vaccines unlikely before October at the earliest, schools are staying flexible and keeping their class options open.

Will colleges reduce tuition? In a recent CNBC poll, 72% of Americans think college should be discounting fall instruction if it is entirely remote. Harvard, Rutgers and the University of California schools already announced they won’t, but Princeton has proposed a 10% price cut and Williams College has offered a 15% discount. According to the Boston Globe, while most schools are not cutting the cost, some have agreed to freeze tuition.

Due to the pandemic, U.S. universities are facing serious revenue constraints. Enrollment for international students (who usually pay full freight) has been on the decline since 2016, and many schools are dipping into their endowments. Combined with deferred enrollment and a decline in out-of-state students (who also typically pay full tuition at public schools), colleges may not be able to afford reduced tuition.

Cutting costs The New York Times reported that a 15% decline in student enrollment nationwide could result in a $23 billion revenue shortfall. But college is a labor-intensive business, with four million faculty and staff members accounting for 70% of a school’s budget. As a result, thinning the ranks of non-tenured faculty and non-union staffers, in addition to freezing wage increases and canceling or delaying major construction projects, are approaches many schools are adopting.

Who’s ready for some football? In another potentially significant hit to university revenues, canceling the college football season would be financially devastating. For most public institutions, tuition and fees are responsible for only 20% of revenues. There are 65 “Power 5” schools (in the Big Ten, SEC, Big 12, ACC and the PAC-12 conferences) who would lose an estimated combined $4-$5 billion in football revenue. This translates into an average revenue loss per school of $60-80 million, or roughly 60% of their total annual operating revenue.

For the safety of players and fans, the Big Ten and the Pac-12 have already canceled nonconference games, and they are trying to salvage their seasons with a truncated schedule of conference-only opponents. Smaller Division I conferences, such as the Patriot League and the Ivy League, have already canceled theirs. Other colleges who are looking to cut costs are targeting expensive, low-profile sports that don’t draw many fans. While football and basketball are colleges’ cash cows, other varsity programs such as golf, rowing, swimming and diving, sailing, fencing, field hockey, tennis and squash are all potentially on the chopping block.

Summer jobs and internships took a hit Students with rescinded internship offers this year are at a severe disadvantage compared with their peers who already have a foot in the door. Those with paid internships have historically received 50% more job offers than their peers with unpaid or no internships. Several companies have continued their internships remotely, but students remain concerned that they will not have the same networking opportunities.

Consequently, students may need to adjust their work expectations in light of the “pandemic economy.” Looking back on those who graduated into the last recession, there are long-term implications regarding future earnings for those who enter the workforce during a recession. It can take 10-15 years for these graduates to catch up to their peers who started jobs during a normal economic cycle. Graduates entering a tough job market will be willing to take the first job that comes their way, even if they are overqualified. So as the economy reopens, it may be more insightful to study the broader labor-impairment rate (U-6) rather than the unemployment rate (U-3) to glean a more comprehensive long-term labor-market outlook.

In addition, a lack of internships can damage a company’s hiring pipeline, as lost summer jobs and internships are typically viewed as an on-the-job trial before making a full-time offer.

What are the political implications of $1.6 trillion in student loan debt? Addressing this burden is likely to be a hot topic in the upcoming presidential election, as Millennials and Gen Z comprise 37% of the electorate. They are also concerned about their future job prospects, so student-loan forgiveness and lowering the unemployment rate are critical issues that should be important to both parties.

Research assistance provided by Federated Hermes summer intern Sophia Tropaitis.

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Tags Coronavirus . Markets/Economy . Equity .
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Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

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