Will the FAFSA Fiasco Kill Off Some Colleges?

Battered by enrollment losses from the COVID pandemic, inflationary pressures, and persistent questions about the value of college degrees, financially imperiled colleges now face a new threat to their economic sustainability and missions. The completely bungled roll-out by the U.S. Department of Education of what was intended to be a simpler, more user-friendly Free Application for Federal Student Aid (FAFSA) is instead causing a precipitous decline in the number of students completing the form.

The result may be a dramatic enrollment decline this fall, leaving colleges already on the brink of financial failure at the risk of falling over the cliff. With the traditional May 1 deadline for students to decide on which college they will attend having come and gone, the FAFSA fiasco has caused hundreds of thousands of students either to not apply to college or face uncertainty about where they can afford to attend because FAFSA delays, mistakes and reprocessing have made it difficult, if not impossible, for colleges to finalize their financial aid offers.

It’s make or break time not only for students, but also for many colleges, particularly those smaller colleges that are highly dependent on tuition revenue to fund their operations. Over the years, their operating margins have shrunk to the point that a particularly bad enrollment year could spell the difference between financial survival or economic ruin. One more crisis could cause them to throw in the towel.

How bad is the situation? While estimates vary, tracking by the National College Attainment Network shows that as of May 24, 14.4 percent fewer high school seniors had completed a FAFSA than at the same time last year. That translates into almost 300,000 fewer high school graduates completing the form. And that’s significant because FAFSA completion is strongly associated with postsecondary enrollment: a much higher percentage of seniors completing the FAFSA enroll in college versus those who don’t complete the form.

While students rely on the FAFSA to know which colleges they can afford to attend, institutions also rely on the FAFSA to help them package their financial aid. In other words, the FAFSA is a critical part of every college’s attempt to optimize financial aid in order to maximize enrollment and increase net tuition revenue.

In our conversations with highly regarded enrollment professionals across a range of institutions, all agree that many colleges will enroll fewer students and gain less net tuition revenue this fall because of the FAFSA problems. Some estimates range from a 10 percent to a 20 percent decline in the entering class.

Jon Boeckenstedt, vice provost for enrollment management at Oregon State University, said he feared the problem “could be the straw that breaks the camel’s back for some schools,” adding that “it’s not a revelation that small, poorly endowed, tuition-dependent colleges with small regional draws in areas that are saturated with private colleges and declining high school graduates will be most vulnerable.”

Many institutions will not know the full impact until the last two weeks of August or early September when they take their fall enrollment census. By then, it could be too late to take the necessary financial precautions to avoid financial disaster.

In our new book, Colleges on the Brink: The Case for Financial Exigency (Rowman and Littlefield, 2023), we discuss the steps vulnerable institutions can take in order to escape the downward financial spiral many have been suffering in recent years as they deal with threats from smaller markets, rising costs, narrowing operating margins and a public that’s grown more uncertain about the value of college.

At the time, we did not foresee the FAFSA problems as one of those threats. Now we do, and in all likelihood, this threat could be even worse than those posed by the pandemic because this time there is unlikely to be any federal bailout. The federal stimulus money no doubt enabled many institutions to survive during the pandemic, in some cases artificially extending their lifetimes without forcing any necessary internal financial changes.

So, what should institutions facing financial precarity do at this point in time? Here’s a list of 10 steps to consider.

1. Don’t wait too long to put some initial financial controls in place. Acting in September is probably too long of a delay. These initial steps should focus on the decisions you can control today, like delaying new contractual obligations and capital projects.
2. Do not obligate non-necessary expenditure until you have a clearer estimate of what operating revenues will be. Defer the things you want and acquire only the things you must have to maintain academic and operational integrity.
3. Identify reserves, sources of one-time funds and open faculty and staff positions that could be frozen.
4. Slow hiring and recurring expenses like increases in compensations, promotions, and the creation of any new positions. Wait to finalize those decisions until your fall revenue is known.
5. Be careful about increasing your tuition discount rate to lure more students to apply. Too much of a discount will make already shrinking margins even thinner, especially if you have fewer students.
6. Rather than continuing to operate within your current budget model, utilize a modified cash budget to monitor monthly activities as you would in your own home. How much cash do we take in, how much will we have to spend to pay our bills, and how much will we have to rely on our savings to make up the difference? When we anticipate relying too much on our savings to pay bills, operating from a cash budget can allow you to slow your spending much quicker.
7. Review your governance regulations so you are prepared to take whatever steps may be necessary to respond to a financial emergency.
8. Develop an academic portfolio or unit-based cost analysis that shows how much it costs to offer courses and produce degrees in your different academic programs. This can allow you to allocate instructional resources and schedule courses that are balanced with your enrollment and the net tuition they generate.
9. Know your enrollment and financial data so you can engage your campus community in planning for future contingencies.
10. Develop a communication platform that outlines the challenges, creates avenues for shared information and responses, and keeps the campus informed about the decisions that are made.

There’s no question that the major victims of the many FAFSA foul-ups this year are the prospective college students who may be forced to postpone or forgo their college dreams because they will not be able to access the financial aid that’s necessary. But colleges and universities have been put at risk too. It’s important for them to keep a close eye on the financial implications of the situation now and be prepared to take any steps required to mitigate the damage that may occur.