Coronavirus Closures Pose Refund Quandary

For colleges that are already financially strapped, issuing room and board refunds “could be disastrous.”

March 13, 2020
 
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Students across the country are making hurried plans to move out of their dorm rooms as the number of campus closures over coronavirus concerns skyrocketed past 200 Thursday.

Away from their dorms and dining halls, many students and parents are wondering if and when they’ll be refunded room and board fees.

But for colleges relying on such fees -- called auxiliary fees -- to support their operating revenue, refunds could be devastating.

“Every residential college and university in America relies on that auxiliary revenue stream. It is baked into the budget,” W. Joseph King, president of Lyon College and co-author of How to Run a College, said in an email. “Significant refunds will cause real problems at many institutions. It will just be worse for those with tighter or deficit budgets.”

Auxiliary services are becoming an increasingly important part of colleges’ operating revenue, especially for private, four-year institutions.

“Most colleges run their own housing. It is usually their biggest source of auxiliary revenue,” King wrote. “Assuming the residence hall is paid for, the net auxiliary revenue can be substantial. Even if it is financed, there is usually a positive revenue stream.”

Smith College, a women’s liberal arts college in Northampton, Mass., with approximately 2,400 students, is requiring all students to move out of on-campus housing by March 20. Smith said it will offer prorated room and board refunds. In fiscal year 2018, Smith collected $40.4 million in residence and dining fees -- about 16.5 percent of its total operating revenue. (This paragraph has been updated to include the correct date by which Smith students must move out of on-campus housing.)

Amherst College also announced Tuesday it would refund room and board fees for students who left campus. Room and board revenue made up nearly 9 percent of Amherst’s operating revenue in fiscal 2018.

“Refunds are a sticky business since they are definitely not in the budget. Any significant refunding will create a budget hole,” King said. “It just depends on how it is prorated. Most institutions have policies about refunds (or no refunds) if a student withdraws. Few (if any) have closure policies.”

Private universities are also collecting less net revenue per student from tuition and fees than they used to, according to Craig Goebel, principal at Art & Science Group, a higher education consulting and research firm.

“There’s much steeper discounting going on at private colleges and universities,” he said, noting that the average discount rate for private institutions is 50 percent. If the college is already under financial stress, “this could be disastrous,” Goebel said.

On top of that, added financial stress could impact a college's credit ratings. A lower credit rating could make it more difficult for colleges to borrow money in the future.

“For some of the schools that have weaker resources or are more pressured, this could create a credit challenge,” said Jessica Wood, a senior director at S&P Global Ratings.

It's unlikely that colleges will receive insurance payouts for refund-related revenue hits.

“Because colleges are sending students home as a preventative measure, not because of an event that triggers coverage under their property or business interruption policy, these refund claims will likely not be covered,” Bret Murray, who leads higher education strategy at Risk Strategies Company, a national insurance brokerage and risk management firm, said in an email Thursday. “With that said, colleges should still put carriers on notice and keep track of all financial impacts related to COVID-19.”

Colleges with substantial endowments or other significant sources of income, like federal and state grant money or land leases, will not be cut as deeply by refund requests.

Harvard University, one of the first colleges to explicitly require students to leave campus, will offer prorated room and board refunds. Board and lodging fees made up less than 4 percent of Harvard’s operating revenue in fiscal 2018, far surpassed by federal grants, gifts for current use and returns on endowment made available for operations.

A wealth gap may be emerging between colleges that choose to close or cancel in-person classes and those that, so far, will remain open. In Pennsylvania, West Chester University -- with an endowment of $40 million -- decided to end face-to-face instruction Wednesday, while Mansfield University of Pennsylvania -- with a $1 million endowment -- did not.

That said, Wood doesn’t believe colleges are making any decisions about closures and remote learning with finances at front of mind.

“While financial considerations are always important, I do think … their decisions are first and foremost being made around their communities', students', staff and faculties' safety,” she said.

Two-year colleges are somewhat shielded from this particular revenue hit. According to the College Board’s 2019 trends in college pricing report, in 2015-16, 96 percent of full-time undergraduate students at public two-year colleges lived off campus or with their parents.

Still, today most colleges are scrambling to scale up their online learning resources and put precautionary plans in place. Few have disclosed whether they will offer room and board refunds to students who leave campus.​

Room and board is a sizable chunk of what students pay each semester, and the fees are often excluded from scholarship calculations. The College Board report states that students at a public four-year universities paying in-state tuition spend on average 43 percent of their budgets on room and board fees. For out-of-state students, room and board makes up 27 percent of budgets, and for students at private four-year colleges, 24 percent of budgets are room and board fees.

Requests for room and board rebates aren't the only way colleges could lose money as a result of the coronavirus. Many have canceled admitted student days and student tours, and closing campus could affect enrollments in the fall. Institutions that rely heavily on endowment payouts could see them dip in a falling market.

The virus will "certainly roil the admission market" just as student deposits and commitments are due, said Brian Mitchell, King's co-author on How to Run a College and the founder of Brian Mitchell & Associates, a higher education consulting firm, in an email.

"Effectively, the crisis has the potential to create a double whammy -- unexpected [costs] and highly unpredictable future revenue at tuition-driven institutions," he said.​

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