Higher Education at a Crossroads: Fiscal Considerations for States

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Key Takeaways

Key Challenges

Demographics and Enrollment

Overall enrollment in postsecondary education has declined since a post-recession peak in 2012. Over the past decade, overall undergraduate enrollment population decreased by 2.4 million students, a 13.5% drop. Enrollment declines were especially pronounced during the COVID-19 pandemic and have been concentrated among two-year and for-profit institutions.

Despite a modest 1.2% enrollment gain in fall 2025 enrollment, according to the National Student Clearinghouse, the higher education sector faces significant, long-term demographic challenges. According to projections from the Western Interstate Commission for Higher Education, the total number of high school graduates peaked in 2025 and will decline steadily through 2041 due largely to declining birth rates. During this period, 38 states will see a decline in the number of high school graduates. Several high population states, including California, Illinois, Michigan, New York, and Pennsylvania, will be hit especially hard, accounting for approximately 75% of the expected decline in total projected graduates.

Enrollment of international students is also declining. The Institute of International Education found that total international student enrollment declined 1% in fall 2025, while new international student enrollments declined by 17%. Although they comprise approximately 6% of the total postsecondary student body, international students often contribute significant revenue to institutions because they pay higher tuition prices and receive less tuition assistance than domestic students. Additionally, many major research universities have higher proportions of graduate students from abroad.

Amid these wider trends, enrollment declines are not equitably distributed among institutions. While many flagship universities are seeing strong enrollment and revenue growth, smaller institutions are often struggling to attract students. A Wall Street Journal analysis of 748 public four-year colleges and universities found prominent state universities increased enrollment in 2023 compared to 2015. In the same period, lesser-known regional state universities saw enrollment fall. The larger number of regional universities and their subsequent enrollment challenges can create significant pressures on higher education. Smaller and regional universities already struggle to compete with more extensive amenity offerings at flagship universities, which can serve as a draw for more student enrollment. There are more than 500 regional universities in the U.S. serving nearly 5 million students and comprising an important funding component of state higher education systems.

Affordability

The rising cost of college is a persistent headline: Over the last 30 years, the inflation-adjusted sticker price of tuition and fees has more than doubled. In 2025-26, the average published tuition and fees at public four-year universities for in-state tuition was $11,950, according to the College Board's Trends in College Pricing report. The average published tuition and fees at public two-year institutions for in-district tuition was $4,150.

While the growth in costs has had a significant impact on students and families, much of the rising cost is attributed to a higher education pricing model that relies on both high sticker prices for tuition and significant financial aid offerings. In 2024-25, undergraduate students received an average of $16,810 per full-time equivalent student in financial aid. Overall, 80% of students attending four-year public institutions received some form of grant aid.

After including both grant aid and non-tuition expenses like room and board, the estimated average net cost of attendance at public two-year institutions was $15,980 in 2025-26 and $21,340 at public four-year institutions. In both sectors, net attendance costs have declined slightly since peaking in the mid-2010s.

Public Trust and Value

A recent poll from NBC News found just one-third of registered voters say that a four-year college degree is worth the cost, compared with nearly half of voters who said a degree was worth the cost when surveyed in 2017.

Recent graduates have also faced a difficult entry-level job market. An analysis from Oxford Economics found that recent graduates' unemployment rate is rising faster than any other education or age cohort. Just 30% of graduates from the class of 2025 found a full-time job related to their education, an 11% decline compared to the class of 2024, according to a survey from Cengage Group.

Due largely to these structural challenges, ratings agencies such as Fitch and Moody's have issued deteriorating or negative outlooks for the higher education sector. These outlooks signal heightened concern about the long-term financial viability of many higher education institutions. Weaker credit outlooks can raise borrowing costs, strain higher education balance sheets and create pressure on state policymakers. As institutions work to respond to these challenges, they must also manage their physical campus presence in accordance with shifting enrollment and financial constraints. Previously, this working group has identified the deferred maintenance needs of state-owned facilities as a growing challenge.

Policy Considerations

Admissions and Consumer Information

As postsecondary systems face declining numbers of traditional high school graduates, shifts in enrollment can create important fiscal impacts on state budgets. Tuition paid by students accounts for approximately 40% of institutional revenue, so declining enrollment may leave state general funds to cover a larger share of public universities' expenses. State policymakers can consider strategies to boost student enrollment.

With direct admissions programs, colleges automatically send offers of enrollment to qualified students. More than a dozen states have created direct admissions programs for graduating high school seniors. In 2015, Idaho became the first state to launch a direct admission program when its State Board of Education created Next Steps Idaho . Early research found that direct admissions increased first-time undergraduate enrollments by 4% to 8% and in-state enrollments by 8% to 15%, providing an enrollment and fiscal boost to Idaho's participating universities.

Beyond the complexity of the admissions process, many students and families struggle with the ambiguity of college costs and pricing. A 2024 survey found that 67% of families will rule out a college option based solely on its sticker price. Policymakers may explore approaches to provide additional pricing transparency to students and families. Minnesota passed legislation which requires the development of a standard financial aid offer form before the 2028-29 academic year. The letter must include standard definitions, including total direct costs and expenses, aid types itemized by source and net price information, presented in a "consumer friendly format." Tennessee is launching a pilot program for direct admissions letters to include personalized financial aid offers for eligible students.

Reengaging Adult Learners

While systems continue to address admissions pathways for high school students, institutions also can engage a vast population of adult learners. The National Student Clearinghouse reports that more than 43 million people have completed some college but not attained a credential, including more than 37 million working age adults under age 65. States can consider targeted programs to reenroll this population and teach them additional skills. At least four states-Massachusetts, Michigan, New York, and Tennessee-have created adult-focused promise or "reconnect" programs that offer scholarships for tuition and fees. In Michigan, which launched a reconnect program in 2020, adult enrollment increased at community colleges by nearly 38% after program launch, fueled by part-time student enrollment. States may also develop, promote and fund nondegree credential options to provide adult learners with shorter and more affordable credential pathways. Investments in these programs can help stabilize tuition revenue streams and reduce long-term fiscal pressures on state budgets through increasing enrollment and workforce participation.

State Financial Aid Programs

States collectively awarded $18.6 billion in financial aid to students during the 2023-24 academic year, a 12% increase from the previous academic year according to the National Association of State Student Grant and Aid Programs. State policymakers play an important role in designing and funding state financial aid programs. In recent years, states have expanded targeted financial aid programs for in-demand workforce fields such as healthcare, education, and technology. Many of these programs include both nondegree and degree options for career-ready postsecondary pathways.

States maintain significant autonomy over the design of financial aid programs, including eligibility, funding levels and eligible programs. In recent years, states have expanded financial aid programs to include different groups of students-like part-time or incarcerated learners-and expand the programs eligible for financial aid awards-like summer courses. To improve college retention and completion rates, states have also created emergency aid programs that provide students with small aid awards to address unexpected expenses such as car repairs or food insecurity. To reduce administrative costs, states have also consolidated their financial aid programs. In 2025, New York included language in the state budget to consolidate three state financial aid programs for part-time students into the Part Time Tuition Assistance Program. In a bid to increase the number of students applying for financial aid, more than a dozen states either require or provide support to students for completing a Free Application for Federal Student Aid.

Student Supports and Completion

As colleges work to engage both incoming high school students and returning adult learners, ensuring these learners complete a postsecondary degree or credential remains important. The national six-year completion rate for the fall 2019 cohort of students was 61.1%, according to the National Student Clearinghouse. While six-year completion rates have increased modestly by nearly 10 percentage points since the late 2000s, they have remained largely stagnant in recent years, and eight states have completion rates under 55%.

To improve completion rates, many states have begun to address non-tuition costs such as campus hunger, child care, transportation and textbooks. Since 2017, at least 10 states have passed legislation creating a hunger-free campus designation to provide students with additional support to address hunger. In 2025, several states addressed resources for homeless students including prioritizing housing placement for students at risk of homelessness and expanding financial aid to cover housing costs. Almost a dozen states have passed legislation addressing expanded use of open educational resources as textbooks at postsecondary institutions.

Consolidation and Mergers

The broadly negative credit outlook for the higher education sector has led many experts to predict that a growing number of colleges and universities will be forced to close or consolidate in future years. Recent analysis shows approximately two-thirds of all colleges showed signs of distress in enrollment, finances or state appropriations over the last decade. Disruptions to federal funds for research and aid could further weaken the sector. Many universities rely heavily on grants and contracts from the federal government. In recent years, federal grants and contracts have ranged from 7.4% of total revenue at all public colleges and universities in fiscal years 2017 and 2018 to as much as 8.7% of total revenue in fiscal year 2022. In 2025, there were substantial concerns surrounding a proposed 15% cap on the portion of a grant that could be used for indirect costs, such as facilities and administration, but the federal fiscal year 2026 budget prohibited any such reductions on the cap rate through the end of the current year.

In the past two decades, more than 100 colleges and universities have merged or consolidated operations. Since 2010, about half of mergers nationwide have involved at least one public college. While many states and systems consider mergers to save money, there are several challenges to this approach. Mergers often generate strong resistance from faculty and staff, and evidence regarding the cost savings of mergers for students is not clearly established, mergers can yield both higher sticker prices and higher financial aid awards for students as newly merged institutions flex their additional market power.

College closures can have significant effects on both individual students who are working to attain a degree or credential and a state's postsecondary education system. Less than half of students who experience a college closure will reenroll in college or university according to a report from SHEEO and the National Student Clearinghouse. Because of these impacts, legislators in recent years have focused more explicitly on college financial health indicators instead of closures. Lawmakers have considered policies to assess the financial viability of institutions, develop contingency plans, or require board members of public higher education institutions to undergo trainings that cover fiduciary responsibilities. Ratings agencies and some outlets such as Forbes have also created financial health indicator tools and research. Policymakers must also consider policy issues related to teach-out agreements, which allow students to finish their degree programs at a different school; loan discharge; and student records for continuing education.

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