Section 3

Education And Economics: Lessons Learned From The Last Two Recessions

The last two recessions provide us with three key lessons to consider in response to the economic recession caused by COVID-19.

Education And Economics: Lessons Learned From The Last Two Recessions

Recessions are defined as significant declines in economic activity spread across the economy.1 Before the recession that began in February 2020, two recessions have impacted the state and national economy during the last two decades: the 2001 recession and the 2007-09 Great Recession. There are specific lessons for higher education from the effects of the last two recessions.

Tennessee’s state revenue, which helps fund public colleges and universities, comes primarily from taxes paid by consumers and businesses. The state’s sales tax accounts for more than 55 percent of overall state revenues, while corporate franchise and excise taxes make up about 16 percent of revenues. These state revenues are very volatile across business cycles because sales and corporate taxable bases swing widely depending on economic circumstances.

Figure 1 tracks year-over-year percentage changes in GDP, sales tax revenues, and state funding for higher education. Most of this state funding comes in the form of appropriations and transfers to colleges and universities, while about one-quarter is in the form of state financial aid to students, such as the Tennessee HOPE Scholarship, the Tennessee Student Assistance Award, the Wilder-Naifeh Technical Skills Grant, and other state grants and scholarships.

Changes in tax revenues swing higher and lower than the overall state economy, and significant changes in higher education funding lag the peaks and valleys of tax revenues by at least one fiscal year. Deep cuts to higher education funding in 2012 were already underway during the three prior years, but federal relief spending filled the gap during the Great Recession.

Figure 1: Higher Education Funding Cuts Lag Falling Sales Tax Revenues By A Year Or More

Growth rates are measured between consecutive fiscal years in inflation-adjusted terms.
Sources: United States Bureau of Economic Analysis (GDP), annual reports of the Tennessee Department of Finance and Administration (sales tax) and State Higher Education Executive Officers (SHEEO), State Higher Education Finance FY 2019 report (state support), 1999-2019.

Lesson 1: Tennessee higher education funding remained steady during the last two recessions – but context is key.

The Tennessee Constitution requires state officials to balance the budget each year, meaning the state must cut spending when revenues fall. During the last two recessions, however, higher education funding actually held steady or increased (Figure 2).

The 2001 recession lasted just eight months – from March to November 2001 – and was too short to register an immediate effect on state support for higher education. One legacy of the 2001 recession, though, along with years of slow state revenue growth before it, was an increase to the sales tax rate and corporate income tax rate.2 This fueled significant growth in appropriations by 2004-05 (Figures 1 and 2).

The 18-month Great Recession spurred federal stimulus and recovery spending that required states to maintain a certain level of support for education.3 Tennessee directed less state revenue to higher education – enacting large cuts in 2009, 2010, and 2011 – and nonrecurring funds filled the gap until 2012. The combined state and federal funding for higher education operations grew 11 percent from 2007 to 2009, while tuition revenue grew 9 percent – an increase that likely resulted from diminishing state support and an increase in overall student enrollments during this time (Figure 2).

Figure 2: Higher Education Appropriations Rose Or Held Steady During The Last Two Recessions

During the 2001 and 2007-09 recessions, state spending for public higher education was maintained. Maintenance of effort requirements from the federal government during the Great Recession were critical to this level of funding.
Source: SHEEO State Higher Education Finance FY2019 report. Figures are in nominal terms, not adjusted for inflation. Appropriations include state funds, state financial aid, and – during the Great Recession – federal relief funds.

In the years following the Great Recession, Tennessee appropriations for higher education fell when federal funds phased out, state tax revenues had not yet recovered from the recession, and the state’s recurring funding remained lower than pre-recession levels.4 Funding cuts, combined with rising tuition, meant that students contributed a greater percent of higher education revenues. Figure 3 illustrates the portion of higher education revenues paid by students or “student share,” and how this has changed during the past 25 years. The student share increased from 33 percent to 48 percent in the three years following the Great Recession – a combination of increased out-of-pocket college costs and loans for many students as well as lower state funds to their institutions.

Figure 3: When State Support Decreased, The Student Share Of College And University Revenues Skyrocketed

Tennessee’s students faced rising tuition prices in the years before and after the Great Recession, resulting in a decrease in college affordability.
Source: SHEEO State Higher Education Finance FY2019 report

Tuition increases create clear cost barriers to students and limit how far scholarship and grant dollars can go toward helping a student meet the academic and non-academic costs of attending college.

Lesson 2: A postsecondary credential matters more during hard economic times.

A postsecondary credential is key for success in today’s workforce, and times of economic hardship prove this point. The last two recessions illustrated the importance of college credentials as Tennessee workers with postsecondary education were more likely to stay employed than workers with only a high school diploma.

Figure 4: An Education-Employment Gap Emerged During The 2001 Recession And Widened During The Great Recession

Tennesseans ages 25-64 without any amount of college education were more likely to be unemployed during economic recession. The unemployment gap between degree-earners and those without degrees widened during the last two economic recessions.
Sources: American Community Survey and IPUMS, 2000-19. People with postsecondary certificates but no associate or higher degree are classified as having “some college, no degree” in this figure and source data.

In the 2001 recession, the unemployment rate for Tennessee workers with any amount of postsecondary education remained fairly low at 4 percent. For working Tennesseans with only a high school diploma, unemployment leaped to 8 percent.

Unemployment for this group of workers remained high until the Great Recession, when it spiked again to 14 percent – or one in seven workers. This pattern was even more pronounced for Black Tennessee workers with only a high school diploma. Their unemployment rate climbed from 14 percent to 21 percent between 2008 and 2009. Unemployment also increased for college-educated workers during the Great Recession – especially for those without a degree – but to a lesser extent.

Significantly, the unemployment gap that emerged in 2001 between Tennesseans with and without a postsecondary education has not yet closed. It is likely that workers with less education will be hardest-hit again during the COVID-19 recession. In fact, the first two months of disrupted economic activity in 2020 have resulted in a four-fold unemployment increase nationally for workers with only a high school diploma.

Tennessee’s workforce looks very different today than it did before the last two recessions, in ways that disadvantage workers with less postsecondary education. Statewide, manufacturing employment fell from 19 percent of nonfarm jobs in 1999 to 11 percent in 2019, and employment shares in retail, wholesale, and construction fell as well. Education, health, professional and business services, and leisure and hospitality industries have become more prominent employers over the same time period.5

Lesson 3: During the last two recessions, more students enrolled in higher education.

For students, the decision to enroll in postsecondary includes consideration of financial costs, time, and anticipated benefits, such as access to better jobs and an improved quality of life. Even if a student’s tuition and fees are covered by grants and scholarships, students face other expenses that include supplies, books, living costs, technology, and more. When deciding whether to enroll in postsecondary education or go directly into the workforce, students consider these costs as well as the benefits from higher earnings, better jobs, and an improved quality of life in the future.

Economic recessions can create financial hardship for many households, decreasing the ability to afford and to attend college. Still, despite the cash flow constraints felt by many Tennessee families, enrollment increased during the last two recessions across Tennessee public institutions (Figure 5).

Figure 5: Enrollment Grew During The Last Two Recessions, Especially In Community And Technical Colleges

Total college enrollment across all public institutions rose 18 percent between 2007 and 2010. Enrollment growth was concentrated at Tennessee’s community colleges and TCATs, increasing at three times the rate of enrollment growth at public universities (27 percent versus 10 percent). Additionally, part-time student enrollment increased more than full-time enrollment, and Black, Hispanic, and other non-White, non-Hispanic students were more likely to enroll between 2007 and 2010.
Source: IPEDS, 1994-2017

Community colleges and TCATs provide industry-valued credentials for recent high school graduates, mid-career workers, and displaced workers, and student demand for these institutions clearly rose during the two prior economic recessions. An important caveat, however, is that credential completion rates are low at these institutions. While more than 80 percent of TCAT students complete their program of study, less than one in four students at Tennessee’s community college earned a credential within three years during the last recession.6 These completion rates have improved over the last decade, but still only 25 percent of first-time, full-time community college students in Tennessee complete a credential over three years.7

Tennessee’s historically underserved students also look to postsecondary education during hard economic times. Enrollment among Black, Hispanic, and other non-White, non-Hispanic students grew 34 percent during the Great Recession, compared with 18 percent for students overall.

Several factors help explain these enrollment increases during the last two recessions. For one, good job opportunities are scarce when the economy declines – meaning a prospective student is not missing out on as much income by enrolling in college. But there were other trends unique to these recessions that pushed enrollment up amid rising unemployment: a greater number of high school graduates driven by a generational bubble in the sheer volume of young people and increased availability and take-up of federal financial aid and loans.7

We should expect enrollment gains ultimately to result in more college-educated workers to fill tomorrow’s jobs, and to help displaced workers attain updated skills and better jobs. But when enrollment increases without an increase in state funding, college and university resources per student suffer.8 These decreased resources affect instructional and student support spending and, ultimately, a student’s ability to complete college. 9

Colleges and universities can at least partially offset lost revenue with higher tuition – as demonstrated in the years following the Great Recession – but this clearly has negative consequences for students. Students pay more in tuition even as instructional and advising resources decline, creating a double set of barriers to earning credentials. In particular, historically underserved students – low-income students and many students of color – have struggled to persist and complete their degrees when tuition or out-of-pocket college costs rise.10 As more first-generation and historically underserved students enroll in higher education, institutions must have the financial capacity to support students academically and socially on the path to a credential, and to make that path more affordable for students and their families.

Putting It Together: What Lessons Should We Take from the Last Two Recessions?

Moving forward, the outlook for higher education is profoundly changed as COVID-19 and its health and economic effects continue to unfold. The three lessons outlined above can help students, higher education leaders, and policymakers approach these problems.

Looking ahead, it is critical to note the higher education policy landscape has changed since the most recent recession. Since 2012, Tennessee lawmakers have steadily increased state support for higher education, and the student share of college and university revenues has declined in recent years. In the last decade, Tennessee enacted two critical statutes that helped to increase access to and affordability of college:

  • The Tennessee Promise Scholarship Act of 2014, provides freshman students with scholarships for up to 2.5 years that cover tuition and fees at Tennessee’s community colleges and TCATs.  Tennessee Promise noticeably increased freshmen enrollment across the state (Figure 6).
  • The Focus on College and University Success (FOCUS) Act of 2016, creates an annually adjusted tuition range that limits the tuition increases by colleges and universities.

As we look ahead to a COVID-19 recession, these two laws should be noted as existing levers to continue improving college affordability and student success in the decade to come.

Figure 6: Freshman Enrollment in Tennessee’s Colleges & Universities Grew 17 Percent With The Introduction Of Tennessee Promise In 2015

Between 2014 and 2015, total first-time freshman enrollment rose 27.7 percent in community colleges and 7.9 percent in TCATs. Not shown is a shift toward full-time enrollment and away from part-time enrollment.
Source: IPEDS, 2009-18
Next Section

Section 3

The Future Of Postsecondary Education

The COVID-19 pandemic and economic downturn will affect students, higher education leaders, and their communities.

The Future Of Postsecondary Education Next section title will be automatically displayed here.

Section 3 Sources

1 Determination of the February 2020 Peak in US Economic Activity. The National Bureau of Economic Research (June 2020).

2 The Structure of State Taxes in Tennessee: A Fiscal Primer. Tennessee Advisory Commission on Intergovernmental Relations and The University of Tennessee Center for Business and Economic Research (February 2003).3 Thomas L. Harnisch. Update on the Federal Maintenance of Effort Provision: Reinforcing the State Role in Public Higher Education Financing. American Association of State Colleges and Universities (July 2012).

4 Tax revenues did not recover from the Great Recession in inflation-adjusted terms until 2016.

5 US Bureau of Labor Statistics, 1999-2019.

6 Tennessee Board of Regents, 2019; Integrated Postsecondary Education Data Systems, 2007-2009.

7 Tennessee Board of Regents, n.d.

8 Long, Bridget Terry. “The financial crisis and college enrollment: how have students and their families responded?” in How the financial crisis and Great Recession affected higher education. University of Chicago Press (September 2015); Barr, Andrew and Sarah Turner. “Out of work and into school: Labor market policies and college enrollment during the Great Recession.” Journal of Public Economics (April 2015); “The Baby Boom Echo: No End in Sight.” Archived Information (August 1999).; Trends in Higher Education Series: Trends in Student Aid 2019. The CollegeBoard (November 2019).

9 Carruthers, Celeste K. and Umut Özek. “Losing HOPE: Financial aid and the line between college and work.” Economics of education review (2016); Garcia, Rosa. “Making College More Affordable for Low-Income Students.” Center for Law and Social Policy, Inc. (January 2018); Denning, Jeffrey T. “Born under a lucky star financial aid, college completion, labor supply, and credit constraints.” Journal of Human Resources (March 2018).

10 Deming, David and Christopher Walters. “The Impacts of State Budget Cuts on U.S. Postsecondary Attainment.” The National Bureau of Economic Research (February 2018)