By Niko Zhou
The COVID-19 pandemic has had unprecedented effects on the United States’ higher education system. With closed borders, an increasingly hostile view of international students, a protectionist standpoint, and new restrictive modifications to the H1B visa requirements, universities are entering unknown territory. International students have always served as a reliable and steady source of income for universities, and the current higher education business model has made schools increasingly dependent on international student enrollment. However, amid the accelerating reversal of globalization and the Trump administration’s anti-immigrant ideology, the fate of international students and the entire American higher education system is precarious.
On July 6, 2020, the Department of Homeland Security (DHS) published a new guideline forbidding international students from remaining in the country if their schools moved entirely to online learning. This new guideline was a shock to both American universities and international students. Immediately after the new guideline was proposed, more than 200 universities filed a lawsuit and successfully reversed it. On September 4, the DHS again proposed modifications to the H1B visa program without opportunity for public comment. The new rules will terminate the Optional Practical Training program for international students and limit the number of eligible H1B visa applicants by substantially raising the salary requirement from 39 to 45 percent. Fortunately, the new salary requirement was heavily challenged by universities and American businesses, and as a result, the requirement did not pass.
This paper argues that American universities’ current business model will be unsustainable with fewer international students enrolled in American universities after Covid-19. In order to maintain a healthy inflow of cash, universities must either limit their financial dependency on international students or use their legal means to expand protections for their students. Part I outlines the history of international students in the U.S. Using the 2019 financial statements from the University of Southern California (USC), the financial statements analyze the business model of universities and explains why they need international students. Part II discusses the growing hostilities toward international students in America during the Covid-19 pandemic and argues that America is losing its competitive edge in attracting foreign talent compared to other Western countries. Part III focuses on the new modifications to the H1B visa program and analyzes the legality of the new rules. It also proposes measures universities can take to ensure their financial health in the future while protecting their students.
Part I: Universities’ Financial Dependency on International Students
A. A BRIEF HISTORY OF INTERNATIONAL STUDENTS IN THE U.S.
The number of international students enrolled in American universities has increased significantly since the 1950s. While there were only 26,000 international students at the end of 1949, the number of international students in the U.S. reached one million in 2017. This dramatic increase in the number of international students was not accidental. Before the explosion in the numbers of international students in the U.S., universities had primarily relied on tuition fees from domestic students and government subsidies for funding. As higher education became more expensive and government funding was limited, universities looked elsewhere for steady revenue streams. Because international students rarely received scholarships and usually payed full tuition without financing, universities soon realized the fiscal value of international students was a source of economic strength.
In the past, international student enrollment growth was closely connected to the level of government founding as public universities relied on international students to cushion the effects of falling government appropriations. However, as both the federal and local governments continued to decrease their levels of university funding, schools became reliant on full-fee-paying international students to recover the lost income. For example, between 1996 and 2012, a 10 percent reduction in state appropriations led to a 16 percent increase in foreign enrollment at public research universities. However, the consistent growth of international student enrollment stalled in 2016 and has, in fact, decreased in the past four years. 2016 was marked by divisive rhetoric, political turmoil, anti-immigration policies, and growing protectionist economic policies. While it is impossible to know all the direct causes of the reduction in international students, it is not hard to imagine that a major factor was the fact that international students were discouraged by America’s political trajectory post-2016. The Covid-19 pandemic has further amplified the current government administration’s protectionist policies, and once again, international students find themselves and their futures largely at the mercy of partisan power struggles.
B. AN ANALYSIS OF THE UNIVERSITY BUSINESS MODEL
The current dominant university business model is a “broad-based teaching and research” framework known for its broad base of assets and back office. However, this model relies heavily on healthy, sustainable cash flow. Even a small decline in the student population would have a significant impact on total revenues. Although an analysis of USC’s 2019 financial statements should not be generalized to all American universities, it does provide important insights into the current business model in American higher education. According to USC’s 2019 consolidated statements of activities, the school had a net loss of $167 million. This loss might be explained by USC’s generous financial aid program, which offsets a quarter of the revenue from student tuition, and the school’s particularly high operating expenses from employee salaries and benefits. This is a cookie-cutter “broad-based teaching and research” business model, evidenced by USC’s broad base of assets, including student tuition, health care services, auxiliary enterprises, and the school’s expenses for supporting teaching and researching activities.
Liquidity ratios and solvency ratios are good indicators of a company’s financial health. Liquidity ratios measure a financial entity’s short-term ability to pay off its liabilities and to meet unexpected cash needs. A company’s current ratio indicates the ratio of its existing assets to its current liabilities. In 2019, USC’s current ratio was 3.33, which means that for every dollar of liability, the school has $3.33 in assets. This ratio indicates that the short-term financial health of USC is robust, and that the school’s creditors and suppliers should be confident in USC’s ability to fulfill its short-term financial obligations. Solvency ratios are a critical financial measure of a business entity’s ability to survive in the long term. A debt-to-assets ratio indicates a corporation’s ability to withstand losses. A vertical comparison of USC’s debt-to-assets ratios in 2018 and 2019 shows that the school’s debt-to-asset ratio increased from 26 percent in 2018 to 30 percent in 2019. This indicates that USC would have had to liquidate 30 percent of its assets at their book value to pay off all its debt. Although the percentage is not overly alarming, a 4 percent increase in the debt-to-assets ratio in a year should still raise some concerns regarding the school’s long-term financial health.
This financial data suggests that although the short-term financial health of the school is robust, its long-term financial future is susceptible to change. Given USC’s business model, a fluctuation in student enrollment would dramatically affect its financial statements. With Covid-19 and the U.S. government’s increasing hostility toward international students, universities may see a significant reduction in the number of international students. Thus, USC and universities in general have a difficult choice to make. Either they embrace the current political environment and gradually sever their financial dependency on foreign students under their current business model, or they must lobby for better policies and fight for international students’ legal rights.
Part II: U.S. Higher Education and its Intentional Competitiveness
The Covid-19 pandemic has been a dangerous catalyst for globalization reversal and anti-immigration policies. As countries abruptly closed their borders, limited domestic travel, and enforced mandatory quarantines, world connectivity and the current globalized stability faced unprecedented challenges. As summarized in an article for the Foreign Affairs, “the lesson of the new coronavirus is not that globalization failed” but rather “that globalization is fragile.”
The 2019–2020 application cycle was both wildly unpredictable and unprecedented. While universities were worried that both their domestic and international students would choose to defer enrollment, students also feared for their academic futures. With closed consulates and halted visa applications, international students were unable to leave their home countries. Even universities that were usually in tune with visa and travel policies were baffled by the situation. Each country had its own policies on quarantine and international travel, and this already complicated process was made even more complicated by international relations and opposing political agendas.
Despite the complications of the situation, international students remained resilient, and their determination to pursue quality education remained strong. According to a recent Chinese survey, only 4 percent of Chinese international students abandoned their study abroad plans because of Covid-19. However, despite these students’ enthusiasm for education, many have turned their backs on universities, citing the current administration’s anti-immigration policies, hostile visa programs, and political unrest as reasons.
Given the recent lackluster enrollment of international students in the U.S., many universities were forced to make difficult financial decisions. Numerous liberal arts colleges and smaller universities that depend on student housing revenue are on the brink of insolvency or have already filed for bankruptcy. Large universities are facing financial difficulties. The University of Minnesota expects to lose up to $300 million from Covid-19 closures, and the University of Michigan is forecasting a one-billion-dollar net loss. Moreover, some universities have had to reduce their academic programs due to a reduction in enrollment. For example, Purdue University had to shut down its in-person MBA program because international students could not travel abroad.
Although many American universities are struggling, schools in the United Kingdom, Canada, and Australia have all seen a dramatic boost in international student applications. As these countries reopen their borders to international students, students have the option to travel abroad and attend in-person lectures. These and other Western countries now have more student-friendly visa and immigration policies than the U.S. The University of York even had to substantially raise its entrance requirements to account for the dramatic rise in applicants.
These comparisons between universities in the U.S. and those in other Western countries raise serious questions about the American higher education industry’s ability to compete internationally. The higher education industry is a buyer’s market; students have the freedom to choose where to invest their money. Therefore, the steady and continuous drop in international student numbers in the U.S. indicates that these students have decided to invest their money elsewhere.
Part III: The International Student Ban and H1B Visa Modifications
On October 8, the DHS, as part of its interim final rule, announced its intention to narrow the definition of “specialty occupation.” The new modifications to the H1B visa also raised the minimum salaries for H1B visa holders by 40 percent. The H1B visa is a non-immigrant visa that allows U.S. companies to employ foreign workers in specialty occupations that require theoretical or technical expertise. For many international students, the possibility of staying and working in the U.S. after graduating from an American university was their main reason for studying in the U.S. Therefore, the new H1B modifications will discourage international students from studying in the U.S. and force them to explore other study destinations.
In June 2020, the U.S. Supreme Court ruled that the executive branch of the government must “turn square concerns” before taking an action that profoundly disrupts the lives of hundreds of thousands of individuals. However, despite the ruling, ICE still issued a guideline to force international students to leave the country. The new H1B visa modifications also indicates that the executive branch outright disregarded the “square concerns” requirement and imposed the new guideline without considering its long-term effect on international students and foreign workers.
In Motor Vehicle Mfrs. Ass’n of United States, Inc. v. State Farm Mu. Auto, Ins. Co, the American Bar Association required the court to “hold unlawful and set aside agency action, findings, and conclusions found to be . . . arbitrary, capricious, and abuse of discretion, or otherwise not in accordance with law.” This standard also applies when an agency modifies existing guidelines; the agency must “be cognizant that longstanding policies may have engendered serious reliance interests that must be taken into account.” Both the ICE guideline and the new H1B visa modifications failed to meet the standard because they did not consider the reliance interests of international students. International students who choose to study in the U.S. rely on the F-1 student visa program. After they graduate from their institutions, they rely on the H1B visa program to work in the U.S. The changes unfairly hindered international students’ interests without considering these students’ need for a work visa to stay in this country after they graduate.
Furthermore, the recent ruling by the Supreme Court in Department of Homeland Security v. Regents of Univ. of California emphasized, in relation to modifying an existing policy, that agencies were “required to assess whether there were reliance interests, determin[e] whether they were significant and weigh any such interests against competing policy concerns.” Again, the H1B visa modifications failed to meet the standard. Many international students choose to study in the U.S. because of the opportunity to stay in the country after graduating; therefore, modifying the H1B visa post hoc and without sufficiently considering these students’ reliance interests was unjust, unlawful, and unconscionable.
The new modifications also failed to consider universities’ reliance interests. As mentioned above, the business model adopted by universities depends on a healthy and sustainable flow of international students. A tiny fluctuation in student enrollment can have a strong domino effect on a school’s financial statements. Universities have become accustomed to reliable and continuous income from international students, which they use to fuel their financial aid packages and other infrastructure developments. Forcing universities to reduce their numbers of international students will dramatically increase the financial burdens on schools and even drive some into bankruptcy. Moreover, universities take pride in their diversity. International students with their distinct cultures and backgrounds help to bring this diversity to the student body. Thus, losing international students would not only hurt universities financially, but it would also reduce domestic students’ exposure to other cultures and mutual learning opportunities.
Part IV: Conclusion
Although changing the business model seems like a reasonable alternative, such a decision could be risky and unpredictable in the long run. Since the beginning of the Covid-19 pandemic, universities have adopted virtual teaching platforms. Thus, it is reasonable to assume that universities will invest more in online education infrastructure and gradually decrease their reliance on revenue from residential living. However, change is never easy, especially during turbulent and unprecedented times. Short-term investors might be discouraged by the unpredictability associated with adopting a new business model, and other shareholders might also grow increasingly uneasy and worried.
If universities are unwilling to change their business models and reduce their financial dependency on international students, they will have to resort to legal means to fight for international students and lobby for better policies. As mentioned above, the new H1B modifications violate the Supreme Court’s ruling on agency law. Again, universities across the countries are banding together to sue the executive branch and the DHS for this capricious and unconscionable policy change. International students have already been disappointed and discouraged by the current administration’s anti-immigration and protectionist policies, and it will take time for academic institutions to regain their trust. Therefore, universities and legal scholars should continue to use financial and legal means to lobby for better policies for international students. Only then will the American higher education system be able to gradually recover with the aid of international students.
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