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Facing the future: How higher education institutions can thrive under a new federal compact

Jul 04, 2025 · Authored by Daniel Greenstein

America’s colleges and universities have long been engines of social mobility, workforce development and knowledge creation. That will not change. But to continue fulfilling these missions into the 21st century, higher education must transform its business and operating models in response to profound changes in the proposed 2026 federal budget.

This proposed budget could mark a significant shift in the compact between the federal government and higher education. While it is not the sole cause of the pressures faced, it is a powerful catalyst accelerating changes already underway.

What could change

The new budget proposes deep reductions to research funding from agencies such as the National Institutes of Health (NIH), National Science Foundation (NSF) and National Endowment for the Humanities (NEH). These cuts would reduce the grants available to faculty and researchers and slash overhead reimbursement rates. For universities, that represents a major hit to discretionary revenue, which supports everything from student services to strategic initiatives.

Potential cuts to Pell Grants would lower the awards available to low-income students and narrow eligibility, threatening access for those who need support most. Reductions to federal loan programs could extend this challenge to middle-income students as well, further depressing enrollment.

Other proposed changes include cuts to TRIO and GEAR UP programs, undermining support for academically at-risk students preparing for college, and increases in the endowment tax, diverting funds that would otherwise support scholarships. Meanwhile, curtailment of international student visas – a change expected alongside the budget – threatens to reduce graduate enrollment and weaken research capacity, as international students make up nearly a quarter of U.S. graduate enrollments.

Taken together, these changes would reduce research funding, depress enrollment across undergraduate and graduate levels and erode the discretionary resources institutions rely on to sustain their layered, interdependent cost structures. And none of this accounts for the potential impacts that state-issued Medicaid and Supplemental Nutrition Assistance Program (SNAP) funding cuts will have on institutions as a result of the passage of H.R. 1 - One Big Beautiful Bill Act. Backfilling for such reductions could put state higher education investments at greater risk.

But this is not a time for panic. Higher education institutions have faced profound external shocks before and emerged stronger through clarity, courage and collaboration. This moment calls for deliberate, thoughtful and sometimes difficult actions in five key areas – all while addressing the public’s concerns about higher education’s value and its values.

1. Optimize back-office operations

In a resource-constrained environment, efficiency is imperative. Many universities have already moved towards shared services, joint ventures and technology-driven efficiencies in functions like payroll, human resources (HR), information technology (IT) and facilities management. Those who have not should act now, and those already on the path must go deeper.

We know how to do this. There are playbooks and proven routes to implement change while respecting institutional culture and shared governance. The question is no longer whether to optimize back-office functions, but how quickly it can be done to protect mission-critical investments and demonstrate to the public that institutions steward resources responsibly.

2. Optimize front-office operations

Transformation must extend beyond administration to student-facing and research operations. Many institutions offer more programs than they can sustain, enrolling too few students per program to justify their costs. A portfolio approach is needed; not every program must be profitable, but the portfolio overall must be financially balanced.

This will require hard decisions about curtailing or closing programs, but also present opportunities to partner with other universities to deliver joint programs. For example, rather than closing a Celtic poetry program, several institutions might collaborate to aggregate enrollment and sustain it.

Similar logic applies to student services. Career advising, health and wellness and financial literacy support can be scaled more effectively through shared models across institutions, enhancing both quality and efficiency. Done well, these changes will show students and the broader public that higher education remains committed to outcomes that matter.

3. Optimize research operations

Research is another area requiring sharper focus. Institutions can no longer afford to operate across overly broad research portfolios. Strategic prioritization is essential, concentrating resources where institutions can achieve excellence and impact.

Shared research services can support this transformation. Universities do not always need to own their own labs and specialized equipment. Collaborative research infrastructure, public-private partnerships and joint ventures can provide access to state-of-the-art facilities while reducing duplicative capital costs.

Aligning research priorities with societal needs will also reinforce the value proposition of universities as public-serving institutions.

4. Leverage partnerships, scale and liquidity

Public-private partnerships (P3s) have long supported residence halls and campus facilities. Going forward, P3s can extend to research infrastructure, back-office services and academic program delivery. These partnerships bring capital, expertise and operational capabilities that universities cannot always build alone.

Beyond partnerships, mergers and acquisitions (M&A) will become more common as institutions scale to remain sustainable. While organizational mergers are never easy, they can create institutions with the breadth, depth and efficiency needed to thrive.

Finally, universities will need to manage liquidity actively. This includes asset management strategies to monetize real estate and facilities, restructuring debt and in some cases taking on new debt to maintain operational continuity and strategic investment. At the same time, institutions must retool enterprise risk management to address new risks in this rapidly shifting environment.

Each of these strategies, if communicated transparently, can address public doubts about higher education’s financial sustainability and moral commitments.

5. Embrace AI strategically and deliberately

Artificial intelligence (AI) is not a future technology; it is a present and accelerating force reshaping the knowledge economy and the higher education sector itself. As I wrote recently, “Colleges are drowning – but they can’t afford to ignore AI.”

AI should be woven purposefully into each of the strategies outlined above. Whether optimizing administrative functions through automated workflows, redesigning student-facing services with AI-enhanced advising or reimagining research processes with AI-driven analytics, it is no longer optional to treat AI as an experimental sideline. It must become a core strategic competency.

This will require deliberate, enterprise-level planning and thoughtful implementation. Universities must invest not only in the tools, but in developing organizational competencies to use AI ethically, effectively and strategically. Doing so will ensure they remain competitive, demonstrate stewardship of public trust and signal alignment with evolving societal values.

An optimistic, pragmatic path forward

This is indeed a watershed moment for higher education. But it is also an opportunity. American universities and colleges have long proven their capacity to adapt and lead through transformative change. Today is no different.

At Baker Tilly, we stand shoulder-to-shoulder with our higher education clients through these challenges. We bring deep expertise in change management, strategy, AI integration and implementation – but most importantly, we care about the people doing this work. We understand institutional cultures, shared governance structures and the importance of solutions that build rather than erode trust.

We remain optimistic. The sector’s missions of social mobility, workforce development and knowledge creation remain as critical as ever. By acting calmly, deliberately and collaboratively – and by embracing new tools like AI with confidence and purpose – universities will continue to fulfill these missions powerfully into the next century.

Let us move forward with clarity, purpose and an unambiguous commitment to demonstrating higher education’s enduring value and values. We’ve got this.

Please note: All views and opinions expressed are my own.

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