By Catherine Brown, Senior Director, Policy and Advocacy, and Doug Steiger, Public Policy consultant and Former Counselor to the Secretary for Human Services
Reading time: 19 minutes
Key Points:
The One Big Beautiful Bill Act (OBBBA) cuts federal safety net programs by more than $1 trillion over 10 years, cuts that will grow dramatically over time and reduce spending to states.
State higher education programs, which are often the first spending category in state budgets to be cut when budgets are tight, are at risk.
The impact of the cuts will vary by state. In general, the 40 Medicaid expansion states plus DC - every state except Alabama, Florida, Georgia, Kansas, Mississippi, South Carolina, Tennessee, Texas, Wisconsin, and Wyoming - that seek to minimize the
impact of these cuts on low-income residents will face the largest budget pressures though all states will be impacted.
State policy decisions will determine the impact and scope of the cuts, and college access and success leaders should prepare now to influence their state’s approach and defend critical higher education investments.
Introduction and Overview of Impending Cuts to State Budgets
The OBBBA, enacted in July of 2025, made major cuts to Medicaid, SNAP, and federal student loans. These cuts will grow over time and may severely impact funding for higher education if states seek to backfill federal cuts with their own funds. The risk
is particularly acute because highereducation has become known as the "balance wheel"
of state budgets and is often the first spending category cut during recessions. Unlike health care and K-12 education,
which is guaranteed in most state constitutions, higher education funding is discretionary and institutions can raise tuition to partially offset state cuts. During the Great Recession,
this pattern played out dramatically: 46 states cut per-student funding for public colleges, with 36 states cutting by more than 20%, and a decade later state support for higher education remained 16% below 2008 levels even as state revenues had recovered.
This policy brief aims to help elucidate the budget pressures that states will experience in the coming decade, how these cuts will affect state higher education budgets, and the key state policy decisions that will determine their impact. It also suggests
some approaches for advocates to take in responding to them.
The bottom line: Medicaid expansion states that seek to minimize the impact of these cuts on low-income residents will face the largest budget pressures relative to other states and be forced to make the most difficult tradeoffs, shifting resources away
from higher education and other areas and towards health care and food security. However, state leaders may be able to blunt some of these impacts on students by developing systems to verify students' enrollment in postsecondary institutions with
minimal hassle and by maintaining funding for higher education institutions and need-based aid even under fiscal pressure. Advocates should consider the likely response of their state leadership and prepare accordingly for challenging legislative
sessions to come.
Medicaid Cuts
The Congressional Budget Office (CBO) projects states will have to make up for half of the $900 billion cut from Medicaid by the OBBBA out of their own budgets, amounting to roughly $450 billion over 10 years. Given that Medicaid represents about 30% of state budgets nationwide, reductions of this magnitude will have serious implications for state finances and competing priorities like higher education. Students who rely on Medicaid are also at risk of losing their healthcare, which can impact their ability to complete college.
The impact will vary significantly across states. The 40 Medicaid expansion states and DC will see between 10 and 21% reductions in federal
Medicaid payments to states, according to the National Academy for State Health Policy, while non-expansion states can expect reductions of between six and 11%. Kansas, for example, is expecting at least $150 million in revenue losses and Minnesota is predicting a $200 million reduction over the next decade. The Fiscal Policy Institute in New York estimates that cumulative funding cuts to the state will be $5.6 billion in the next fiscal year and $14.3 billion by 2030.
Work reporting requirements ($317 billion) – mandating that adults ages 19 to 64 covered through the Medicaid expansion meet work requirements (or qualify for an exemption,
such as being a parent of a young child or enrollment in postsecondary education at least half-time) by the end of December 2026. CBO estimates that these
requirements will drop more than five million people from coverage by 2034.
Limits on state provider tax arrangements ($183 billion) – preventing states from increasing existing taxes on Medicaid providers and barring states from creating new provider taxes. Almost all states finance a portion of their Medicaid spending
through taxes collected from health care providers.
More frequent eligibility redeterminations ($178 billion) – blocking implementation of two Centers for Medicaid & Medicaid Services (CMS) rules that would have streamlined enrollment processes and reduced barriers to Medicare Savings Programs,
and requiring more frequent eligibility redeterminations (at least once every six months instead of annually) for Medicaid expansion adults.
Together, these cuts amount to $678 billion in federal funding that states will need to replace if current Medicaid service levels are to be maintained.
Beyond the direct fiscal impact of coverage reductions, the Medicaid work reporting requirements will impose additional
administrative costs on states. The law requires states to verify at application and at renewal that individuals in the Medicaid expansion group meet work requirements (or are exempted), and states can also require verification more frequently. State
choices about implementation, such as how often to verify eligibility and how effectively they use existing data to automate verification processes, will significantly impact both the number of people losing Medicaid and state implementation costs.
Supplemental Nutrition Assistance Program (SNAP) Cuts
The budget reconciliation bill also cut $186 billion from SNAP, the federal program formerly known as food stamps and aimed
at addressing food insecurity, over 10 years. According to the CBO, 1.1 million college students rely on SNAP and an additional 2.2 million met the criteria, but are unable to access benefits
due to the complexity of the program. The budget reconciliation bill:
Expands work reporting requirements for childless adults from an upper limit of age 54 to age 64 and introduces them for parents with children aged 14 and older. Those who do not qualify will be limited to three months of benefits per year.
Requires for the first time a state match for SNAP benefits of between 5% and 25%, based on each state’s payment error rate, beginning in 2028. The error rate is a measure of the accuracy of
each state’s eligibility and benefit determinations that includes both overpayments and underpayments.) These rates vary significantly between states, as can be seen in the FY 2024 data.
Alaska, DC, Georgia, and Florida had error rates over 15% while South Dakota, Idaho, and the Virgin Islands all had rates below 4%. At their FY24 error rate, Colorado would face a $130 million cost while Florida and New York would have to pay $1 billion.
Halves federal funding for administrative payments from 50% to 25%.
Eliminates tolerance for minor payment errors under $57 from calculation of the payment error rates, which will increase state error rates and likely their share of benefit costs.
Prohibits participation by persons who are not citizens or lawful permanent residents, which will mean refugees, asylees, and Iraqi/Afghan Special immigrants will no longer be able to receive SNAP. (SNAP eligibility has never been extended to people who are undocumented).
Higher Education Budget Pressures
The budget reconciliation bill also cuts over $300 billion from higher education over 10 years, by eliminating Grad PLUS
loans, capping Parent PLUS loans, reducing graduate student borrowing limits, and restructuring of the federal student loan repayment system. While these cuts directly
affect students and institutions—not states—they will reduce institutional revenue and reshape the higher education budget landscape.
Beyond reconciliation bill cuts, colleges and universities face additional financial pressures from:
Proposed research cuts – The Trump Administration proposed cuts to the National Science Foundation, Department of Energy, and the National Institutes of Health while limiting indirect costs to 15%. Some public universities receive over a quarter of their revenue from federal sources (e.g., University of Michigan, University of Alabama at Birmingham). Though Congress has resisted the deepest cuts and many are tied up in court, funding uncertainty has forced institutions to freeze hiring, delay projects,
and reconsider research priorities.
Declining international enrollment – The Trump Administration delayed or withheld student visas for fall 2025, causing international enrollment to fall 17%.
Since international students typically pay full tuition and often subsidize domestic student aid, this represents significant revenue loss.
Uncertain federal student aid funding – The Trump Administration's FY2026 budget proposed eliminating TRIO, GEAR UP, and SEOG while cutting Federal Work-Study by 80%, and has withheld grant funding citing diversity concerns. While Congress
has provided level funding for the last three years, this uncertainty disrupts institutional planning and threatens support services for low-income and first-generation students.
Tax Losses
In addition to federal funding cuts, many states conform some or all of their tax codes to federal definitions, meaning that without state action, the OBBBA's tax cuts will create state revenue losses beyond the federal losses. For example, the Tax Foundation estimates
that the bill's business "expensing" provisions will reduce state revenues by an average of $20.7 billion annually over the next decade. The OBBBA also includes temporary individual tax provisions, such as the widely discussed "no tax on tips" policy,
which expires in 2028. While automatic conformity will reduce state revenues by $1.7 billion in FY 2026, the impact could exceed $20 billion if state legislators choose to adopt these popular federal policies even where conformity is not automatic.
The authors of the OBBBA maintain that the tax cuts will increase economic growth, which would improve the fiscal outlook for states
and reduce the need for cuts. To date, they do not appear to have had a major impact but perhaps this will change over the course of 2026.
Compounding Economic Factors
The Trump administration's tariffs, widespread federal layoffs, and federal spending cuts risk slowing the economy and could further depress government revenues while increasing demand for assistance from programs like Medicaid and SNAP. Consumers remain frustrated by inflation, which persists despite declining from pandemic-era highs, particularly with tariffs in place. This economic situation could create
a particularly difficult squeeze for states since revenue declines will occur simultaneously with increased service demands.
State by State Impacts
For state higher education advocates the critical question is: How will these cuts impact their state specifically? There are different ways to analyze this question, and a lot of factors could impact any projections made today.
According to the KFF, Louisiana, Illinois, Nevada, and Oregon face the most severe cuts at 19%
or more of their federal Medicaid spending over 10 years. The average cut nationally is 14% of federal Medicaid spending.
In general, the 40 Medicaid expansion states and DC, particularly the largest states, will face the biggest absolute budget hits. Wisconsin, which has implemented a partial expansion where Medicaid is available to low-income adults with income below the
poverty level, will face a slightly smaller budget hit. The 10 states that have not expanded Medicaid and do not have to implement the work reporting requirements will face fewer cuts. They are: Alabama, Florida, Georgia, Kansas, Mississippi, South
Carolina, Tennessee, Texas, Wisconsin, and Wyoming. Wisconsin has implemented a partial expansion where Medicaid is available to low-income adults with income below the poverty level. The policy changes that apply to the expansion states will also
apply to the expansion population in Wisconsin.
More specifically, we can think of the impact of the Medicaid cuts on state budgets by categories. Roughly in order of magnitude of impact, those categories are:
Medicaid expansion states– Provisions affecting only Medicaid expansion states account for $526 billion—over half of the total gross federal spending reductions. The 40 expansion states plus DC are hit particularly hard because most
of the law's Medicaid cuts specifically target the expansion population.
States with large undocumented populations - The law reducesthe
federal match rate for emergency medical treatment of undocumented immigrants from 90% to the state's regular Medicaid match rate (50% to 76.9%). This change will results in the largest cuts to states with higher per capita incomes - and thus
a lower federal match rate - and large populations of people without authorization, such as California, New York, New Jersey, and Illinois. Texas, Florida, Arizona, and other states with large undocumented populations will also see cuts for emergency
services.
States with "Trigger Laws" – Nine states have laws requiring automatic termination of Medicaid expansion if the federal match rate drops below 90% - and the OBBBA reduces this match for the expansion population to 80%. These states face complete
loss of Medicaid expansion coverage, and the federal revenue that comes with it, if they don't change their laws or invest large sums of state funds to replace lost federal revenue to maintain enrollment. These states include: Arizona, Arkansas,
Illinois, Indiana, Montana, New Hampshire, North Carolina, Utah, and Virginia.
States affected by provider tax restrictions – The reconciliation bill prohibits all states from raising additional state revenues through new provider taxes or increases in existing provider taxes. It also reduces the permissible size of most provider taxes in expansion states (starting October 1, 2027). 31 expansion states will be required to eventually reduce their provider taxes, according to KFF.
The New Hampshire Fiscal Policy Institute estimates
that if that policy, which cuts the provider tax to 3.5% by 2031, had been in place in FY24, the state would have lost $133 million in tax revenue.
Rural/urban hospitals – States with large numbers of rural hospitals (and the funding those facilities receive from Medicaid) as well as states with significant proportions of urban hospitals that also serve low-income populations will face serious cuts. The budget reconciliation bill included $50 billion to bolster rural hospitals,
but no comparable relief for urban facilities. Kansas has the most rural hospitals at risk in absolute numbers while
states in the West and Northeast will be affected most by the cuts to urban
areas, according to an analysis by Harvard University.
The bottom line is that the 40 Medicaid expansion states will face dramatically larger cuts than the 10 non-expansion states – and those cuts will deepen over the coming decade. Large expansion states like California, New York, Illinois, and Pennsylvania
face the biggest absolute dollar losses, while states like Louisiana, Nevada, and Oregon see the highest percentage reductions. Rural states and states with large low-income urban populations face additional fiscal pressure from hospital closures
regardless of expansion status, particularly once the $50 billion fund is exhausted.
How States Respond Will Impact Budget Cuts
How states respond to the OBBBA cuts will determine the impact the law has on their state budgets and their residents. The choices they make will significantly affect state higher education budgets now and going forward. Two areas of response will be
central:
Whether states shift funding towards covering people who lose Medicaid and SNAP –The question state leaders will face is whether and how to continue these individuals’ coverage without massive impacts to the state’s discretionary budget
lines. If states choose to simply end the Medicaid expansion and allow the SNAP cuts to go into effect, they will lose federal funding for services, but they will not need to find nearly as much savings from other areas of the state budget. States
with trigger laws ending Medicaid expansion with reductions in federal funds will be required to reduce funding and leave unenrolled residents out of the program, absent a change to their state laws. States that want to maintain enrollment - all
or partial - will need to invest to do so.to make up for the loss in federal funding.
How states implement work requirements –When Arkansas tested Medicaid work requirements under a waiver, many
of those impacted were unaware of the change or confused by the requirements. And as a result, thousands lost coverage. Similarly, during the recent "unwinding"
of Medicaid pandemic era eligibility, as many as two-thirds of those who lost coverage did so due to procedural reasons, not because they were ineligible. Some questions state leaders will have to answer that will impact the number of people affected
by the work requirements, and the cost to the state budget include:
How much of an educational effort will a state undertake to make sure Medicaid and SNAP recipients know what they need to do to maintain coverage?
How easy – or not – will the verification/reporting requirements be to fulfill?
Will a state invest in new information technology and additional staff to build the necessary systems to comply with the law?
A state’s policy choices will impact the scale of savings needed from other parts of its budget, including higher education.
Recommendations for Higher Education Advocates
Higher education advocates have a critical role to play in protecting student access to vital benefits and maintaining higher education budgets. As a first step, advocates should partner with state and community experts to educate lawmakers about the
scope and impact of impending cuts. The State Priorities Partnership—a network of over 40 nonpartisan, state-level organizations focused on budget and economic policy—may be a good place to start. With new
legislators taking office in January 2027 and delayed implementation of some cuts, a window exists to educate state lawmakers about what is coming and encourage them to work with federal officials on potential changes to federal law.
Second, advocates should assess the likely response of their state leaders to the federal funding reductions, which will help clarify the scale of the challenges their state may face in the coming year. Then, we recommend tailoring advocacy activities
and policy recommendations accordingly.
In all states, even those where the fiscal impact of the budget reconciliation bill is likely to be modest, college access and success leaders should prepare to:
Prepare to defend critical higher education investments: Advocates must prepare to defend critical higher education investments, which primarily include operational and capital support
for public colleges and universities and need-based aid programs, as states confront difficult budget decisions. The fiscal pressures created by federal policy changes may lead some states to target higher education funding for cuts. Now is the time to find student success and impact stories, build coalitions, identify and cultivate champions, marshal evidence about the returns on investment in higher education, and make the case that maintaining robust support for colleges and students serves long-term state economic interests even in challenging
budget environments.
Educate students and their families about the new rules: College attainment programs, which are trusted messengers in educating students about their postsecondary options and the availability of student aid, should prepare to explain the new
rules. As states roll out new SNAP and Medicaid requirements alongside changes to higher education financing, student-serving organizations are uniquely positioned to help students understand how these policies intersect and what steps they must
take to maintain benefits. Clear, proactive communication will be essential to preventing benefit loss among students who remain eligible under the new rules.
In states that are facing significant cuts and want to mitigate their impact on low-income students, we recommend college access and success programs:
Advocate for enhanced data-sharing partnerships: Rather than placing the burden on students to obtain and submit enrollment documentation, states should work with colleges and universities to confirm half-time enrollment directly. This approach
will reduce administrative barriers for students, minimize verification delays, and decrease the risk of eligible students losing benefits due to paperwork gaps. Higher education institutions already maintain accurate enrollment records and can
provide reliable, timely verification through existing data systems. States have a critical role to play in synthesizing the data to ensure accuracy, including when students are enrolled at multiple colleges. Guidance from CMS requires states to first use “reliable” information available to the state prior to requiring additional information from Medicaid applicants or participants. States that establish direct data-sharing partnerships with higher education
institutions to verify student enrollment status for SNAP and Medicaid eligibility can create systems that not only minimize the number of students who lose health care and food benefits, but also minimize the cost to states over time by reducing
the staff time needed to process verification paperwork.
Help state leaders prioritize the most important higher education programs and be strategic about cuts: The scale of reductions coming will force many state leaders to make difficult choices. College access and success leaders can help by making
clear which programs have the greatest impact on college access and success, ideally in coalition with other higher education advocates around the state. We recommend prioritizing maintaining need-based student aid above all else, given the magnitude
of the affordability challenge for students. If states need to make cuts to higher education funding, they should do so in a strategic manner. Often states implement across the board cuts that
harm higher education institutions with smaller margins and fewer revenue streams, such as community colleges and regional campuses.
Look for innovative ways to increase efficiency and raise revenue: There may be opportunities to reduce the administrative burden on students and consolidate state student aid programs, particularly if these changes can be framed as saving state dollars
in a tight fiscal environment. Eliminating extraneous application and program requirements can make state need-based aid programs easier to administer as well as access and maintain. In addition, technology may
offer solutions for completing rote tasks and answering basic questions that can save states money .Finally, a few states have created innovative revenue streams (e.g. the Fair Share Amendment in
Massachusetts, which provides dedicated revenue for higher education, and the business and occupation tax in Washington).
The impact of the OBBBA on state budgets, higher education investments, and college affordability, will unfold over the coming decade as state and federal policymakers make consequential implementation decisions. Now is the time for college access and
success leaders to start planning so they can minimize the impact on the students they serve and best support the success of all who strive to earn a higher education credential.
We are grateful to Frank Ballman, Brittany Matthews, Laura Szabo-Kubitz, Kate Tromble, Anika Van Eaton and Dustin Weeden for providing valuable feedback on a draft, and to the Joyce Foundation for supporting this work.
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