Posts Tagged “financial model”

Perilous Path to Financial Sustainability in Higher Education

The results of the most recent Tuition Discounting Study from the National Association of College and University Business Officers (NACUBO) are telling and worrisome. The study, released last week, examined how much colleges and universities awarded students in scholarship and grants and how deep tuition discounting has become.

The NACUBO study found that the average institutional tuition discount rate for first-time, full-time students hit an estimated 49.1 percent in 2016-2017, up from 48 percent the previous year. The discount rate was highest at small institutions, where the first-time, full-time freshman rate was 50.9 percent for 2016-2017. And perhaps most troubling, more than 25 % of the institutions surveyed have rates well above 50 percent.

Why Does College Tuition Discounting Matter?

Why does this matter?

As Inside Higher Education’s Rick Seltzer points out, the tuition discount rate is defined as institutional grant dollars as a percentage of gross tuition and fee revenue. Translated, a discount rate of 50% means that fifty cents of every tuition dollar never makes it to the college’s bottom line because it is dedicated immediately to financial aid. All but a handful of American colleges and universities are highly dependent on tuition, although they also work to supplement tuition revenue through fundraising in areas like student scholarships.

The problem is that endowments do not fund much institutional grant aid. In 2015-2106, for example, endowments funded only 12.4 percent of institutional grant aid provided to students. In general, 79 percent of aid awarded went to meet need, regardless of whether that need was classified as need-based or merit-based.

Need for Financial Aid Increases but Tuition Revenue is Flat

Mr. Seltzer notes that as tuition prices continue to increase, the share of students with financial need will also likely rise. What’s especially concerning is that the percentage of first-time, full-time freshman receiving institutional grants is estimated to be 87.9 percent in 2016-17. That doesn’t leave much space for the tuition from full-pay students to make much of a dent in the financial aid budget.

The overriding fact is that net tuition revenue per full-time freshman – the cash that supports the college after financial aid — is essentially flat, rising only 0.4 percent in the past year. Worse yet “well over half of survey respondents, 57.7 percent, reported a decline in total undergraduate enrollment between the fall of 2013 and the fall of 2016.” Further, just over half of schools surveyed reported a decrease in enrolled freshmen. The respondents blame price sensitivity, increased competition, and changing demographics as the primary reasons for this decline.

That leaves many colleges in a precarious position. If net tuition revenue is flat, discount rates are rising, the economic headwinds are blowing against them, and their enrollments are declining, financial options are narrowing at most colleges and universities.

A college or university can no longer depend on rising tuition or increased demand to grow its way out of what is now a systemic financial problem.

Discounting Strategies Aren’t Sustainable; Schools Know It but Few Admit It

Yet the most curious result in the survey was on the question of sustainability. In the IHE study, 44 percent of schools reported that their discounting strategies were not sustainable over the long term. Of the remainder, 32 percent said that they were sustainable over the short- but not the long-term. But only 9 percent “were willing to say that their strategies were not sustainable.” They presumably believe that some combination of new programs, better recruitment, and improved marketing strategies could work to improve their competitive position.

Financial aid is a complex question. Many of the colleges now suffering from their discounting practices have increased their discounts, for example, in an effort to serve more financially needy and diverse students. There can be time-specific reasons as well like the development of major new program initiatives.

But the inescapable fact is that American higher education continues to rely on outmoded and archaic financial strategies that used their primary source of revenue – tuition, fees, room and board – to balance out their expenses.

It’s an expense-driven model in which most of the large expenses – financial aid, cost of labor, technology, health care, and debt on capital expenditures – determine the revenue needed, effectively setting the tuition. Any institution increasing tuition much above the cost of inflation, now running at less than two percent, is effectively kicking the can down the road.

Despite the worrisome results of the NACUBO survey, many of us are still betting on American higher education to thrive. It must change how its financial pieces fit together and think imaginatively about how it can finance itself. It is likely that colleges will abandon long-time efforts to finance their capital expenditures exclusively on debt. It is possible to explore creative ways to manage targeted capital campaigns and rethink annual fund efforts. Change will require consortial efforts that move beyond paper and library purchases to see what can be accomplished in common on health care, retirement benefits, and technology.

The NACUBO study forces three conclusions upon us:

  • Higher education must evolve more rapidly.
  • The broad philosophical debates among staff, trustees, and the faculty must be about institutional sustainability.
  • There is only so much time left to take the first big steps.

When a Major Employer Closes: Local Lessons from St. Joseph’s College

Along with students and alumni, the citizens of Rensselaer, Indiana, expressed shock last week when St. Joseph’s College announced that it would close at the end of the academic year. The small, private Catholic college was founded 128 years ago and was a fixture – and major employer — in the town.

St. Joseph’s president, Robert Pastoor, argued that the College would need about $100 million to be feasible, with an immediate infusion of $20 million needed before the end of June. He stated: “Despite our best efforts, we were not able to escape the financial challenges that many tuition-dependent smaller universities have faced in the past several years.”

Financial Challenges, Decades in the Making, Were Insurmountable

Mr. Pastoor cited extensive debt, fears the College would permanently lose accreditation, depreciated facilities, and pressure from auditors that would limit access to student loans as the reasons for the Board of Trustees’ decision. Last November, an accreditor, the Higher Learning Commission, placed St. Joseph’s on probation through 2018 citing concerns over “resources, planning and institutional effectiveness.”

There are many lessons to be learned from the financial failure of St. Joseph’s College. There are also strong views about the failure of the Board and administrators to demonstrate transparency even if the signs were there after the accreditation actions last November. The finger pointing will likely begin, especially directed to the Board of Trustees, but there’s undoubtedly plenty of blame to go around. The cold fact is that no one expects a college to close even when the signs point to it.

Much of the reporting on the closure focused on the sense of loss felt by students and alumni, who invested their sense of self – psychologically and emotionally – in the place. Students are now scrambling to find a way to complete their education affordably. Alumni feel strongly about their alma mater and wonder if their degrees will continue to hold value.

Impact of College’s Closure on Local Community Cannot Be Ignored

The story of loss that is more often ignored, however, is the impact the closing of a college has on its community. In college communities affected by closures, the economic impact of a college’s business operations suddenly becomes important. In the case of St. Joseph’s, the College employed more than 200 individuals, making it a major employer in a town of 6,000 people in a largely agricultural region. These soon-to-be former employees will face limited options as they begin to think about future employment.

There are also secondary effects on a community when larger employers like St. Joseph’s close. The college is the town’s third largest utility customer after the local hospital and the school district, spending $640,000 last year, according to its Mayor. The ripple effect on local businesses will spread across the region as the employment base shrinks and 900 students spend their consumer dollars elsewhere.

As Melissa Shultz, a local businesswoman and lifelong resident lamented to a Chicago Tribune reporter: “I just don’t want this to become a ghost town.”

The loss to a community is comparable to an auto plant shutting down or a mine closure except for an important distinction. The business of higher education is a public good whose benefits extend well beyond employment. America’s colleges – of whatever size – prepare citizens for the workforce. They are also among the principal economic engines in their region. They bring visitors to Main Street, anchor the quality of life, and provide continuous stable employment in a way that the much touted reopening of the Carrier plant in Indianapolis cannot do.

America can continue to let its Rust Belt deteriorate as demographic shifts depopulate its rural stretches. Or, policy makers can see the impact that inattention has had well beyond the slogans and the politics of nationalism that will delay but not stop globalization. That boat sailed before this century began.

Instead, what is most needed is a kind of Tennessee Valley Authority approach to re-imagining the towns that America’s post-industrial economy will otherwise leave behind.

The closing of St. Joseph’s College is a warning shot to America about the loss of bedrock institutions that defined entire towns.

It was like a death in the family. The solution to solving the problems of the Rust Belt is not simply to find more manufacturing jobs for unemployed workers in new Toyota plants.

In the end, all politics is local.