Posts Tagged “financial model”

Colleges Must Change Financial Model to Avoid Death by a Thousand Cuts

American higher education is a complex, decentralized, and interlocking network of institutions that provide education to a disparate group of learners. Historically, many of the fundamentals build around an applicant cohort of 18- to 22-year olds. The demographics of the 21st century predict that this group will not be able to support a robust pool of potential students into the future.

For many colleges, the choice is to expand the pool, both geographically and to better reflect shifting demographics. College administrators, seeking an admitted student population that mirrors the ethnic, gender, race, and religious characteristics of the country, generally work to open fresh applicant streams from among historically disenfranchised groups.

It is new territory for many schools in which campus culture supports these efforts intellectually but wrestles with the cost, preparedness, and internal dynamics of the cultural change required to maintain recruitment standards and retention and graduation rates.

Student Recruitment, Retention Costs Growing

Those colleges relying upon the 18-22 year old pool of applicants have little choice. From a financial perspective, these institutions have always relied upon wealthy, full-pay families to provide much of the revenue to support financial aid for needy and deserving students.

The problem, now growing into a crisis over the past twenty years, has been that the recruitment and retention costs for each class now exceed the capacity of the institution to balance full-pay revenue with the needs of less fortunate students.

College Discount Rates Sap Schools’ Financial Strength

A dramatic rise in unfunded aid – translated into the college’s discount rate – has sapped the financial strength of many institutions. The hard truth is that a college operates with fixed costs – heavily tied to labor, land, debt, and financial aid – that permits little left in an annual budget for discretionary moves that might offset these alarming trends. At a growing number of institutions the discount rate is now over 70 percent.

What industry – or any financial enterprise – can operate on 30 percent or less of the revenue that it advertises as its sticker price for the product that it delivers?

Colleges’ High Sticker Price Make Affordability Arguments Nearly Impossible

Another problem vexing colleges is the sticker price. Trinity College (CT) just announced a comprehensive fee (tuition, fees, room and board) of $71,660 for next year. Trinity is an outstanding college where students receive an exceptional education. But the optics look terrible for those colleges and universities that cross the Maginot Line of $70,000 per annum.

It is difficult and sometimes impossible to argue affordability when the sticker price is confused or equated with with the bill that students and their families actually pay. Does a high sticker price limit the size of a potential pool regardless of a college’s policy on generous financial aid?

There are at least three approaches to combat this trend:

The first is to increase the financial aid budget to offset increases in a college’s sticker price. This seldom works, especially over the long term. It is difficult to be less generous to successive classes without an enrollment strategy that matches financial aid to changes in enrollment practice. The most nimble colleges have a well-delineated financial aid model that links their enrollment practices to where they want to be in out years. But most institutions seldom follow through, effectively decreasing net tuition revenue over the long term and raising the discount rate higher.

A second option is to shift the financial burden to students, generally in the form of increased loans. The problem is that many students see debt as a responsible way to pay for an education, whatever the level of debt incurred. The result is that many students unskilled in handling debt become subject to it. The result is disastrous and often leads to higher default rates among students, many of whom fail to graduate, who work at jobs that do not permit them to repay debt that they did not understand when they agreed to its terms.

A third option is to rely on support from states and the federal government. The trends work against students here. Government support for student aid and debt relief has been – put kindly – spotty at best. Further, governments at all levels are losing their discretionary ability as pressing fiscal and political priorities affect their discretion. There may be a point at which discretion and government regulations intersect with hard choices ahead for those who seek state and federal aid.

What’s the alternative?

America’s colleges and universities should assume that any solution must be organic and come from within the higher education community. The discount rate at many colleges is now approaching a tipping point.

It’s not that colleges and universities face massive, wholesale closures. It’s more like death by a thousand cuts in which closures increase steadily but without a classic catastrophic event that shakes the college and university community to produce the next generation of operating changes necessary to survive.

It feels a little like being the lobster in the pot brought to a boil. When you fully recognize the danger, it’s already too late. The task ahead is to plan for an orderly review of how to prepare for an uncertain future and how best to pay for it.

American Higher Education Has a Serious Revenue Problem

Painting a grim picture for American higher education, Moody’s Investors Service recently changed the industry’s outlook from “stable” to “negative.”

This return to negative ratings reinforces a number of trends that bear close review.

The facts are clear and inescapable:

  • The comprehensive fee – tuition, fees, room and board – will approach $70,000 a year at a number of high sticker-priced colleges and universities.
  • Students and their families are voting with their feet, with 46 percent of first-time students beginning or having had some experience in community colleges.
  • Politicians sensitive to anecdote or polling or simply worried about the price of a higher education degree, promote policies that reinforce this optic.
  • Recent efforts to tax wealthy endowments to skew higher education spending priorities, often towards demands for moderated tuition or increased financial aid, illustrate this point further.

Higher education has taken some steps. Efforts have been underway to trim rising costs and achieve basic efficiencies since the Great Recession. These efforts vary widely depending upon the urgency felt within an institution, its level of creativity and nimbleness, shifting demographics, and the relative strength of the net tuition revenue it receives.

Trimming costs or enrolling more students, however, cannot cure what higher education faces. America’s colleges and universities have a revenue problem.

Fixed costs in land, labor, and debt repayment and rising costs in health care and financial aid largely determine a college’s operating budget. Labor alone might be sixty percent of a typical small college’s budget.

Most colleges are heavily tuition dependent. There is little or no discretion in the operating budget. For some of them the financial aid discount rate now approaches seventy percent. Dorms will be full until the institution, desperate for revenue, closes, merges, or is acquired.

Many of these colleges rely on other sources of support. Auxiliary revenue sources like residence and dining hall fees cover some of the territory lost to declining tuition revenue.

Endowment income also helps, but most colleges do not have sufficient endowment revenue to make a significant difference. Comprehensive campaigns and research grants and contracts address longer-term needs but do little to fund short-term revenue problems.

College Operating Model is Outdated, Unsustainable

The truth is that colleges rely on an older, archaic operating model where tuition increases historically matched expenses to balance an annual budget, often aided by auxiliary services revenue. For many schools, it was that simple. As new financial, cultural, demographic, consumer, and program pressures build, these “Mom and Pop” shops do not have the flexibility or capacity to meet the new demands.

What’s the path forward?

There are a number of changes that must be made immediately to offset this growing crisis:

  • College governance is weak and ineffective and must be immediately adapted to meet new oversight demands, with the faculty playing a more important role in creating an innovative educational enterprise.
  • Colleges must understand the institution’s value proposition, if the mission is still relevant and differentiated from its peers, and where the college wishes to be in out years. Why should the college exist in the 21st century?
  • The “Mom and Pop” operations must give way to a newer, more flexible model that accounts for changes in how colleges use tuition, re-imagine underutilized real estate assets, re-configure capital campaigns to meet shorter-term needs, re-think the use of temporarily-restricted funds, and seek additional partners to produce new revenue streams.
  • Higher education institutions must set aside older enrollment strategies in favor of newer financial aid analytical models that differentiate academic programs, emphasize student life, expand when practical the traditional 18-22 year old applicant pool, and focus on outcomes through stronger career counseling networks that create a lifelong affiliation.
  • Stakeholders must work much more aggressively at retention and graduation strategies, using student life, including athletics, as an enrollment tool to increase student fit and the level of satisfaction.
  • Colleges must determine what facilities footprint the institution can afford. Its leadership must grow/shrink the college to create a better fit among people, programs and facilities.
  • Institutions must get out of those business arrangements that are eating up financial capacity for which there are better service providers. If the college can use its legal, accounting and student life teams to create a robust residential life program, for example, does it really need to own its housing, with its corresponding debt, that might otherwise go to academic support?
  • The campus community must think of technology as an ongoing operating lease rather than a draw against remaining levels of debt capacity.
  • Its supporters must remember that a college is both an educational enterprise and an economic engine for its region, and seek strong public private partnerships to mutual benefit.

Despite the dismal forecasts, the decentralized and complex higher education system remains a cornerstone of American ingenuity, creativity and promise. The task ahead is to imagine the possible.

This op-ed first appeared on The Hechinger Report, a nonprofit, independent news organization focused on inequality and innovation in education.

Oberlin’s Financial Crisis: Sobering Lesson for Higher Education

Last month, Rick Seltzer reported in Inside Higher Education about a brewing controversy at Oberlin College, which is facing a significant budget shortfall. The College, including its prestigious Conservatory, faces a multi-million dollar deficit caused largely by lower-than-expected enrollment.

Oberlin College buildingTrustees charged with looking into Oberlin’s shortfall found that the College relies too heavily on cash from gifts. In a letter to the student newspaper, The Oberlin Review, two faculty members argued that it is “inadequate and depressing that neither the board nor the administration has the leadership or imagination to address the crisis in any other way than by eliminating raises for faculty and staff.”

Options for Closing Budget Gap Without Cutting Compensation

In response, Oberlin’s administration pledged to look for new revenue to reduce spending in the short term. This will encourage and permit development of long-term strategies to broaden its appeal to college-bound students, raise money through a new comprehensive campaign, offer early retirement plans, and place stricter conditions on funding for large capital projects.

Is Oberlin’s Campus Culture Hurting Enrollment?

There are two ways to look at Oberlin’s situation. The first is to criticize the school for getting itself into this mess, failing to educate its stakeholders about the crisis and not including them more directly in seeking a solution.

Critics might argue that any financial changes must be more fundamental because Oberlin has a shaky financial model that will be subject to unanticipated cyclic downturns when some combination of enrollment softness, brand weakness, and fundraising failures and endowment shortfalls hit the College in the future.

It is unlikely that Oberlin suffers from an enrollment shortfall, as some contend, because its faculty and students lean toward one end of the political spectrum, even if, in fact, they do. Oberlin appeals to students who are comfortable with the campus culture; indeed, it one reason that 27 % of those who are accepted in the college of arts and science actually enroll there.

An alternative to criticizing campus culture for the current budget woes is to commend Oberlin for facing the tough questions that beset its peers and aspirants across the country. Most college leaders envy Oberlin, with its sterling reputation and a $770 million endowment upon which to base its decisions.

What Oberlin should demonstrate to the rest of American higher education is that serious, purposeful, and inclusive conversations must occur if an institution is to avoid what many less endowed and recognized colleges already face – open concerns about whether they are sustainable.

For most of higher education – public and private – the facts are clear. The operating model doesn’t work, especially if the college relies overwhelmingly on a tuition-grounded comprehensive fee.

At all but a handful of colleges and universities, fundraising cannot keep up with growing demands on the budget. Fundraising is, at best, a long-term solution. Even with the run-up in the stock market, most institutions do not have endowments that are meaningful supplements to tuition revenue.

Auxiliary revenues are flat and typically diverted to pay for academic programs that student tuition cannot finance. At the Division 1 level, for example, only one in eight athletic programs pay for themselves. And most colleges have already made tough decisions on creating basic efficiencies — either through short-term actions like salary freezes or on a more permanent basis, like modifying health and retirement plans.

There is little wiggle room left in budgets that are largely fixed by labor and capital costs including debt repayment, facilities upkeep, and technology. There is almost no discretion left in many college operating budgets.

Some colleges panic, surmising that a shift to new programs at the undergraduate, professional, or continuing education levels will keep the wolf from the door.

Others are thinking more about online programming opportunities. It may be that a solution based on shifts, modifications, and new programming ventures will offset growing financial aid discounts and annual operating increases. It is more likely that such actions will delay the reckoning that will come when discounts make long-term survival an open question.

In the end, what we need to hope for most is that colleges are nimble and creative institutions with long histories that survive the upheavals that they face as these venerable institutions have in the past.

What’s so encouraging about Oberlin is that they are asking the right questions.

The road may be a little bumpy until transparency improves, but Oberlin put its future on display to address systemic issues. And it did so before it had no choice.

Change is coming to higher education. Each institution will find a different solution on a path to sustainability. But the solution will be about strategy, not tactics.

In the end, the institutions that survive will not be protected by their money, alumni base, or reputation. They will prosper because they figured out how to remain relevant in the 21st century.

New Thinking Needed on How to Pay for College

Swirling around the debates over the high sticker price of higher education is a deeper conversation about the broken financial model that most colleges and universities continue to use to pay their bills. While the largest universities have more options based on the scale of their endowment, fundraising prowess, and research support, most public and private colleges are heavily tuition dependent.

State governments have been withdrawing their historic support for public colleges and universities. These institutions now increasingly rely on tuition, fees, and room and board to pay their bills. Each passing day, their finances look more like private colleges.

That’s not a good thing if higher education is to develop a sustainable financial model. Private colleges rely heavily upon a tuition model that presumes that a family pays based upon their ability to do so — that is, wealthy families should not expect to receive financial support from the college that their child attends.

The stated goal behind the model was to improve access and encourage diversity in all its forms by making college more affordable for students who qualify for support. They do so through financial aid discounting practices that places the burden of support on full-pay families to pay for the discount.

College Financial Aid Model No Longer Useful

Today a new reality has set in, based principally on the fact that the student financial aid model has run to the end of its useful shelf life. Until the early 21st century, it was possible for financial aid administrators to cobble together financial aid discounts, state and federal support especially for public colleges, and loans of various types to make a case to families about how they could afford to pay for college. But cracks began to appear in this practice as the gap widened between what colleges could piece together and what families could afford to contribute.

At some colleges and universities, including often those of very good reputations, the financial aid discount now exceeds 70 percent. It is possible to imagine a scene where their student residence halls will be full but the comprehensive fee received will no longer sustain the enterprise.

The number of “full-pay families” — those who can pay the full comprehensive fee — is decreasing along with the willingness of families to send their children to high sticker-priced colleges. Many of these colleges did not meet their fall enrollment targets in September 2017. Further these institutions often rely on merit scholarships, now extending into the wealthier income brackets. Wealthier families brag about the merit scholarships they receive to encourage their child to attend the college they selected.

When admissions officers calculate financial aid offered to the “set asides” for Division I athletes, academic programs, and special circumstance candidates of various types, there is very little flexibility remaining in a financial aid budget.

Tuition and Fees Aren’t Enough to Cover College Expenses

This aid budget depends on the institution’s ability to meet general college expenses through tuition and fee increases. But this is where the crisis occurs because American consumers have turned against high tuition sticker prices, especially since so few families pay the full price today.

When elite universities charge $65,000-$70,000 annually, the media focus on the extreme rather than on the more moderately-priced institutions that form the majority of America’s colleges and universities. But it is an open question whether the sticker prices over $40,000 resonate with the American public anymore.

It’s a mess with few supporters backing the old financial model upon which American higher education has historically depended to finance the enterprise.

America’s colleges and universities are certainly aware that they face a crisis of confidence, credibility and economics ahead of them. The question is how well and how quickly will they respond to this crisis.

Three things must occur:

The first is that higher education must recognize that its colleges and universities – whether public or private – face a situation that will not be ameliorated by outside factors like an improving economy or rising wages. The fact is that most American families believe that college is a right and not a privilege. They are less likely to devote the personal resources necessary to have skin in the game.

The second is that higher education must have an open, prioritized conversation about how to pay its bills. It is unlikely that a single partner such as the federal government will step in like a white knight on a singular mission to save higher education. A better policy is to determine the range and level of funding sources available to colleges across its historic funders. This includes both operational and capital support from all sources. The most important decision will be whether to keep the decentralized higher education system in place with reinvigorated and better-defined missions and purposes.

Finally, higher education must imagine the possible. It is likely that America’s colleges will see a wave of mergers, closures, and acquisitions over the next 50 years. If so, how will this be managed? For those institutions that have achieved sustainability, what are the terms that bring people, programs, facilities, and technology together to foster common agreement on what higher education contributes to America?

America’s colleges and universities have evolved successfully for nearly 400 years. They are nimble, creative and distinctive. Higher education must go forward with transparency, purpose and urgency. To begin, it must demonstrate its willingness to change and adapt.

Why American Higher Ed Should Care About Harvard’s Finances

Every solution offered by a college or university faces a pending crisis in a different way. Wealthy institutions have the resources to weather challenges by kicking the can down the road, often for decades. That’s why it is significant that Harvard University last week issued a warning about its financial constraints that every American college and university must heed.

The good news is that Harvard ended the 2017 fiscal year with a $114 million surplus, which is $37 million larger than last year’s surplus. Most of the surplus was due to the money the University saved by refinancing its debt.

Writing in the Boston Globe, Deidre Fernandes reports: “The university’s financial chiefs cautioned that the surplus may reflect a ‘high water mark’ for the foreseeable future – a sign that the financial disruption experienced by universities and colleges across the country is hitting the biggest brand in education, too.”

In Harvard’s annual report, Vice President for Finance Thomas J. Hollister co-wrote, “The business model of higher education is under enormous pressure. Large research universities have been to date somewhat less affected, but they are not immune.”

The sticker price of many elite institutions – now approaching $65,000 – $70,000 at places like Harvard and Boston University – fails to reflect their need to increase financial aid to make it possible for their students to attend their institutions. Fixed costs, including faculty and staff compensation, facilities growth and maintenance, and technology, for example, increase the pressure further.

Harvard’s concerns grow when the weak performance of its endowment, compared to many other richly resourced schools, are factored into the equation. This year, the Harvard Management Company reported that the University’s endowment grew to $37.1 billion, an increase of 8 percent, up from a 2% return in 2016.

That having been said, Harvard continues to invest heavily in areas like its physical plant. But what is perhaps most interesting is that the University is aggressively seeking new sources of revenue.

Even Harvard is Seeking New Sources of Revenue

To this end, Harvard is growing its continuing education and executive education programs, which are less dependent on financial aid to attract students. To illustrate: “Between 2015 and 2017, the income Harvard generated from undergraduate students increased by just 7 percent, and graduate degree programs brought in 11 percent more revenue. But revenue from continuing education programs jumped by 19 percent during that period, from $345.5 million to $410.7 million.”

Why Should Anyone Care About Harvard’s Finances?

Why should anyone else care what happens at endowment-rich Harvard? The University’s detractors come at them from many sides, of course, but most of them argue that a wealthy, elitist institution with a massive endowment is not a suitable object of pity. They respond that Harvard could self-fund its undergraduate colleges simply by drawing interest off its endowment.

What these detractors miss, of course, is that American higher education institutions serve a variety of purposes, offer different missions, have varied histories, and undertake their academic programs by relying on whatever sources of support that they can put together. Harvard does it better and for longer than most.

The fact is that Harvard has both a mission-driven institution and is economic engine that fuels the regional and national economy. The draw on its resources comes from innumerable needs, supporting its position as a global incubator, research and medical powerhouse. But the fact that Harvard should find new sources of revenue by looking at its continuing education and executive education programs has a spillover effect on the rest of higher education because the Harvard brand is so strong.

So, whatever you think personally what happens at Harvard bears watching.

The lesson from this year’s annual report is that America’s colleges and universities do not have a sustainable economic model, no matter who they are or how successfully they put their funding pieces together.

It appears that Harvard recognizes that its high sticker price, dependence on an uncertain economy’s effect on its endowment, and people-heavy and land-centric base require entrepreneurial solutions that did not matter before.

History of American Higher Education is at Inflection Point

The lesson for the rest of America’s colleges and universities is clear. We are at an inflection point in the history of American higher education. The way that American colleges and universities finance their academic programs is broken. For some, time is running out as their discount rates approach 70 percent, their fundraising remains weak or anemic, and their endowment returns do not offer the safety valve that Harvard enjoys. Those that can should use this time to plan for how they can survive by shifting priorities and approaches within their finance model.

One lesson is especially telling. A rebounding economy or improving wages, should these even occur, will not be sufficient to return America’s colleges and universities to a misty, distant past where revenue met expenses, even with increasing sticker prices offset by increased financial aid.

What is equally certain is that higher education is nimble and creative. Most institutions will likely find a way to modify what they must do to remain relevant. But it is no longer possible to kick the can down the road.

As the Ivy League Goes…So Goes American Higher Education?

Brandon Busteed, the executive director for education and workforce development at Gallup, wrote a stimulating and thought provoking op ed earlier this month. The article’s title captured Busteed’s summary opinion: It’s Time for Elite Universities to Lead in Non-Elite Ways.

Mr. Busteed argued that America’s colleges and universities have traditionally followed the lead of America’s most elite institutions, an approach he argues has produced an “arms race of extensive new facilities, substantial growth in administrative staff, and the expansion of postgraduate degrees and programs.”

ivy covered wall and window
Citing the Wall Street Journal, Mr. Busteed reports that these trends caused 30 years of unprecedented growth in tuition rising “more than 400 % since the early 1980s and far outpac(ing) the cost increases of all other goods and services during the same time frame.” Busteed concludes, rightly so, that the pace is unsustainable.

For Mr. Busteed, the solution is for elite institutions to lead in non-elite ways. This does not mean simply ratcheting up financial aid since more aid is not the same as reducing costs. Instead, he asserts: “the real conversation should be about how to reduce the actual cost of college – and that is the difficult conversation higher education leaders don’t want to have.”

His solution is for elite colleges and universities to both talk the talk and walk the walk. Specifically, they should offer “associate degrees, certifications, non-accredited boot camps, employer- or industry-specific workforce programs, and even build…active partnerships with their local K-12 school districts.” He wonders “whether elites will have the foresight and the will to lead us in that direction.”

Change Often Moves at Snail’s Pace Especially at Elite Colleges and Universities

First, Mr. Busteed is right to infer that America’s colleges and universities are often places of cultural inertia. On most college campuses, process overrides other considerations. Shared governance among trustees, staff, and faculty often produces thoughtful change.

But change can move at a snail’s pace, especially at the handful of well-heeled elite colleges and universities relatively unconstrained by financial, political, or cultural pressures.

It’s a kind of “rule by committee” at times in which winning the debate can be as important as settling on the policy direction. The process can look more like the production of sausage even if the end result is appealing.

Less Wealthy Colleges & Universities Often Most Innovative

Second, change is hard. But the advocates for change face unique and idiosyncratic differences on every campus. Rather than argue that less wealthy colleges follow the elites, it may be just the opposite.

Under-endowed colleges and universities are the most willing to make change. Simply put, they have no choice.

These institutions are tuition-dependent and their survival requires some mix of planning, gambling, and luck. American higher education is not a monolithic pecking order in which the less fortunate emulate the wealthy. Those days ended in the last century when financial aid discounting disrupted archaic financial planning models to produce the current financial crisis in higher education.

Third, American higher education is highly decentralized. Expanding graduate and professional degree programs means very different things at a major research university compared to a rural, four-year liberal arts college. Further, colleges identify what they do and what programs they offer by their mission and purpose. Each category – indeed, every college and university – has a different purpose. Not all of them train America’s workforce in the same way or contribute to local and regional economic development in lock step.

Active Community Partnerships are Part of Most Colleges and Universities

Fourth, it is wrong to assert that colleges and universities are failing to build active community partnerships. In fact, most of America’s colleges and universities are eager and integrated community participants, deeply involved in basic education locally, and active in promoting regional, social, cultural, and economic initiatives.

Where would West Philadelphia be, for example, without the decades-long work of the University of Pennsylvania and Drexel University in their local community? There are hundreds of these examples across America.

That’s not to say that America’s colleges and universities must not evolve to match their programs to develop the workforce and assist in economic development based on the pressing needs their regions face.

In fact, the mission and purpose of any institution must always reflect the society that surrounds it. Yet these institutions must also help set the agenda for where society will head.

Colleges & Universities Must Plan Individually and Act Collectively

It’s not enough to follow the trends sanctioned by the actions of elite institutions. It’s critical to have the courage to lead locally based on what challenges face them at home. To do so, America’s colleges and universities must plan individually and act collectively.

Higher education is not a monolithic industry with a defined and inflexible pecking order but a collection of decentralized colleges and universities – large and small – that reflect the genius, strengths, and pitfalls of 400 years of history.

America’s colleges must find new ways — and new words — to describe their importance and differentiate more sharply their contributions to society. But the pronouncements and policies of a handful of elite colleges and universities is only one place among many from which the majority of higher education’s institutions can find and refine their future.

Follow The Money: The 2017 College Business Officer Survey

In many respects, what a college or university business officer (CBO) thinks about the health of higher education says more about the vitality and sustainability of America’s colleges and universities than the opinions of any other group surveyed. The reasoning is simple: The business officers know where the money comes from and where it goes on a college campus.

In this respect, the new findings released in the “2017 Inside Higher Ed Survey of College and University Business Officers” are sobering.

Stated starkly, most CBO’s recognize that American higher education is in the midst of a financial crisis that is different and arguably more persistent than the higher education challenges caused by the Great Recession.

Let me be clear. It’s not that the sky is falling. And it’s not that America’s colleges cannot find ways to adapt to changing impacts that detrimentally affect their bottom line. Many would say that they have administrative, programmatic, and institution-wide strategic tools that can help weather the coming storm.

But there is a sense that these options are narrowing, that traditional approaches like belt-tightening may not work fully to offset revenue declines, and that the operating models developed in the last century may not translate to adapting to the pressures building on colleges in 2017.

Inside Higher Ed (IHE) surveyed 409 chief business officers from public, private and for-profit institutions. They weighted their results statistically to produce findings that represented the view of their colleagues nationally.

Higher Ed Budget Officers Less Optimistic About Financial Health

IHE’s Doug Lederman and Rick Seltzer suggested that the sunnier opinions shaping findings of earlier survey years had darkened somewhat. They reported:

“The emerging picture is decidedly less optimistic than that of previous years. This year, 71 percent of chief business officers agreed with the statement that media reports saying higher education is in the midst of a financial crisis are accurate.” This represents an increase from 63 percent in 2016 and 56 percent in 2015.

What’s even more amazing is that only 56 percent of those surveyed agreed or strongly agreed that their institutions will be financially stable over the next five years, declining to 48 percent if the timeline extends 10 years.

Tuition, Fees Are Not Strong Sources of Future Revenue

So, how will spending needs be met in future years? Most chief business officers argue that new revenue will not be found either from comprehensive fee increases, including tuition, or from increases in net tuition revenue.

Lederman and Seltzer reported: “Just over 7 in 10 – 71 percent – agreed that their institutions would seek to increase overall enrollment. Nearly a quarter, 23 percent, said they would try to lower the tuition discount rate, a move that would have the effect of increasing net tuition revenue.”

Is Reallocation of Budget Funds “New” Spending?

The alternative strategy is to reallocate money from within the annual operating and capital budgets. Consistent now over three years, almost two-thirds of the respondents indicated that reallocation was the best source of new spending.

Lederman and Seltzer point out, however, that these findings differ dramatically from the past: “The portion of chief business officers agreeing their institutions will try to increase overall enrollment dropped by 16 percentage points from 2016. The portion saying that they will try to lower the tuition discount rate fell 13 percentage points.”

Arguably, reallocating money and redirecting it to other spending priorities is an efficient use of existing revenue, providing an opportunity to create new efficiencies, new investment strategies, needed program review, and potential economies of scale. It also answers questions about whether higher education institutions take their stewardship responsibilities seriously. And it is sensitive to political and consumer demands.

There are some problems, however, with this approach. College operating budgets carry significant fixed costs, especially in areas such as labor, facilities, and technology. They disproportionately employ white-collar workers who command higher salaries. Indeed, the compensation piece of the operating budget may approach up to 80 percent of this budget at some institutions.

After fixed costs, one of the overlooked facts about higher education is that there is very little discretionary money left. Indeed, many colleges squeezed much of the obvious discretion to handle shortfalls in the Great Recession. There isn’t much easy money left on the table.

Reallocation of Compensation Budget Pits Administration Against Faculty, Staff

Reallocation therefore implies some effort to address revenue shifting from fixed costs. The largest source might be compensation, setting administrators and trustees against faculty and staff. It’s worrisome, especially since the options on where to allocate revenue from have narrowed so dramatically.

There may be alternatives, especially if American colleges are willing to reimagine how they handle enrollment, the performance of underutilized assets like real estate, and their willingness to engage in broad partnerships that extend beyond the college gates. Need, rather than long-term planning, will likely motivate the higher education institutions that move first. But they could quickly become a model for others to follow.

It will be interesting to see if the most at-risk schools become the most nimble, leading higher education in a direction that others who have the luxury of time must ultimately follow.

Will Mergers and Acquisitions Dominate the Future of Higher Education?

A hotly debated topic making the rounds in higher education now is whether American colleges and universities – public and private – face a round of mergers and acquisitions over the next several years.

There are a number of reasons that the discussion of this topic had gained momentum.

Tuition discount rates are creating revenue squeeze for colleges

First, many colleges, especially small private colleges, are seeing their tuition discounts — now at 50% on average for every tuition dollar received — rise while their net tuition revenue remains flat or continues to fall. In fact, there are some colleges where the tuition discount now approaches 70 percent.

Financial health of many schools is questionable

Second, federal composite credit scores, which reflect the overall relative financial health of institutions along a scale from -1 to 3, have shown a good number of institutions to be in questionable financial health. A score greater than or equal to 1.5 indicates the institution is considered financially responsible. Colleges with scores of less than 1.5 but greater than or equal to 1.0 are considered financially responsible, but require additional oversight. These schools are subject to cash monitoring and other participation requirements.

The Chronicle of Higher Education reports that 177 degree-granting private colleges failed the U.S. Education Department’s financial-responsibility test, which seeks to quantify the financial health of proprietary and nonprofit institutions, for the 2014-15 academic year. That’s 18 more than failed the year before.

Further, of the 177 failing institutions, 112 (63%) are nonprofit and the rest are for-profit. For the previous year, 58 percent of the 159 failing institutions were nonprofit.

Third, Moody’s has revised its outlook for U.S. four-year higher education to stable from negative, reflecting the expectation that the sector’s business environment will neither erode significantly nor improve materially in the next 12-18 months. Until this latest ratings change, higher education had received a negative rating since January 2013.

Moody’s rating suggests that higher education is at best treading water and not in a robust recovery from the impact of the Great Recession.

Fourth, there is growing anecdotal evidence of a struggle over financial health. Nearly four of ten private colleges reported that they still had available seats in their upcoming admissions class last year. On the public side, some states are considering closing or merging small and underperforming (often rural) campuses. The number of students entering community colleges is also dropping. Years of underfunding public sector institutions have produced problems like the collapsing infrastructure and structural deficit issues at respected institutions like UMass Boston.

In addition, much of the public discourse over projected closures like Sweet Briar College, failed merger attempts, and persistent rumors of financial distress continue to feed the higher education gossip circuit.

The cumulative effect is to pit trustees, staff, faculty, students, and alumni against one another as the blame game over failed efforts at transparency and worse indications of poor stewardship shake higher education’s foundations.

Free tuition at public schools could be detrimental to private institutions

The newest wrinkle addresses the likely impact that variations in the free public tuition proposals might have in the 35 states where such proposals have arisen. In New York, for example, a number of private college and university presidents with whom I have spoken recently wondered what will happen when the state uses the program to encourage New York State families to vote with their feet for four-year public colleges. The impact on the state’s private and community colleges could be detrimental, lasting and severe.

There’s little question that American higher education is now going through a period of chaos and uncertainty that is upsetting the otherwise glacial pace by which higher education has historically evolved.

But history also tells us that there have been at least two other periods characterized by the same level of disruption. In each case, higher education grew and adapted but did not suffer from an agonizing collapse. It is possible to imagine the possibility and to see the potential amidst the chaos, even if some of it is self-inflicted.

Disruption in higher education may spark creative, positive change

And perhaps this is ultimately the point. Higher education will need to change the way that it operates. Leadership at all levels must modernize and re-think financial models, operating principles, and governing structures. It is likely that American colleges and universities will not be able to rely on traditional state and federal partnerships in the way that they have in the past.

It is essential that institutions begin to imagine broad cooperative efforts that cut across rigid but now outmoded divisions as “public” and “private,” research and teaching, and two-, four-, and graduate-level institutions. Education must be a seamless, lifelong pathway.

The most important change will be to build an aggressive, unapologetic defense of what higher education represents, why what it does is important, and how its colleges and universities contribute in unique ways to American society.

Disruption makes anything possible. Now is the best time to think about how to manage this disruption rather than simply react to what’s coming.

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.