Posts Tagged “sustainability”

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.

Consolidation in Higher Education: the Clash Between Data and Optics

Earlier this month, Jeff Selingo wrote in The Washington Post about the coming era of consolidation among colleges and universities. Mr. Selingo based many of his comments on findings from a study by Parthenon-EY Education to which he also contributed.

The study concluded that more than 800 American colleges exhibit factors that call into question their sustainability over the long term. These factors include

  • having enrollments under 1,000 students,
  • tuition discounts higher than 35 percent, and
  • high debt payments for recent campus capital improvements.

As expected, nearly 80 percent of these potentially unsustainable colleges are small – with fewer than 1,000 students – but nine percent have more than 10,000 students.

Seth Reynolds, a managing director at Parthenon-EY Education, offered two important observations. The first is that “small and large colleges that are thriving . . . have either found a strong niche or they operate at a large scale.” The second conclusion is perhaps even more telling: “But for most institutions, the path forward is not one that they can take alone. They need to shift their mindset and consider collaboration in ways they haven’t before.”

Some may consider these bleak conclusions. But they do not mean that the sky is falling for American higher education.

Mr. Selingo notes that higher education is primarily a location-bound, highly regulated, bricks-and-mortar industry with wide variations in capacity to reflect changing American demographics. He notes that the report suggests that circumstances will force many institutions into deeper partnerships with one another.

The report also suggests that the biggest obstacle to deeper partnerships is pushback from various constituencies, including trustees, faculty members, students, and alumni. Mr. Selingo concludes that “if the current rich diversity of the American higher education system has any hope of existing another few centuries, campuses need to rethink their long-held position that the best way to survive is to operate on their own.”

Greater Collaboration, Even Consolidation, May Be No-Brainer

There is a good deal of common sense embedded into this logic. Many colleges and universities – including a good number whose names are widely recognized – operate on older, unsustainable financial operating models that lack coherence and transparency.

Looking at ways that combine a mix of people, programs, and facilities to create not only efficiencies and economies of scale but also new opportunities for students and faculty is something of a no-brainer.

Or, at least it should be.

The problem is that the spark that triggers the kinds of changes that higher education institutions must make is missing. The protectors of the historic traditions that shape the governance of these institutions support, at best, incremental change and point correctly to the relative handful of closures and mergers annually to make their case for the status quo.

The root of the problem is perhaps that no one is talking about overall health, focusing instead on trend lines and a murky future. Many argue that solving the growing income disparity in America, or waiting it out for more robust economic growth, will largely make the concerns over sustainability in higher education go away.

Lessons From the 1800s on Changing Higher Education Landscape

History doesn’t support this analysis. There have been distinct phases of growth in higher education. One in particular in the 19th Century illustrates the kind of future that might be in store for American colleges and universities.

In the 19th Century, the predominant trend that followed a period of expansion in American higher education was a surprising number of mergers and closures, especially as the Civil War deaths decreased that generation’s ability to support colleges and universities across the country. By the end of the century, a new commitment to public, professional, and graduate education reshaped the higher education landscape.

The point is that change happens and that the record supports an unsteady and uneven evolution ahead.

As we look at the Parthenon-EY Education study, it is essential to think through how best to prepare for change. The worst case is that either side – whether incrementalists or disruptors – wins. It is far better to imagine a negotiated evolution.

Disconnect Between Data & Perception Must Be Reconciled

To do so, we must do a much better job of linking data with a more thoughtful education of key higher education constituencies to produce a common understanding of the issues. It must begin with the recognition that American colleges and universities are – overwhelmingly – tuition dependent, endowment poor, and debt ridden. Many are open enrollment institutions with archaic management practices. And most important, governance practices and constituency perceptions must be brought into better alignment with what the data suggest.

There’s a tremendous opportunity to manage the crisis to a more sustainable future. But it must start with a recognition that the fundamental disconnect between what the data tell us and what uninformed campus communities think is happening must be reconciled quickly.