Don’t worry about disruption: The business model of college is collapsing under its own weight

By:

May 28, 2019

The Class of 2023 is already coming up short, despite not yet having set foot on campus.

High school graduation season is still in full swing, but The Chronicle of Higher Education reported last week that a handful of elite schools have already announced enrollment shortfalls. NACUBO has reported record-setting tuition discounting. The demand for workers with education and skills has never been higher, yet many traditional colleges are struggling. Why?

Because the business model of college is broken.

In the spring, families around the country anxiously await news from college admissions officers, hoping that four years of high school achievement will translate into acceptance letters. But colleges are waiting just as anxiously: the business model of college is highly sensitive to enrollment. Residential schools can’t risk over-enrolling—like Rome, dorms aren’t built in a day. But under-enrolling can quickly induce financial disaster: colleges have high fixed costs, and so empty seats roll directly into the bottom line.

Even for schools who do fill their seats, students aren’t what they used to be—at least not financially speaking. Tuition discounts have popped over 50%, meaning that while tuition has never been higher, actual tuition revenue is essentially flat. American higher education employs a relatively unique pricing model: that 50% discount isn’t spread evenly across the class. The vast majority of students (89% at private nonprofits) receive financial aid, but the small fraction remaining pay full freight. Those “full-pay students” are a highly sought-after species in higher ed, because they can afford to pay more. But, as The Chronicle reports, these students increasingly are opting for cheaper options, like public schools—and every year, as tuition prices inexorably rise, there are fewer of them.

Demographic declines, as well as decades of price increases, are beginning to affect demand for the traditional college experience. Over the long term, colleges face disruptive pressures, but over the short term, the business model of college is collapsing under its own weight.

What can colleges do?

In many industries, a shrinking market would drive companies into a cost-cutting panic and a product-development flurry. But higher ed has heard it before: discount rates have been rising since college business officers were in diapers, and complaints about the cost of college are evergreen. For decades, schools have been responding to the outcry by tweaking tuition a few percentage points up every year, kicking off new capital campaigns, and turning over new rocks in the search for ever-elusive full-pay students.

This time just might be different. As economist Nathan Grawe has compellingly argued, demographic declines present a new problem for an industry that has steadily grown over the past several generations as more and more Americans have pursued college degrees. Tuition, and its accompanying discounts, have finally risen high enough to make college business officers sweat. But what can they do?

First, cut costs. While this may seem obvious, it’s actually counter-intuitive for an industry that for years has employed sustaining innovation to make college better and more appealing to its best customers: full-pay students. And while other industries embrace cost-cutting, higher education leaders often fear it can set off a death spiral, whereby lower costs mean lower perceived quality, and lead to fewer (and poorer) students. Cost-cutting is further stymied by historical and cultural dynamics like shared governance, large budget committees, and dramatic aversion to cutting programs—even programs with unsustainably low enrollment.

Second, schools need to demonstrate value. That value proposition may vary, but ought to be measured. If schools believe they are offering students an effective pathway to a career, then schools should work to assess their graduates’ labor market outcomes. If schools argue that it’s not just about salaries and jobs but about learning, that’s fine too: measure learning when students walk onto campus and when they leave, and make the gains transparent. And for schools who claim that they are simply offering an idyllic experience, measure student satisfaction. In a more competitive world, schools need to demonstrate value in order to survive.

But over the long term, schools may need to build entirely new models in order to survive. Disruption does loom for higher education, and many of the fastest growing institutions have already adapted to this new reality. For instance, Southern New Hampshire University—which used to be a small residential school in the Northeast with declining enrollment—successfully built a disruptive business model that now serves nearly a hundred thousand students.

Alana leads the Institute’s higher education research and works to find solutions for a more affordable system that better serves both students and employers. In this role, Alana analyzes disruptive forces changing the higher education landscape.