Despite strong economy, worrying financial signs for higher education
Despite strong economy, worrying financial signs for
higher education
By Jeffrey J. Selingo August 3, 2018
Earlham College in Indiana might lack a national brand
name, but as Rick Seltzer pointed out in the online publication Inside Higher
Ed recently, it’s “not an average down-on-its-luck liberal arts college.” It
has an endowment of $438 million and draws about half of its students from
outside the Midwest.
That’s what makes the college’s announcement of a nearly
$13 million deficit even more surprising. As a result, Earlham is cutting $8
million from its $50 million budget. In late June, a few weeks after the
announcement, the college said its president of just one year was leaving.
While the news roiled the campus of 1,000 students and
its alumni, what is happening at Earlham is in many ways emblematic of the
financial issues facing much of higher education these days. A few weeks ago,
Moody’s Investors Service said that 25 percent of private colleges are running
deficits. The news isn’t much better for public universities, according to
Moody’s. Last year, revenue at state-run schools grew 2.9 percent while
expenses jumped 4.8 percent — the second consecutive year that expenses
outpaced revenue.
Moody’s examines the finances of more than 500 colleges
and universities that issue debt through the public markets. So while it
doesn’t follow all colleges and universities, Moody’s tends to look at the
strongest players, and its ratings provide a good indicator of the strengths
and weaknesses of colleges and universities.
In the public and private sectors, reports from Moody’s
tell a tale of a growing divide in higher education. Large public research
universities, such as the University of Maryland at College Park, the
University of Michigan, Arizona State University and other top public schools,
hold more than 90 percent of the total cash and investments in the sector,
despite enrolling 80 percent of the students. Among privates, the top quarter
of colleges and universities hold 85 percent of all cash and investments.
What’s especially troublesome for colleges and
universities is that these trends are emerging in a strong economy and as
higher education heads into a period of stagnation among traditional high
school graduates nationwide. The number of high school graduates is projected
to rise slightly in the middle of next decade. Then, between 2026 and 2031, the
ranks of high school graduates are expected to drop by 9 percent. In that
period, four-year colleges nationwide stand to lose almost 280,000 students. In
addition, the number of white graduates is expected to decrease sharply, while
the number of Hispanic graduates grows substantially.
These demographic head winds come as a new generation of
students with different needs and motivations arrives. Generation Z, born
beginning in the late 1990s, has replaced millennials on campus. “Unlike millennials
who were willing to pay for the college experience and go into debt for it, Gen
Z is more focused on value and price,” said Corey Seemiller, an assistant
professor at Wright State University and co-author of “Generation Z Goes to
College.” Most of all, Seemiller said, this is a generation that saw its
predecessors amass more than $1.3 trillion in student debt and doesn’t want to
do the same.
That means colleges won’t have much of an ability to
raise prices in the future, putting more pressure on them to cut costs, develop
different pricing models or build entirely new models for the traditional
four-year residential college.
One of those new models comes from Paul Quinn College in
Texas. A decade ago, the college was on the brink of closure, but now it’s
receiving national publicity for its work-college model. All Paul Quinn
students, regardless of financial need, are required to work at least eight
hours a week, first on campus, then off campus for participating employers.
Part of students’ pay goes to offset their tuition, and the rest is a cash
payout. Students’ supervisors double as their mentors.
Paul Quinn’s president, Michael Sorrell, wants to create
a national network of work colleges. Last month he took the first step toward
that vision, announcing that the school would open a second campus in Plano,
Tex., and partner with companies that include FedEx, JPMorgan Chase and Liberty
Mutual to sponsor internships.
“America’s colleges and universities,” Sorrell said,
“need to change and do more to address the needs of students.”
Indeed, one needs only to look through the Moody’s
reports on public and private colleges and the research on what Generation Z
wants out of college to know that major changes are on the horizon for higher
education. The question is whether college leaders will be able to find the
right solutions, and in enough time.
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