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Cost / Financial Sustainability

1 Leave a comment on paragraph 1 0 If something cannot go on forever, it will stop. – Herbert Stein

2 Leave a comment on paragraph 2 0 Cost

3 Leave a comment on paragraph 3 0 According to the National Center for Public Policy and Education, over the past 25 years, the cost of higher education has grown 440 percent – nearly four times the rate of inflation. These increases have occurred at public and private colleges and have directly contributed to the student debt crisis, which now surpasses credit card debt as the leading personal debt liability in the U.S. (Williams, 2014).

4 Leave a comment on paragraph 4 0 On average, low-income students finance the equivalent of more than 100 percent of their family’s annual income to attend one year at a four-year college (National Center for Education Statistics, 2012). The class of 2017 will leave with an average debt of approximately $35,000 (Belkin, 2017). Graduating seniors are still often told that college is the best path to financial success, but told nothing about how that potential success varies by degree and ability (Webber, 2016).

5 Leave a comment on paragraph 5 0 Research findings continue to support positive returns on investment (ROI) from a college degree, especially versus no college degree (Avery and Turner, 2012; Webber, 2016), but it has been posited that ROI will diminish if tuition rates continue to rise and students incur more debt. Webber (2016) has found that for “an individual with average ability, the value added [for] the vast majority of majors is worth well beyond the typical costs associated with a four-year public institution. However, those lower ability students who pay substantially more than the average college costs may not see their investment pay off until much later in life, and depending on their major the degree may never pay itself off” (p. 308-309).

6 Leave a comment on paragraph 6 0 For low-income students, even if the potential of obtaining a college degree can pay off financially at some future date, there is still the issue of retention (Webber, 2016). Low-income students drop out of college at almost three times the rate that high-income students do (Bailey and Dynarski, 2011, in World Economic Forum, 2015). And, many low- and moderate-income students contribute to the ongoing costs associated with their education by working more than 15 hours per week, which compromises retention and degree attainment (Poutré et al., 2017).

7 Leave a comment on paragraph 7 0 Although once better supported by state and federal government, the current reality is that financing higher education is increasingly viewed as the responsibility of individuals and their families and not government’s (Dumestre, 2016). A report by the Center on Budget and Policy Priorities (Mitchell et al., 2016) indicates that more than 75 percent of higher education students are in public colleges and universities. States once provided more than 50 percent of revenue for these institutions. But, primarily due to the 2008 recession, state contributions to their public colleges and universities have decreased by nearly 30 percent. Despite pressure to hold tuition rates down, tuitions have increased by 30 percent.

8 Leave a comment on paragraph 8 0 Compounding that, according to the Center’s report, median household income fell by 8.1 percent from 2007-2011. Increased costs of attendance and decreased ability to pay are putting low- and middle-income students and their families in an untenable position. In some cases, these students have turned to less expensive community colleges with the intent to transfer to a four-year institution. But, there are some who have simply given up on attending college at all (Dumestre, 2016). It remains to be seen whether the “free-college” movement (e.g., New York, Rhode Island, Tennessee) for public institutions will gain traction throughout the country

9 Leave a comment on paragraph 9 0 Although an oversimplification, the high cost/discount interplay and ultimate net pricetag are resulting in a house of cards/high stakes poker game: tuition increases predicated on brand value and depth of pocket (e.g., endowment, donor largess, and other sources of income). Ongoing tuition increases are unsustainable, “…the cost of the traditional model is outpacing the middle-class family’s ability to pay … Tuition-dependent universities, in particular, are vulnerable” (Dumestre, 2016, p.1).

10 Leave a comment on paragraph 10 0 Financial Sustainability

11 Leave a comment on paragraph 11 0 The cost of operating most colleges and universities (i.e., physical infrastructure, salaries, and other overhead expenses) is too high to be covered by net tuition income alone. Endowments have helped fund gaps, but for many institutions, the growth of their endowment has not kept pace with the increasing overall cost of running the institution. The average tuition price – as a percentage of the median family income – has increased by nearly 15 percent, but forty-nine cents of every dollar from tuition goes back out as financial aid (discounts) to first-time freshman, according to the 2015 NACUBO Tuition Discounting Study (NACUBO, 2015).

12 Leave a comment on paragraph 12 0 With government assistance per Full Time Equivalent (FTE) down and tuition rates projected to increase at twice the level of the consumer price index (CPI) over the next 15 years, it will be harder for tuition-dependent universities to charge tuition rates that cover operating costs (Dumestre, 2016) and continue to provide competitive discounts. According to a study completed by Moody’s (2013) of more than 500 higher education institutions, between 2000-2011 the average institutional debt levels more than doubled and liquid assets relative to debt declined more than 40 percent.

13 Leave a comment on paragraph 13 0 A 2015 National Association of College and Business Officers (NACUBO) report reviewed how universities invest their endowment and how returns fund annual operating expenses. It is not surprising that institutions with more than $1 billion in endowment assets earn the greatest return on their investments compared to those with endowments under $25 million. What is particularly interesting, though, is that institutions with the largest endowments invest more than 55 percent of their assets in alternative strategies such as commodities, private equity, non-campus real estate, and other more sophisticated investments, while institutions with small endowments devote only about 10 percent to such investments. The fewer funds a university has to invest, the more averse to risk they need to be with their portfolio. The NACUBO report also affirms that universities with the largest endowments are able to fund their operating budgets at a higher rate.

14 Leave a comment on paragraph 14 0 Dumestre (2016) in Financial Sustainability in US Higher Education: Transformational Strategy in Troubled Times has identified some key problems facing higher education:

15 Leave a comment on paragraph 15 0 (1) Higher education institutions can no longer depend upon significant increases in tuition to cover expenses because tuition is now outpacing the middle-class’ ability to pay.

16 Leave a comment on paragraph 16 0 (2) Even with the increased earning power made possible by a college degree, ongoing rising tuition, disputes about educational outcomes (preparedness for a 21st century workforce), and alarming student debt have triggered questions from students and their families about the value of higher education. Colleges and universities have the dual task of showing how well they prepare students for employment and how they articulate the cultural and social values of a college degree as more than career preparation.

17 Leave a comment on paragraph 17 0 (3) Seeking to ensure an educated workforce and citizenry, many governments view higher education as an investment. Despite the perception that the U.S. will never completely follow suit with countries that fully fund higher education, it is imperative for colleges and universities, as a collective whole, to advocate for federal and state funding of higher education as an investment in the future. Higher education’s expansion was based on government financing after World War II. This financial support directly factored into American economic expansion and global leadership.

18 Leave a comment on paragraph 18 0 (4) Regulation tends to be a reactionary process and so it is important that colleges and universities proactively address issues that might result from the changing landscape. This includes non-traditional teaching models and emerging forms of distance education. Colleges and universities must demonstrate academic effectiveness and operational oversight in order to hold off increased government regulation. The practical reality is that non-traditional instructional technology is crucial for successful educational reform. It is essential that colleges and universities perform assessment alongside any new initiatives.

19 Leave a comment on paragraph 19 0 (5) The blueprint or model for many colleges and universities is centuries old and has been imitated, more or less, during each expansion of higher education in the U.S. The model, itself, has come under pressure due to both external and internal changes. For most colleges and universities to survive and ultimately thrive in a higher education ecosystem that is becoming more and more heterogeneous, it is critical to refine or refashion local practices to mirror an institutionally distinctive mission and student body.

20 Leave a comment on paragraph 20 0 A 2012 Bain & Company report “The Financially Sustainable University” provides financial cautions about what they term as a liquidity crisis in higher education. Using Integrated Postsecondary Education Data System (IPEDS) statistics from 2006-2010, the report identifies one-third of institutions as having increased weakness in their financial statements. They “are spending more than they can afford” (Denneen and Dretler, 2012). The authors revised their statistics in 2014 with updated IPEDS data noting an increase of at-risk institutions moving to 40 percent. Increasingly, many higher education institutions are finding themselves in worsening financial environments.

21 Leave a comment on paragraph 21 0 Given their analysis, Denneen and Dretler (2012) suggest four corrective strategies or what they call “reversing the Law of More” (i.e., reversing operating on the assumption that the more you build, spend, diversify and expand, the more you will persist and prosper):

  1. 22 Leave a comment on paragraph 22 0
  2. Develop a clear strategy focused on the core
  3. Reduce support and administrative costs
  4. Free up capital in non-core assets
  5. Strategically invest in innovative models

23 Leave a comment on paragraph 23 0 In a corporate environment, core means a company’s primary business. Operations are devoted to providing products and services for what they do best and what makes them distinctive. Likewise, colleges and universities must determine which student populations they serve, and how they differentiate themselves from other colleges and universities. This will include directing services, administrative costs, and capital to educating the core student population and eliminating non-core assets. In the end, this set of strategies forces colleges and universities to move away from a generic understanding of higher learning, toward identifying who they serve, what they do best, and why potential students should choose them (Denneen and Dretler, 2012).

24 Leave a comment on paragraph 24 0 Critics have compared the state of American higher education with the dot-com bubble at the turn of the 21st century and the 2008 housing/mortgage bubble. In an Academic Impressions report, Amit Mrig (2013), President and CEO of Academic Impressions, writes about what he calls the “denial bubble” in American higher education. Mrig’s contention is that higher education leaders continue to rely on what has worked in the past and ignore the challenges currently facing higher education: increasing costs, stagnant revenues, market shifts, and declining public trust.

25 Leave a comment on paragraph 25 0 In addition to the denial factor, Mrig cites from an AGB (Association of Governing Boards) of Universities and Colleges survey, which reveals a dissonance between higher education leaders and public perception of higher education:

  • 26 Leave a comment on paragraph 26 0
  • Eighty-nine percent of American adults believe higher education is in crisis. Fifty-two percent of college leaders feel the opposite
  • Forty percent of consumers believe colleges provide an “excellent” or “good” value for the money invested. Seventy-six percent of all college and university presidents believe their institutions deliver a “good” to “excellent” value

27 Leave a comment on paragraph 27 0 A majority of the general public thinks colleges and universities are out of touch with their needs and care more about their own bottom line than the public good. These very different perceptions about the value of a college education indicate something more than a public relations problem.

28 Leave a comment on paragraph 28 0 Due to increasing cost and greater prospects of debt, students and their families are becoming more conscious of the cost-value proposition. Demonstrating best value, reputation, and fit are now key recruitment objectives for colleges and universities. Students are increasingly choosing either institutions of established quality and reputation or institutions that are highly affordable.

29 Leave a comment on paragraph 29 0 For colleges and universities, the escalation of tuition discount rates has diminished net revenue. Significant new sources of revenue are not likely to come from just adding more traditional students, but alternative revenue streams often require changes in institutional self-perception and flexibility around different types of programming. Colleges and universities need to focus more on creating new programming and less on building new facilities. Alternatives to the traditional college degrees are emerging. These include micro-credentials and other certifications of post-secondary competencies. Designing different types of credentials does not require an abandonment of traditional college degrees, but rather recognition of the knowledge, skills, and abilities that will be required of graduates entering a 21st century workforce.

30 Leave a comment on paragraph 30 0 Despite all of the challenges identified by Mrig (2013), he still believes that American higher education has the following tailwinds that ensure near-term viability:

  • 31 Leave a comment on paragraph 31 0
  • During the recent recession, the unemployment rate for those with a bachelor’s degree was only about 5 percent.
  • Lifetime earnings of college graduates are typically $1 million more than high school graduates.
  • A college is still a reliable gateway into the middle class.
  • President Obama’s college completion agenda provides political support for the economics and cultural value of higher education.[i]

32 Leave a comment on paragraph 32 0 Mrig (2013) encourages institutions to take an approach that looks internally and holistically while improving quality while reducing costs, creating new models for delivering education, and aligning organizational structures and incentives. Referencing Ron Heifetz, co-author of The Practice of Adaptive Leadership, Mrig writes that Heifetz would characterize the aforementioned as adaptive in nature, as opposed to technical, because there is no immediate solution that is currently within our capacity.

33 Leave a comment on paragraph 33 0 “Adaptive challenges require ongoing experimentation, creativity, risk-taking, and a tolerance for trial and error. More profoundly, they require that leaders question long-held assumptions and engage the talent throughout their institution in identifying opportunities to adapt to a changing environment. This will not happen overnight; Heifetz teaches us that adaptive challenges are characterized by their lengthy timeframe, so that the challenge for institutional leaders is to ‘keep people in the game’ during a period of ‘sustained disequilibrium’” (Mrig, 2013).

34 Leave a comment on paragraph 34 0 In their concluding chapter, “A Call to Action,” Kelly and Carrie (2013) juxtapose a then and now scenario. Government and the general public once supported post-secondary education. It resulted in “an excellent intellectual and emotional coming-of-age experience for students,” and sought to include “small class sizes, increasing admission selectivity, nationally renowned faculty, research, constant upgrading of facilities, enhanced student services, alumni(ae) networks” (p. 158). The current reality is one divided as to whether post-secondary education is a social good or a private good (the responsibly of students and their families), but in general agreement as to its inefficiencies and high cost.

35 Leave a comment on paragraph 35 0 Kelly and Carrie (2013) believe the traditional model (small class sizes, increasing admission selectivity…) is becoming only an option for the most elite of institutions because of their high endowment and their ability to be highly selective during their admissions process. Students and their families will continue to pay the high cost of attendance. But most colleges and universities will find themselves in a very different situation.

36 Leave a comment on paragraph 36 0 For most institutions, determining their market (ideal student constituency) must become a crucial part of their strategic thinking. Private institutions, in particular, will need to examine their mission and determine the student population it best serves. Institutions must then put all of their resources into educating and supporting these students. All subsequent institutional structures and operations must be predicated on educating and supporting these students (Kelly and Carrie, 2013).

37 Leave a comment on paragraph 37 0 Refocusing on greater efficiency and lower cost will compel college and universities to place more emphasis on outcomes rather than inputs (e.g., structures, organizations, and personnel). Curricular change does not mean an abandonment of a liberal arts foundation. “The question should be: what competencies can students depend on obtaining with a liberal arts education? Likewise, what knowledge, skills, and sensibilities can students expect to acquire in their chosen major? Answers to these questions will greatly determine the character of a university” (Kelly and Carrie, 2013, p. 159-60).

38 Leave a comment on paragraph 38 0 Kelly and Carrie (2013) believe that community building around mission (coalescing around common meaning) is key to an institution’s success. All members of the community should not only understand the mission, but also be able to articulate how they, in their roles, can contribute to it. The authors recommend ongoing seminars and social events as ways to deepen a sense of belonging; and they stress a dynamic interpretation of mission (viewed as an animating force), used to address current and future challenges and culture. Higher education institutions with a deep, mission-based sense of community have a substantial advantage in actualizing transformational change and thriving into the future.

39 Leave a comment on paragraph 39 0 References:

40 Leave a comment on paragraph 40 0 Avery, Christopher, and Sarah Turner. “Student loans: Do college students borrow too much—or not enough?.” The Journal of Economic Perspectives 26, no. 1 (2012): 165-192.

41 Leave a comment on paragraph 41 0 Belkin, Douglas. “U.S. News: Liberal arts lose luster — colleges add math and statistics courses so students gain more marketable job skills.” Wall Street Journal, Eastern edition; New York, N.Y. (2017).

42 Leave a comment on paragraph 42 0 Denneen, Jeff, and Tom Dretler. “The financially sustainable university.” Boston: Bain & Company, July 6 (2012). Available at http://www.bain.com/publications/articles/financially-sustainable-university.aspx. (2014 update available at http://www.thesustainableuniversity.com).

43 Leave a comment on paragraph 43 0 Dumestre, Marcel J. Financial sustainability in US higher education: Transformational strategy in troubled times. Springer, 2016.

44 Leave a comment on paragraph 44 0 Kelly, Andrew P., and Kevin Carey. Stretching the higher education dollar: How innovation can improve access, equity, and affordability. Harvard Education Press. 8 Story Street First Floor, Cambridge, MA 02138, 2013.

45 Leave a comment on paragraph 45 0 Mitchell, Michael, Michael Leachman, and Kathleen Masterson. “Funding down, tuition up state cuts to higher education threaten quality and affordability at public colleges. Center on Budget and Policy Priorities.” (2016). Available at http://www.cbpp.org/research/state-budget-and-tax/funding-down-tuition-up.

46 Leave a comment on paragraph 46 0 Mrig, Amit. “The other higher-ed bubble (The bubble we aren’t talking about).” Denver, CO: Academic Impressions (2013). Available at http://accesstocompletion.com/wp-content/uploads/2014/05/Hero-Story-Academic-Impressions-story.pdf.

47 Leave a comment on paragraph 47 0 Moody’s Investors Service. Moody’s 2013 Higher education outlook. Available at https://www.moodys.com/research/Moodys-2013-outlook-for-entire-US-Higher-Education-sector-changed–PR_263866.

48 Leave a comment on paragraph 48 0 NACUBO report. May 16, 2016. “2015 NACUBO Tuition Discounting Study.” Available at http://www.nacubo.org/About_NACUBO/Press_Room/2015_Tuition_Discounting_Study.html

49 Leave a comment on paragraph 49 0 NACUBO report. January 29, 2015. “Building on 11.7% Gain in FY2013, educational endowments’ investments returns averaged 15.5% in FY2014.” Available at http://www.nacubo.org/About_NACUBO/Press_Room/2014_NACUBO-Commonfund_Study_of_Endowments_(Final_Data).html.

50 Leave a comment on paragraph 50 0 Webber, Douglas A. “Are college costs worth it? How ability, major, and debt affect the returns to schooling.” Economics of Education Review 53 (2016): 296-310.

51 Leave a comment on paragraph 51 0 Williams, Ray. “Why the current higher education system is not sustainable.” (blog). Psychology Today, Wired for Success, February, 2014. Available at https://www.psychologytoday.com/blog/wired-success/201402/why-the-current-higher-education-system-is-not-sustainable.

52 Leave a comment on paragraph 52 0 Notes

53 Leave a comment on paragraph 53 0 [i] This could change under subsequent presidential administrations.

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Source: http://library.providence.edu/fhertr/index.php/cost-financial-sustainability/