Two of our nation’s premier credit rating agencies, Moody’s and Fitch, have issued reports recently giving a negative outlook on the finances of American higher education. Of course, the financial condition of schools varies considerably: there are affluent ones with large cash reserves, billions in investments in their endowment, and robust demand for their services, while other schools are worried about where they will get cash to meet their payroll and pay their bills. I heard of one state school that was supposedly trying to sell buildings in order to meet its payroll.
The pessimism of the rating agencies seems justified. Total higher education enrollments in the U.S. have been falling for the last seven years, particularly concerning for the majority of institutions dependent on tuition fees for much of their operating funds. Most current college freshmen were born in or near the year 2000. The number of births in 2005 or even 2009 (potential students a few years from now) was less than it was in 1990. The lifetime fertility rate of American women is at a record low of around 1.8, well below the level needed to avoid long-term population decline in the absence of large-scale immigration. Moreover, anti-immigration attitudes and toughening visa requirements do not bode well for large increases in foreign-born students.
Even more ominous, the prevailing view that “a college education is vital if you are going to be at least modestly successful financially” seems to be changing as the media tells us about former college students suffering from mountains of student loan debt, or students who are underemployed working as baristas or retail sales clerks at wages no higher than what high school graduates make. And the public is impacted by stories of welders making six-digit salaries, or about the desperate need for drivers of long-distance trucks. Mike Rowe of “Dirty Jobs” is viewed as a positive role model. The earnings advantage associated with a college degree has been stagnant for years, even as college costs continue to rise.
Adding to the woes of the state universities that educate the vast majority of America’s students, public support for traditional university training seems to be waning. Legislators are fed up with soaring tuition fees, low graduation rates, mediocre job outcomes at some schools and a lack of academic diversity on campuses, so state subsidy payments are not growing particularly robustly. Rising health-care costs are also crowding out state government spending on higher education.
Some new governors and their administrations are openly talking about moving more funding into non-traditional forms of postsecondary education. I recently heard Ohio’s soon-to-be new Lieutenant Governor, Jon Husted, extol the virtues of non-degree forms of technology education, including “nano-degrees” where students will learn a skill or trade in a career college setting over a period of study ranging from a few weeks to perhaps a year or two. There was hardly a mention of traditional four-year or advanced degree training.
Add to all of this a growing uncertainty about the economy. It is true that a downturn, which we have not had for almost a decade, typically actually aids college enrollments since when jobs are scarce, schooling is a good alternative to unemployment or a very low paying job. But with poorer business conditions also comes other problems: reduced state tax revenues (with resultant falling university subsidies), declining donations, and falling investment income.
American capitalism is driven by concerns of creative destruction: if a business makes a big mistake, it might go the way of Enron (bankruptcy) or Eastman Kodak (become a shadow of its former self). Government subsidies and private philanthropy have cushioned universities from worrying too much about creative destruction, but the warnings from Moody’s and Fitch remind us that they are not immune from literally dying. Along with others (e.g., Harvard’s Clayton Christensen), I have been predicting the demise of minimally hundreds of colleges in the coming years.
What schools are most vulnerable? Generally, those most dependent on tuition revenues for income, minimally endowed private schools, public universities that have been particularly hard hit from falling enrollment, and community colleges. Schools in the Northeast and Midwest are more vulnerable since they are in areas with out-migration and older populations. Highly selective schools generally have large endowments or other non-tuition support, so they are in better shape. Harvard is in far better financial shape than the U.S. government, for example.
How will politicians react as more schools start to bite the dust? Providing taxpayer-funded bailouts to private schools, particularly ones with religious affiliations, is unlikely to win public support. ‘Free college’ efforts of progressives have become somewhat more muted as more realize that the benefits of zero tuition fees often fall more to affluent students rather than the poor.
I think a decent case can be made that in the long run, the closing of some schools with mediocre performance will strengthen higher education. The mere threat of closure is making some schools more efficient and entrepreneurial. Higher education needs to change, and falling enrollments are beginning to make that clearer to key players in the collegiate milieu.