Higher Education Must Change to Survive

Member Group : Lincoln Institute

Exploding student debt is fueling a debate in Congress and in the public about free public education for colleges.  The NEA is pushing for free college education.

The legacy of student loans is bringing to the forefront the student loan crisis plaguing our nation as well as the financial instability of academic institutions in the United States.

The multiple and inter-related problems for universities of the student loan crisis, declining student enrollment, as well as the continued increasing of tuition and fees at academic institutions will combine to trigger a major retrenchment in educational institutions in our country.

Relative to the student loan crisis, the New York Federal Reserve concluded in its 2018 report that the obligations for student loans total approximately $1.5 trillion or approximately $37,000 per student for the class of 2016.

The report notes that there are over 16.8 million borrowers under the age of 30 while the total number of borrowers is almost 44,700,000. The delinquency rates on the loans range between 10% to 20% for the various age categories.   The number of borrowers in the delinquency rates have skyrocketed since 2012.

Surprisingly, the report also indicates that there are 3.2 million borrowers over the age of 60 with an average balance due of $26,700. The delinquency rate for these borrowers is approximately 12%.

Concurrent with the higher student loan balances, college enrollment rates for students have declined 2.3% in 2013 compared to 2012 while the decline in enrollment was 1.7% from 2018 compared to 2017 continuing a trend that has continued for over six years.

There are many factors which have contributed to the decline in college enrollment; however, major factors include rapidly increasing tuitions, lower birth rates, higher unemployment rates for recent graduates, and the debilitating effects of student loan repayments on students and their parents.

The 21st-century is the first time in our nation’s history in which the parents have had student loan debts and obligations and now have children considering entering college. The experiences of these parents as well as the debt obligations themselves have discouraged their children from incurring too much debt.

Additionally, despite the declines in enrollment, tuition increases for the period 2017-2018 averaged 1.9% over the prior year for private institutions and 1.3% higher for public institutions.  These increases have outpaced increases in income for the families supporting students as well as for the students themselves in the job market post graduation. The net result is that the affordability index for college, meaning the ability to pay relative to income and funds available for education, is widening and making colleges relatively more expensive than they were decades ago.

Concurrently, Moody’s 2019 report gave a negative financial outlook for ALL universities.   Earlier studies have indicated that over 50% of all colleges and universities are projected to close, merge, or shut down in the next 50 years.

The consolidation, failure, and decline have already started and the pace will accelerate.

The causes of the insolvency for universities include:

  • Continued escalation in college tuitions and fees compared to the overall rate of inflation
  • Limited growth in incomes of parents and students in recent years and continued high levels of unemployment of graduates.
  • Extensive outstanding student loan debt already amounting to $1.5 Trillion
  • Development of alternative education systems such as remote classes and internet systems
  • Growing debt of colleges and universities
  • Extraordinarily high fixed costs of colleges and universities making the education system very susceptible to losses from reduced enrollment.
  • Growing trend to “discount” tuition at major universities. This is very similar to the problem that faced hospital with “contractual allowances”

The sum of all these factors will cause a collapse of the education systems as we know it unless the cost drivers of the cost of universities are addressed.

Obviously, schools that are well-funded and well endowed will be little affected by these changes.

However, marginally profitable schools, or schools with high debt loads which depend upon taxpayer support will find survival difficult at best.

The economic realignment of education will occur due to the factors above such that the following will take place in the next 5 to 10 years.

First, to stem declining enrollment, tuition will have to decrease. Schools will struggle to maintain enrollment and in order to cover their fixed cost will be forced to reduce tuitions to encourage students and enrollment.

Second, faculty tenure and burgeoning cost of academic instruction will come under question and will be changed. While existing tenured faculty will probably not be affected, the probability of getting tenure for other professors will be significantly more difficult except at well funded academic institutions.  Pay will likely decline as well.

Third, entire educational institutions will begin to file bankruptcy.  For the academic years 2016-2017 to 2017-2018, 120 colleges and universities closed or were merged.

Fourth, it is very obvious that academia will be forced to justify its cost relative to the value garnered from the education. This will be one of the first times in history that the value of education relative to the cost will come under scrutiny.

The education bubble has burst!  Free college is not the answer.   Reinvesting the university system is the answer and is critical to survival.

Parents and students alike are demanding accountability and results.  It is relevance that is needed, not free college.

Frank Ryan, CPA, USMCR (Ret) represents the 101st District in the PA House of Representatives.  He is a retired Marine Reserve Colonel, a CPA and specializes in corporate restructuring.  He has served on numerous boards of publicly traded and non-profit organizations.  He can be reached at [email protected].