American colleges and universities operate on an unsustainable financial model. They are heavily tuition-dependent at all but the best-endowed institutions. In fact, of the more than 4,000 non-profit colleges and universities, the number that have the flexibility to rely on revenue, whether from endowment drawdowns or other sources, may be less than forty institutions.
The rest watch a critical metric — net tuition revenue — closely because they have no other option available to them. A crisis, like the one most colleges face today, was inevitable.
Options for Keeping Revenue “Wolf” from the Door
There are ways to keep the wolf away from the door over the short term:
- Some colleges choose to run a structural deficit, using revenue drawn from areas like their quasi-endowment to cover expenses.
- Others seek new lines of revenue, often emphasizing new programmatic initiatives in adult learning, online and continuing education.
- Some look to build out revenue-producing public-private partnerships, refinance of their existing debt, or undertake short-term fundraising campaigns to create the flexibility that they need.
- A handful go beyond the kind of efficiencies and economies of scale undertaken by most to use their budget shortfalls to re-engineer the way that their institutions do business.
But the majority of institutions will continue to rely on tuition to meet their expenses. And for many of them net tuition revenue is stagnating or declining as fewer full-pay students attend and many of their alternative revenue producing sources offer mixed results at best.
The problem is that colleges operate with an impossible assumption. They argue that full-pay students should effectively subsidize the rest of their admissions class while college officials work steadfastly to meet much of the cost of college for their most needy students.
As tuition sticker prices rise, consumers drawn broadly from the middle class are looking for alternatives and rejecting the long-established tradition that middle-class families should have financial skin in the game.
International Students Provide Much-Needed Tuition Revenue
One way to increase net tuition revenue is to look to international students to fill the gap. In many countries, their families encourage and support their education at American colleges and universities, arguing that the prestige, alumni connections, and quality of education make a substantial difference for their children. Parents of international students are willing to pay full price for what they believe to be a reasonable transaction that expands the type and range of education that might be available to students at home.
For many international families, an American college education is a good deal, despite rising sticker prices.
International students often choose to attend colleges and universities, especially large research universities like the University of Southern California, Boston University, and New York University, that have broad name recognition. Within operating budgets still reliant upon net tuition revenue, they provide an attractive alternative to American full-pay students. International students bring additional advantages to institutions that cast themselves as a global learning center, among numerous other benefits.
But perhaps the most important contribution that international students make is to the bottom line. International students pay the bills that make an antiquated financial aid system that no longer works possible — at least for a little while longer.
Geopolitics is Dampening International Student Enrollment
This is where geopolitics is beginning to play a role. In a recent Boston Globe article, Laura Krantz examined international applications to business schools, which is arguably a good bellwether for the health of the international market.
Ms. Krantz reported: “The number of international students applying to US graduate business programs dropped dramatically over the past year, likely as a result of political uncertainty caused by the Trump administration, according to two recent reports and local business school administrators.” While the US applicant market fell by 1.8 percent, international student applications to MBA programs in the United State fell by 10.5 percent.
A report released in October by the Graduate Admissions Management Council found that the Trump Administration has made it more difficult for foreign students to obtain student visas as well as visas to stay and work in the United States temporarily.
International students are also seeking alternatives elsewhere including Canada, Australia, and Europe. The effect on a college that accepts high numbers of international students is to create growing uncertainty as its impact may quickly affect its available financial aid to all students in subsequent years.
Insuring Against Loss of International Students
It’s increasingly clear that cultural inertia cannot continue to shape incrementalist enrollment practices at most colleges. Every action has a reaction. James Paterson reports in Education Dive that the University of Illinois now insures itself against a loss of Chinese international students.
Specifically, the business and engineering colleges at the University of Illinois at Urbana-Champaign (UIUC) have obtained a $60 million insurance policy protecting them from a one-year, 20% or greater decrease in revenue from Chinese students, according to the Times Higher Education.
The insurance costs the institution $424,000 annually and about 20 percent of the business college’s revenue comes from Chinese students. The University could file a claim in the event of visa restrictions, a pandemic, a trade war, or other events out of the institution’s control.
New products, like business interruption insurance to cover the loss of income from international students, can provide some benefit. But the larger question is how long higher education can finance the academic enterprise using antiquated enrollment practices constrained by available student financial aid.