Will Your College Survive the Next Decade?

Inside Higher Education (IHE) released its 2018 Survey of College and University Business Officers last week. While the findings vary across the different sectors of American higher education, many are sobering, especially for four-year private colleges.

Many Small, Private Colleges’ Financial State is Perilous

According to the IHE survey, conducted in partnership with Gallup, “44 percent of chief financial officers [CFOs] at four-year baccalaureate colleges said they are confident their college will be financially stable over the next 10 years, down from 52 percent a year ago and 54 percent in 2016.”

It is unclear why public college CFOs are somewhat more optimistic, although their feelings of security might vary by their level of tuition dependency, even with diminishing state support, compared to their private counterparts.

Many Colleges Thinking Seriously About “Drastic Measures”

Given the incremental nature of an annual survey, a couple of surprises stand out:

First, college CFOs are “thinking much more seriously than they have in the past about taking drastic measures.” A shocking twenty-four percent of the baccalaureate institutions have had “serious” discussions about a merger, a response almost five times greater than a year ago.

An astounding twenty-six percent say that their college should merge with another.

Where among colleges and universities is the concern? According to IHE’s Doug Lederman, “more than two-thirds (68 percent) of financial officers at four-year private colleges and universities now acknowledge that their discount rate is unsustainable.”

The hard truth is that private four-year colleges are overwhelmingly tuition-dependent. Rising financial aid discount rates are making it almost impossible to pay the bills.

Mr. Lederman is cautious to indicate that contradictions abound among the responses received. This is true among respondents from all higher education sectors. It may also reflect the particular biases of the group that responded.

Private College CFOs are Least Optimistic about Financial Future

But the situation bears watching. In particular, the survey found that the four-year private college CFOs are the least optimistic. Their views also are more pessimistic than those of their presidents, among whom a recent but different IHE survey found that 54 percent of presidents are confident about the future of their institutions.

In the IHE article, Larry Ladd, director of the higher education practice at accounting firm Grant Thornton, suggested that “the leaders of small private colleges are moving beyond what he called ‘denial’ about their financial situations and are increasingly ‘understanding their financial circumstances to be enduring’ rather than temporary.”

Adjusting to Changes in College Revenue and Cost Structures

Mr. Ladd makes two interesting points. First, he argues that colleges are looking at changes that will allow them to adjust to a different level of revenue. Second, they are beginning to move ahead to change their cost structures to reflect a different level of revenue.

There are at least two ways to judge this reaction. The first is to suggest that a weakening four-year private college sector is symptomatic of changing tastes among consumers. This argument presumes that high sticker prices and the failure of what differentiates this group of colleges — a liberal arts education — no longer resonates with students and their families.

Yet the facts demonstrate that the all in costs of attendance, together with the high likelihood of graduating after four years without additional costs, argue against price alone as the determining factor. Employment and graduation rates at private colleges are also the highest by far among the various higher education sectors.

The second is to dive deeper into Mr. Ladd’s comment.

Colleges and universities are in a period of substantial chaos and disruption. But their history over 400 years suggests that they are highly adaptable — one of the few institutional groups that remains a vital and dynamic characteristic of American society.

Adaptability is Redeeming Characteristic of Private Higher Education

It may be that private colleges are simply at the crest of the wave of change sweeping over higher education precisely because they are tuition–sensitive with state and local subsidies. Mr. Ladd’s comments speak to the adaptability that is a redeeming characteristic of private higher education.

In this sense, America’s private college sector may predict the depth of change facing higher education overall and the path that public and private institutions alike must take to become more sustainable.

It is now probably well past time when private higher education leadership — particularly at private colleges and universities — recognize that they operate on an unsustainable financial model.

For some of them, the danger will be that the grass will be cut and the dorms will be full on the day that financial aid discounts shut their doors as they cross over a tipping point from which they cannot recover. For others, it is more of a question of how to grow net tuition revenue and how best to grow beyond their dependence on it.

The best news — even with the sobering findings of the IHE-Gallup survey — may be that the data is catching up with the internal conversations about how to become more sustainable institutions.

The hard questions about why an institution should survive are welcome, even if it is frightening to a campus community. America’s colleges and universities must make open, reasonable, and conservative decisions in full public view while they still can and before their declining economic circumstances and sometimes debilitating campus inertia cripple them.

Fundamental to their success will be a sense of shared purpose.

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