America’s college students aren’t the only ones on campus struggling to pay the bills and facing an uncertain future these days.
Colleges that long enjoyed rising demand and a seemingly unlimited ability to raise tuitions are starting to falter as operating expenses are outpacing their traditional sources of revenue.
Major new market analyses published in recent weeks suggest that the future of higher education is a rocky one, with many universities likely having to resort to alternative sources of funding when state appropriations simply aren’t sufficient.
The combination of rising university costs and stagnant or even decreasing state funding could force a shift from public to private standing for many of the nation’s higher education institutions and far more market pressures for harried college presidents and boards.
“We’ll see many more ups and downs than we have in the past,” said Jennifer Delaney, an education professor at the University of Illinois at Urbana-Champaign. “The cycles will tighten, and the unpredictability coming into institutions will increase.”
Added Thomas G. Mortenson, a senior scholar at the Pell Institute for the Study of Opportunity in Higher Education: “There is a lot of change, an enormous amount of change, in what we have taken for granted as a public university. They simply cannot continue to operate the way they have in the past because state funding is drying up.”
The financial pressures facing the U.S. model of public and private college education were dramatically underscored with the release this summer of negative reports from two of the nation’s leading credit rating agencies. Analysts at both agencies said that, despite the continuing strong demand from middle-class families for a college education, the economic pressures and bottom line worries for America’s colleges and universities will only increase in the near future.
Among those pressures, according to a report last month from Moody's Investors Service, were state financing contributions that are not keeping up with operating expenses; more and more marginal institutions falling into “acute financial distress;” rising pension and health benefit costs for retirees; tuitions at top-level schools at $50,000 to $60,000 a year reaching the limit of what even well-off families can afford; and the inability of both public and private institutions to sustain annual operating revenues increases of 3 percent, the rating agency’s standard for stable financing given today’s inflation climate.
The five-year bull market in stocks has helped mask some of the problems with the basic financial model, but any sign that the market was about to turn could expose even more institutions to financial pressures.
Standard & Poor’s has issued a “negative” outlook for the U.S. not-for-profit higher education sector, pointing to many of the same pressures.
“While many institutions have been able to manage through the financial pressures to date by trimming budgets and changing tuition, financial aid and operations at the margins, some are considering larger adjustments that are more difficult and take much longer to implement,” S&P said.
“We expect that, in 2014, [university] management teams will continue to wrestle with how to demonstrate, prove or improve the ‘value’ of their offerings. As they make and implement these strategic decisions, operating margins and financial resources may erode.”
And the Moody's analysis sees an emerging division of haves and have-nots among private colleges more heavily dependent on tuition and endowments to pay the bills: “There is a growing disparity between tuition-dependent colleges and market-leading universities with diverse revenue sources,” according to the ratings agency’s new analysis.
While state investments in higher education increased nearly 6 percent in the last fiscal year, those slight increases haven’t matched the pace of growing operating expenses.
What to do?