The Changing Business Model For Colleges And Universities

Feb 02, 2018

Lucie Lapovsky , CONTRIBUTOR
I write about strategic financial issues in higher education.
Opinions expressed by Forbes Contributors are their own.


Colleges and universities face daunting challenges to long-established business models. The cost of providing higher education continues to rise with fewer students either able or willing to pay the price. Competition among institutions for students has increased especially between public and private institutions; this is exacerbated by the demographic changes in the country whereby the number of high school graduates has decreased in most of the country and will not increase again until 2024. Compounding this problem is that the decrease in graduates from religious and private high schools is projected to be much greater than from public high schools. In addition, competition for students will further increase at private colleges and universities with the adoption of “free college programs” in various states and localities which are spreading like wildfires; there are now more than 200 such programs around the country with New York being among the most recent and the largest.

Resources are continually more difficult to generate. The average annual return on endowments over the last ten-years is 5% which is only slightly above the average spending rate of 4.4%. This does not allow endowments to keep up with inflation and is likely to lead colleges to reevaluate their spending policies which provide for spending rates between 4% and 5%. Tuition at private institutions has increased by 54% over the last ten years while net tuition per student has been almost flat as the tuition discount rate has approached 50% for new students. At public colleges, tuition has increased 62% over this same period due in large part to anemic funding from state and local governments in support of higher education. Further worsening this challenging climate, the public is beginning to question the value of higher education given the large debt incurred by students and their often perceived poor prospects for employment. Although this is the public perception, data shows that the return to a college degree ranges from $600,000 to $1.3 million compared to a high school degree and the average unemployment rate for college graduates did not reach 5% during the 2008 recession.

To ensure financial sustainability, many colleges and universities are responding by experimenting with changes to their business models. Historically, many of us advised institutions to “stay in their lane” meaning that they should stick with their mission no matter how narrowly defined. The advice was just to execute better on what you were good at doing. Today, I think most colleges with narrowly defined mission statements especially those which are primarily undergraduate liberal arts institutions need to think very seriously about moving outside their lanes. There are some schools which have made very large changes to their business models and have recreated themselves as very different institutions from the way they began.

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