Can Private Colleges Survive from 2014?

Earlier Predictions Come to Haunt Higher Education

First Published on Stevens Strategy Blog

A slow, plodding revenue growth strategy may no longer provide private colleges with the financial reserve needed to survive. For decades, marginal increases in enrollment, tuition, and other revenue sources were good enough to cover expenses and provide a cash buffer against unforeseen changes in financial markets. However, those days are quickly fading into the past. Moody’s Investor Services, Bloomberg News, and the Wall Street Journal claim that an increasing number of private colleges are in a death spiral due to shrinking enrollments coupled with the costs of providing traditional and on-line programs that prepare students for employment. The following graphs illustrate the characteristics of the problem facing private colleges.

Here are the major financial challenges:

1. Total revenue varies widely by year because of investments
2. If investments are removed, total revenue porpoises around expenses
3. Administrative, academic-student services, and faculty costs either lag or are directly affected by changes in enrollment
4. Net assets have varied widely due to major swings in revenue
5. Net asset forecasts are not promising and remain unsettled

There are also non-financial challenges:

1. Governmental regulations
   • Tuition rates
   • Gainful employment
2. Accreditation constraints
   • Tenure
   • Curriculum structures
3. Technological changes in delivering instruction
4. Changes in degree payback, which alters preference for degrees

The challenges are producing these pressures:

1. Pricing pressure from:
   • Demand, fewer high school graduates
   • Costs to support declining academic skills
   • Cost of technology
   • Cost of regulations, government and accreditation
   • Unpredictable returns from investments
2. Operations do not produce sufficient cash to provide reserves in times of financial stress
3. Recent (4/14/14) Bloomberg article: “Small U.S. Colleges Battle Death Spiral as Enrollment Drops” (Michael McDonald)

How private colleges are being reshaped:

1. Too many private colleges are operating at the margin putting them at risk as student markets change and new and costly technologies are introduced.
2. Private colleges cannot continue to increase their tuition discount without depleting the cash flow from tuition to support operations.
3. Public institutions need a comprehensive tuition discounting strategy as their price competition increases and competition increases with on-line programs at private colleges.
4. Experience suggests that operations at many private colleges absorb cash and do not generate cash.
5. Cost structures are too expensive.
6. Market strategies need to account for government regulations that:
   1. Limit price increases; thereby increasing competition.
   2. Require publication of the economic viability of graduates
7. Existing markets (revenue sources) are not large enough to offset forecast shrinkage of the traditional market for high school graduates.
8. Data systems are inadequate to support operations and to improve student performance.
9. Investment policies are too volatile for many private colleges.
10. Public colleges have to evaluate their reliance on state funds as states continue to reduce funding formulas.

As colleges are being reshaped, they are facing these existential issues:

1. Are financial reserves being depleted at traditional bachelor’s degree granting colleges?
2. Will private colleges and universities have the financial reserves to compete?
3. Do private institutions have the administrative and technical skills to build a strong technological base?
4. Can colleges find student markets that do not require huge investments in technology?
5. Are private colleges willing to develop new ways of reducing costs, delivering instruction, and working with competitors?

Here are the probable outcomes from the challenges, pressures, and existential issues facing private colleges:

1. Colleges will look the same as they do now with minor changes to account for new regulations imposed by federal and state governments.

(Estimated probability is 10%)

1. Most liberal arts colleges will be forced to redesign their programs to respond to parent and student demands that their degree prepares them for employment.

(Estimated probability 30%)

1. Many liberal arts colleges will shift their resources toward internet delivery for day and continuing education students in order to cut costs generated by new regulations (such as new costs to increase graduation rates) and to respond to limits on tuition rates imposed by governmental regulations.

(Estimated probability 15%)

1. Vendors will provide very cheap standardized virtual reality courses that colleges will buy replacing self-developed courses and full-time faculty.

(Estimated probability 20%)

1. More colleges will face cash crises forcing them to: permanently cut expenses, merge, or close.

(Estimated probability 15%)

1. Multiple colleges will create implied or pseudo mergers in which they build a separate institution owned by the participating colleges that contains several or all of the preceding five scenarios.

(Estimated probability 10%)