Higher Education: Acknowledging and addressing today’s challenges

The challenges facing higher education in the United States have become well-known:  the demographic cliff, rising costs, fierce competition for students, doubt regarding the value of college attendance, and shifting political winds. These challenges have resulted in the closure of more than 100 colleges or universities since 2016 and have left a number of schools at risk of failure. In many cases, and for many schools, the future looks rather bleak.

A wide range of possible responses to all of these challenges exists. This article will review some of those responses after first setting out a few of the larger challenges or problems. The ideas discussed in this article are by no means comprehensive or complete, but rather are intended to provoke further thought and work.

The challenges:

Failure to recognize or admit problems

The most fundamental, and most frequent, challenge for schools is a failure to recognize and/or acknowledge that problems exist. Often, early warning signs, such as a sudden drop-off in acceptance rates or an increase in discount rates, are brushed aside as one-offs or temporary, rather than acknowledged to be problems that need long-term solutions. Instead of admitting a long-term and/or structural problem, schools announce that they will redouble their efforts and the problem will be solved.

Failure to plan

Far too many schools fail to make long-term plans that include multi-year projections regarding enrollment, tuition, costs, and external support.  Instead, they live year-to-year, responding to challenges with short-term solutions.  For example, it is not uncommon for a school experiencing an operating deficit to solve it by an emergency fundraising effort, often focused exclusively or primarily on trustees and alumni. Such short-term planning is incompatible with long-term sustainability, not to mention exhausting for administration and staff.

Demographics

By now, everyone is familiar with the “demographic cliff.” It was identified as far back as the early 2010s when birth rates began declining after the Great Recession. Yet most schools took few, if any, steps to prepare for it. Many schools projected continuing enrollment growth, convinced that they alone would buck the trend. That approach was a mistake, as most schools are finding that maintaining enrollment is challenging.  Many are being forced to increase financial aid and/or adjust enrollment standards to meet enrollment targets, and quite a few are seeing dramatic and continuing declines.

The numbers are stark: Using 2019 as a baseline, college enrollment is projected to decline by 15% over the years 2025-2029, according to a model developed by the Federal Reserve Bank of Philadelphia. That decline is not spread evenly, however. Schools in the Northeast and Midwest are likely to face an even greater decline, while schools in the Southeast and Southwest will experience a smaller decline.  Moreover, after a slight uptick in potential students, schools will likely face a further decline as high as 15% between 2033 and 2039 as the impact of declining birthrates works its way through the system.

Rising costs

The increase in inflation since 2021 has driven up the costs of education, which include salaries, supplies and services.  In 2020-21, inflation hit 5.3% and in 2021-22, it hit its recent high of 8.5%. Most schools have found it impossible to raise tuition to levels necessary to cover the increased costs.  Higher interest rates, even in the public debt markets, have driven up borrowing costs, further challenging schools.  Currently, in the neighborhood of 5%, interest rates for tax exempt bonds have not been this high since 2008.

The possible responses to these challenges:

No single step will resolve the challenges facing higher education today. Rather, a series of steps, structured to address a school’s specific challenges and to take advantage of its unique attributes, will be necessary to achieve sustainability. 

Strategic planning

Amid immediate enrollment and/or cash flow challenges, it is often difficult to think about planning for the next 3, 5, or 10 years.  Nevertheless, strategic planning is critical. It must be done; plans must be followed; and plans must be updated as circumstances change.  A plan, if carefully crafted, will align operational, financial, and academic goals across departments.  It should be consistent with and support the core values and long-term aspirations of the institution.  And it must take into account enrollment trends, labor market data, and an honest assessment of the institution’s performance.

Cost cutting

Reducing expenses at a college or university can be a difficult process since the largest part of the expense line is employment costs.  Nevertheless, tough decisions should not be avoided.  Potential cost reductions include voluntary separation plans, which, while requiring a one-time large expenditure, can provide meaningful long-term savings. Shared services among departments and/or campuses or with other institutions can likewise provide long-term savings. Offering three-year degree programs can reduce costs and can have the additional benefit of improving graduation rates.

Debt restructuring

Every institution experiencing challenges, particularly financial challenges, should immediately review its debt obligations to determine if some relief is possible. Most colleges and universities have some amount of bond debt, typically tax-exempt bonds. Some schools may also have bank debt, in the form of a line of credit or some other short-term funding source.  And far too many schools have an aggregate amount of debt that exceeds their ability, under current circumstances, to service it.  As a result, schools may need short-term debt service relief and long-term reductions.

Negotiating debt relief, on the one hand, is straightforward: The institution should develop a set of projections that reflect what it can realistically pay and use that as a basis for negotiating a restructuring and/or reduction of its debt load. On the other hand, negotiations with debt holders – be they bondholders or banks – must proceed cautiously. An acknowledgment that the institution cannot pay its debts could result in a default under the bond documents or the bank loan, triggering a possible suspension of financial aid transfers by the Department of Education or a loss of accreditation.

Affiliation or merger

For any college or university experiencing challenges, particularly financial challenges, possible solutions must include consideration of an affiliation or merger. Such consideration should begin as early as possible, balancing the benefit of a broad consideration of possibilities with the need for confidentiality. A too-narrow list of possible partners could result in missed opportunities, while a broad list increases the risk of premature public disclosure.

In considering a possible affiliation or merger, a key factor is cultural compatibility: ensuring an alignment in mission, governance, and academic philosophy. Likewise, the preservation of the institution’s legacy is critical. As part of the process, due diligence regarding the above factors as well as each institution’s financial health, enrollment trends, and fundraising results, must be carefully conducted.

Conclusion

The challenges facing higher education are not going away.  In fact, they are likely to worsen. Institutions that avoid acknowledging and addressing the challenges reduce their chances of surviving them and maintaining their existence.  Institutions that acknowledge and address the challenges; that plan long-term; that make difficult decisions; and that are open to a variety of solutions increase their chances of success. The ideas identified above – presented in summary fashion – will require further elaboration and are just some of the responses available. If you have questions regarding the content of this article, reach out to attorney Shawn Riley.