Posted by Brad @ 6:45 pm on May 30th 2009

The Higher Ed Bubble

I’ve sort of fallen into a career in higher education endowment management and donor relations. It’s what I’ve been doing as I try to find a “real” job, which will also probably be in higher ed (more marketing and PR though). Anyway, what has occurred to me working in this field during this recession is the “long tail” potential for an economic downturn such as ours. Higher ed was really one of the last industries to be hit by the recession—although endowments are invested and, at places like Harvard and Stanford and other fabulously wealthy universities, have been absolutely decimated by the downturn, at most institutions yeah they took a hit, but there wasn’t a sense of immediate panic as in other industries.

Staff and faculty are, for the most part, thusfar pretty well insulated from layoffs and such, most endowments are pretty robust and invested at pretty low risk so their principals have been, mostly, safe (even as income dries up), and universities have other sources of revenue, tuition and government support, that allow them a fair bit of fallback, and most universities also have a helluva lot of redundant spending and waste, which means that money can be “found” to cover short term deficits at the expense of things that won’t be immediately felt (spending and hiring freezes, holding off on capital campaigns and building projects, expending unrestricted monies, and just all-around belt-tightening). That, of course, won’t last forever, but it does mean that the effect of an economic slide is pretty well belated in higher ed, and in the past, that means that most of the trade-offs don’t have to occur until after the economy has picked back up and money is again coming in.

These are all great advantages in a short term downturn. However, there is a structural problem inherent to higher ed that means, for a long capital R recession, colleges may be among the last industries to really feel the crunch, but also may wind up being among the hardest hit over the long term and the slowest to bounce back.

For one, tuition, while it isn’t usually the largest source of revenue, is nevertheless usually enough to cover the basic operating expenses. But tuition, more than anything but perhaps buying a home, is thoroughly credit-based. Very few people have 40k they can just plop down annually for four years, so the entire system is dependent on loans, student aid, endowment income, and credit. All of those have dried up nearly entirely. The Chronicle of Higher Ed, in a much-discussed new article, summarizes the situation thusly:

With tuitions, fees, and room and board at dozens of colleges now reaching $50,000 a year, the ability to sustain private higher education for all but the very well-heeled is questionable. According to the National Center for Public Policy and Higher Education, over the past 25 years, average college tuition and fees have risen by 440 percent ó more than four times the rate of inflation and almost twice the rate of medical care. Patrick M. Callan, the centerís president, has warned that low-income students will find college unaffordable.

Meanwhile, the middle class, which has paid for higher education in the past mainly by taking out loans, may now be precluded from doing so as the private student-loan market has all but dried up. In addition, endowment cushions that allowed colleges to engage in steep tuition discounting are gone. Declines in housing valuations are making it difficult for families to rely on home-equity loans for college financing. Even when the equity is there, parents are reluctant to further leverage themselves into a future where job security is uncertain.

The second major source of university money is, frankly, the government, and here there is reason for hope if you work in higher ed. Thankfully (or not, depending on your point of view), politicians are generally pretty inclined to support education, and if the university system in America does start getting really hard hit, it seems likely (to me anyway) that a stimulus/bailout will be there for them if it gets too bad. And the third source of revenue, endowments, tend to take hits twice. The first as their investments dry up, and the second as the steady stream of donations that universities rely on dries up as well, as people A. have less money, and B. the money they do have they are less inclined to give.

But tuition alone might prove to be a very tough riddle to fix. Universities tend to grow almost automatically, i.e. as more money comes in that money isn’t used, generally, to make education cheaper, but to make universities larger. It’s not often used to make services more available, in other words, but usually to just make more services (even scholarship support is usually not seen as a way to chip away at student costs, but just as an excuse to admit more students). In a way, the university system in America operates in large part by expanding, at least in part, almost for the sake of it—to justify having or needing more money.

That system is well overdue for a change, but the problem is, structurally, that sort of change won’t be pretty, or easy. But what really ought to frighten administrators is what happens if higher education falls from a necessity to a luxury in the eyes of middle and working class parents. We’re a long way from that happening, if it ever does, but if it does, the entire system will wind up being scrapped, replaced, I would guess, with technical schools and commuter colleges, while places like Harvard or other universities that more or less charge hundreds of thousands of dollars not for any skill sets or career paths, per se, but for the degree itself, are going to find themselves in a world of hurt.

Or, maybe not. I hope not, in any case, in that I’m a true believe of the liberal arts education. But, at the same time, I’ve also got real doubts about the sustainability of the higher education system as presently structured in America today. As I said, I think administrators are still a bit in denial, and still insulated enough from immediacy to allow them that luxury, but it will be interesting to see how that looks in three to five years time. A lot of very smart education-watchers are openly asking the question if, by the time other markets are finally starting to rebound, higher ed doesn’t prove to be the next big bubble whose bursting is on the horizon, in sight.

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