Monday, July 1, 2019

The Not Broken, But Seriously Bent Higher-Ed Business Model, Part One: How Did We Get Here?

The Not Broken, But Seriously Bent Higher-Ed Business Model
Part One: How Did We Get Here?

We regularly hear about the broken business model of higher education. It is in need of being fixed, but it didn’t break. The contemporary components of the operational side of colleges and universities all stem from a history that did work at certain times in history. The problem is that the ratios have all changed for external and internal reasons that have led to practices that are unsustainable for many institutions.

It is the current model that has led Harvard professor, Clayton Christensen, to predict the bankruptcy of half of America’s colleges and universities in the next 10 to 15 years. He is wrong, but the current discourse around the economics of higher education has given him much more airtime than he would have received a decade ago.

American higher education has a wide range of funding models: private not-for-profit, public, and for-profit being the principal categories. The private not-for-profit institutions include religiously affiliated and independent institutions. Religiously affiliated institutions range from associations of little more than founding histories and no financial support to significant ecclesiastical oversight and concomitant funding.

Aside from some institutions that receive religious funding, most institutions receive revenue from tuition, room, board, fees, gifts, grants, endowment income, contract services, and state and federal funding.

Students who attend private institutions may receive state and federal funding in the form of grants and loans. These include PELL grants and, in many cases, limited state support for students who stay in state to attend private colleges. Over the past few decades the percentage of operating revenue for state-sponsored colleges and universities has dropped dramatically. For example, last year, the state appropriation to the University of Virginia represented 8% of its budget.

Rising interest in “free college” as part of the current presidential campaign conversation is founded on an incomplete understanding of how limited the federal government’s involvement in education is and how little states actually support their namesake universities. {An extended commentary on the “free college” movement will appear in an installment later this month.}

The components that have warped the business model include dramatically expanded access to a college education, especially for students with limited means that once precluded post-secondary education; the high cost of innovation; a decline in public funding when adjusted for inflation; and a decreased willingness of families with the capacity to pay to invest in the best educational opportunity available to their students rather than “the best deal.”

Financial aid is typically awarded in two categories: need-based and merit-based. Many institutions, like Susquehanna, are deeply committed to providing access to meritorious students, and we provide substantial financial aid packages to students whose families do not have the economic capacity to fund their attendance. For our most financially challenged students, some aid is provided through federal and state programs, which when combined with institutional aid makes it possible for these students to complete a life-changing college education.

The historic model of institutional scholarships was that endowment funds and current gifts would offset the discount associated with each scholarship. This meant that the discount had a funding source. That practice remains true at the very wealthiest schools, but at the vast majority of institutions, only a small portion of financial aid is funded. At my institution, about 11% of institutional aid is generated from endowed funds.

The remainder of that aid is tuition we waive in the form of a scholarship. This practice is often regarded as new, but there has been a long tradition of colleges waiving some tuition from poorer students and making up revenue from the students who required less aid. At Susquehanna, this was a foundation practice. Students enrolled in the Missionary Institute (an original core component of the University) paid no tuition. Part of their education was underwritten by gifts from the church, but most of the cost of operations was made up from the tuition paid by students in the Classical Division and the Female Academy, which were the liberal-arts branches at the time.

During the Great Depression, many colleges and universities supplemented operations in creative ways. Illinois Wesleyan University, where I used to work, accepted produce and livestock in lieu of tuition from students who no longer had the traditional means to attend.

After the much more recent Great Recession, endowments took dramatic hits and many families were suddenly unable to continue underwriting the cost of education they had before the market fell and unemployment rose. Most private institutions undertook significant measures to help their students complete their programs by discounting their tuition at higher levels while having shrunken endowments unable to directly fund these expanded aid packages.

Because the economic recovery has favored those with the resources and incomes to invest, average families have not seen an equal share of the boom. These families have seen virtually no increase in their ability to pay for college over the past ten years. Tuition and fees have increased steadily, and in many cases the discount rate has grown to accommodate all of the increase, resulting in an escalation of the overall discount rate.

All of the pieces of the model that worked historically have not been aligned with the economic division we have experienced over the past decade, and our commitment to providing access has exacerbated this challenge.

That is how we got here. In the next installment, I will address the challenges of the present situation and potential solutions.


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