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This is an extraordinarily challenging time in higher education. Institution leaders—trustees, executives, union representatives and faculty members involved in governance—need to approach the next three years mindful of market realities. In my assessment, there are four major market trends to keep an eye on.
Higher education enrollment has been dropping for almost 15 years, and that will continue. This is, in part, a matter of demographics: America is aging, the high school cohort shrinking. It also reflects cultural and economic trends. With unemployment at a low 3.6 percent, workers have plenty of options other than school, and the decline in confidence that higher education is a worthy investment is likely to continue, driven in part by messaging from political leaders. Take a look at your current enrollment. Absent significant strategic moves by your institution, it is not going to get better, and it will probably get worse.
Most institutions are also going to experience declining revenue. This is a function, in part, of declining enrollment, but it will be intensified by other factors. Sharp losses in the stock market will reduce endowment draws and may make fundraising more challenging. Federal COVID stimulus and emergency funds, which many schools used to stabilize their balance sheets, have dried up. Increased competition for students, between individual institutions and between the higher education sector and the labor market, will continue to drive tuition discount rates upward.
Inability to Hike Tuition
Since the Great Depression, colleges and universities have increased tuition well above the rate of inflation. Today, that is impossible for all but the strongest brands. The decline in the perceived attractiveness of higher education as a life investment and fierce competition will leave most institutions with little ability to raise tuition to keep pace with inflation, let alone exceed it. In the 2022–23 academic year, for example, average tuition and fees rose by 1.6 percent at community colleges, 1.8 percent for in-state students at four-year public colleges and 3.5 percent for students at four-year private institutions, far below the 2022 inflation rate of 6.5 percent. This modest growth was not a choice: colleges were forced to hold the line on tuition due to competitive pressure. That market pressure is going to continue, pushing more colleges into the red.
Ordinarily, institutions would seek to cut costs during an era of declining revenue. Unfortunately, that is going to be really hard for most colleges and universities. Inflation remains high, at 6 percent, and it will probably stay high. Though the Fed was using aggressive interest rate hikes to try to bring down the inflation rate, pressure in the banking sector, exemplified by the closing of Silicon Valley Bank and Signature Bank, will likely force the Fed to moderate its efforts. Continued high inflation will result in additional wage pressure from employees, particularly those who saw wage freezes at the height of the COVID emergency. This will be intensified at unionized institutions, as union activism among workers, faculty and graduate students rises for economic and ideological reasons. Continued inflation will also drive prices higher for fuel, food and other commodities. Absent major reductions in the number of employees, institution costs will be very hard to limit.
In sum, the outlook for the higher education sector as a whole is bleak. Am I being overly pessimistic? I don’t think so. My analysis is consistent with most market watchers, like the bond rating agencies. In my estimation, economic conditions in the higher education sector are unlikely to improve significantly over the next few years. This has significant implications for all but the strongest of institutions. I will assess those policy implications in my next post.