Starting to Worry

Despite strong fiscal positions, elite liberal arts colleges have started to question the long-term viability of the sector's financial and educational models.
October 10, 2011

If you glanced at Smith College’s "Futures Initiative," you might think the college, like a number of liberal arts colleges in the current economy, was in serious financial trouble.

The report -- which outlines a series of studies the college is undertaking -- talks about reconsidering not only the financial model of the institution, but also the types of students the women’s college attracts, ways it can move beyond the residential campus model, and how it goes about delivering instruction.

But Smith isn't exactly struggling. While it faced some budget cuts as a result of the recession, the college’s endowment is more than $1 billion. It is regularly cited for the quality of its undergraduate experience. For the fall of 2011 it accepted fewer than half the students who applied, and it attracts some of the top applicants in the country.

"Because we’re in that position is exactly why we thought we could ask those questions," said Smith College President Carol Christ. "We aren’t worried about what’s going to happen next year."

And Smith isn’t alone. In the past year, presidents of several elite liberal arts colleges have questioned whether the financial model underpinning their institutions – one relying on high tuition costs and student aid paying for expensive instruction and residential life on beautiful campuses -- is sustainable over the long term. They have also begun to question whether the education they offer, with small classes, relatively rigid schedules, limited course and major offerings, and intense academic rigor, is going to continue to appeal to students.

"The model – if it’s not breaking – it’s showing signs of age," said Richard Kneedler, former president of Franklin and Marshall College, a liberal arts college in Pennsylvania, and a consultant with Ann Duffield and Colleagues, a presidential consulting firm. "The price has been pushed up at a number of the top institutions. It’s gotten to the point where people are asking a lot of questions about it, and this high price is creating a sense in part of the public that higher education is becoming a commercial exercise."

Private colleges without large endowments or prestigious reputations have already been rushing to add preprofessional or online programs or find a new niche that can attract students. And public colleges and universities haven’t been able to avoid questions about how efficiently they’re using public money as state appropriations per student have declined. But elite liberal arts colleges such as Smith do not face the kind of immediate financial strain affecting other sectors. They have high student demand, large endowments, high rates of giving, and strong cash flows and credit ratings. But that relative security hasn’t stopped some presidents from wondering whether tuition is too high, whether they will still be able to attract and support diverse student bodies, and whether they are too dependent on “full-pay” students, an increasingly hot commodity as other sectors of higher education look to bolster their own revenues.

And some are doing more than wonder. The president of Middlebury College announced last year that the college would cap tuition increases at 1 percent more than the rate of inflation, as well as expand other revenue-generating enterprises. The vice chancellor (the equivalent of president at most institutions) at the University of the South announced in February that the university would cut tuition by 10 percent and shift focus from merit aid to need-based aid. In a column last month and in his convocation talk this semester, Bowdoin College’s president questioned whether there was something the college could learn from Clay Christensen’s book The Innovative University, and whether it needs to enhance the role of technology in a liberal arts education.

Smith College's effort might be the most comprehensive. Christ characterizes it as a thought exercise to identify what challenges the college could face in the future. On the financial front, the college will commission groups to study strategies to increase both high-paying and low-income students, to increase or decrease the amount the college spends on student aid, to identify new sources of revenue, and assess the size of the student body. On the educational side, the review will look at ways to broaden global initiatives, assess the market for enrolling non-degree students and online instruction, consider pathways to reduce the time required to get a degree, and explore post-baccalaureate programs. Faculty members said moving away from single-sex education was discussed, but is not an issue the college is seriously considering. At many institutions, the questions Smith is asking would hardly be revolutionary, but elite liberal arts colleges have defined themselves by the four-year residential experience and an undergraduate focus.

"It’s an exercise so that the board can come to at least a consensus of what the questions are, even if we disagree about what the answers are,” Christ said. "Part of the purpose is for the board to arrive at a consensus view of the future."

While each college’s initiative is noteworthy on its own, collectively they paint a picture of a sector of higher education that, while financially secure at present, is concerned about the future. The outcomes of these colleges’ experiments will offer insight into not only their own future potential, but also that of other liberal arts colleges.

In total, liberal arts colleges teach about 5 percent of all undergraduate students, and include hundreds of institutions, some of which are struggling financially.

A Costly Education

A residential liberal arts education is expensive to deliver. It requires highly trained faculty members, small classes, significant academic resources, and a residential environment with amenities.

According to the Delta Project on Postsecondary Education Costs, Productivity, and Accountability, Smith College spent $61,655 per student in 2009, $47,113 of which went to education-related expenses. By comparison, the nearby University of Massachusetts at Amherst, a public research university, spent $31,762 per student in 2009, $18,048 of which went to education-related expenses; Holyoke Community College spent $10,935 per student, $9,140 of which went to education-related expenses.

Much of Smith's budget goes to faculty salaries, which, as at other liberal arts colleges, tend to be higher than average. In 2010-11, full professors at Smith made an average of $130,000, associate professors made an average of $90,700, and assistant professors made an average of $60,500, according to the American Association of University Professors’ annual compensation survey. The average class size is 19 students. Other expenses that drive up the cost of education include maintenance of the 147-acre campus, including a botanical garden and 100-year old conservatory, and a $2,000 stipend offered to students after their sophomore or junior years to pursue a summer internship.

Many of the efficiency measures that larger colleges and universities have begun to explore and adopt, such as hiring part-time and adjunct faculty members, increasing class sizes, and using technology to cut down on classroom costs, don't fit well with the type of education that liberal arts colleges see as their value proposition.

This education is expensive for colleges to offer, and it tends to be costly for students. Tuition at four-year, private nonprofit colleges and universities rose 28 percent over the past decade, according to the College Board. At elite liberal arts colleges such as Middlebury, Williams, and Bowdoin, total costs including tuition, room and board, and student fees are significantly more than $50,000 a year.

"We're in a situation where those families that can afford to pay the full price of institutions like Smith are in the top 5 percent of the distribution of American family incomes," Christ said. "What does that say about the value that Smith places, that other colleges and universities place, on access?" She added that she thinks such institutions have run up against a tuition ceiling, and that tuition increases of 5 or 6 percent a year are unlikely to come back any time soon.

Many colleges discount this sticker price through a combination of grants and loans. According to an annual survey by the National Association of College and University Business Officers first-time, full-time students paid an average of only 57.6 percent of the sticker price, and the actual tuition dollars institutions collect from students has not increased nearly as quickly as sticker price.

In 2009, Smith charged close to $40,000 in tuition, but because of the aid it provides, it only took in an average net tuition of $20,522 per student, a growth of about $2,000 since 2004.

That growth in discounting strains colleges’ bottom lines, since it means more money is spent on aid and less on the educational mission. "Tuition discount rates at a lot of these institutions are very high and getting higher," said Richard Ekman, president of the Council of Independent Colleges, which represents more than 600 private colleges. "People worry about whether it’s sustainable."

Officials at liberal arts colleges worry that, despite the high rates of discounting, the high sticker price could scare away admitted students or prevent some qualified students from applying.

When Sewanee's vice chancellor, John M. McCardell Jr., announced that the university would be dropping its tuition -- then just over $46,000 per year -- by 10 percent, he cited the fact that the university was losing admitted students to top-tier public universities with lower sticker prices, rather than other liberal arts colleges. "More and more families are telling us that they are basing their decision on price," he said in February. He said the current economic trends for liberal arts colleges are "unsustainable" and could represent "a slow death scenario."

The high tuition, high discount rate model also requires a large number of students who can afford to pay the full sticker price, and many institutions are finding those students increasingly hard to come by. As public universities face budget cuts, they are increasingly looking to out-of-state students who can pay full tuition to provide new revenue streams.

Kneedler warned institutions against placing too much emphasis on finding full-pay students, which can significantly damage a college’s public image. "If you lose your social relevance, if you lose the sense you are doing good work that is valuable to society -- if you lose that, you’ve really lost an awful lot."

Reversing the trend in sticker price is not easy, particularly with the ongoing economic downturn still affecting endowment returns. Institutions may also be reluctant to cap or lower tuition unilaterally and thereby giving their competitors more resources with which to attract students. High prices, many argue, may be seen as indicators of quality. Institutions are regularly judged in rankings not only by how much they charge, but also by how much they spend per student.

To keep that second metric up, several colleges have started exploring alternative revenue streams to fund the academic core. While these initiatives tend to focus on shrinking administrative budgets, increasing the size and payout of endowments, and improving philanthropy, some college leaders have proposed alternative solutions.

Middlebury has taken several steps to generate new revenue streams. In 2010 it partnered with K12, an education company, to offer online language instruction. It also acquired the Monterey Institute of International Studies. The Smith report calls for a task force to explore post-baccalaureate educational offerings and other programs that enhance the college’s "reputation and revenue structure."

'Easy to be Complacent'

While the cracks in the financial model are discussed most often, Smith’s report also notes that the college needs to begin thinking about new ways of delivering its education.

"An undergraduate education, once commonly undertaken in nine-month 'academic years' over a four-year period on a college campus, will become more discontinuous, self-schedule and customized," states the Smith report. "Driven in part by the high cost of residential college education, students will seek to combine study at public universities, community colleges, online (often for-profit) institutions and residential colleges – and amass credit for these varied experiences."

Even raising such issues has caused faculty unrest at some colleges. Smith faculty leaders generally are supportive of the review, and note that they are involved in meaningful ways in these discussions.

Alexandra Keller, a professor of film studies and member of the Faculty Council at Smith, said the best part of the Futures Initiative was getting faculty, who are often focused solely on the idea of education, in discussions with trustees, who often focus on how the college is faring in the marketplace.

One of the topics that will be hotly debated over the next few years is just how strongly institutions like Smith should cater to what students want – be it educational delivery methods or residential life – in an effort to attract them. "Just because that’s what the market wants doesn’t mean we have to deliver that," Keller said.

Finding which students are attracted to what the college can offer is the true question. "In 20 years, what do we look like, who is it that would want us, and will we want them?" she said.

Don Baumer, a professor of government and member of the Faculty Council, said he doesn’t see the initiative as radically redefining what Smith is or how it operates. "Most of us who are doing fairly well … are going to be operating more similarly than differently,” he said. Changes will likely come on the margin – such as increasing international student enrollment, allowing students to take more online courses, or partnering with other institutions on graduate programs – but they won’t radically redefine what the college does, he said.

Most sectors of higher education are facing some disruptive change brought on by technology, though some leaders at liberal arts colleges think that, given the quality of education available and the draw of residential campuses, liberal arts colleges will be some of the least affected by such disruptions. "Rather than being disruptive to Bowdoin, I am convinced that technology and modes of learning emancipated by technology will have the power, potentially, to incrementally, rather than disruptively, improve our educational model," wrote Bowdoin President Barry Mills.

Several colleges are considering alternative delivery models to help augment what they can offer and help them compete with larger institutions. One of the major changes that observers saw on the horizon was the use of consortiums to supplement on-campus options. Based on their size, liberal arts colleges are typically not able to provide the same range of academic offerings that large public research universities can. Some lack courses in specific disciplines, such as certain foreign languages.

Ekman, of the Council of Independent Colleges, said they can likely overcome that by partnering together. If a student wants to attend one institution but seeks a program, such as Arabic, that a lot of small colleges can’t offer, he might be able to take that course online from another institution while still partaking in the residential campus experience. But there is a limit to how much of that can take place. At a certain point, if a student is taking all of his courses online, Ekman said, he or she is going to question why he’s paying so much money to attend the physical campus.

Kneedler applauds colleges like Sewanee and Middlebury for taking steps to get ahead of the disruption that he says will eventually come their way, even if they’re not facing any immediate financial danger. "Their biggest concern should be complacency," Kneedler said. "In a troubled economy, they’re doing arguably quite well, and when you’re in that position it’s easy to be complacent and think that you don’t need to change. But others are going to adapt. This is a fast-changing environment. If you fall behind it's going to be harder and harder to catch up, and one day you could wake up and you could be in serious relevance trouble. Economic certainty and security could work against creativity in the upper echelons."


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