Will Higher Education Have a Higher Mortality Rate?

This topic came up briefly while talking to a few college students the other night at Startup Houston roundtable about whether they felt they were getting their money’s worth, so I thought I’d throw in my two cents.  While historically, higher education in America led the way in terms of global leadership and turning a profit, there are some who believe that paradigm may be changing. Colleges are contending now not only with the chaotic bursting of the credit bubble, but also with a growing population of disillusioned potential students.

These young men and women have watched the months go by as literally millions of people throw up their hands and leave the workforce; many of whom already have accredited four year diplomas. Additionally, their parents are strapped for cash, most likely unemployed/underemployed themselves, and have also lost faith in the educational system in general.  Let’s look at some financial aspects and social variables which may determine which Universities are likely to survive.

Appealing to a Changing Social Dynamic

The traditional “well rounded” education may be losing its perceived luster. The workforce of the 21st century is telling people they need well defined schooling, niche curriculums, and technologically dense programs. Fewer people want to study French literature, while drastically more feel that they need to sit behind a computer screen and get an edge on modernity.

Students are drawn by the potential to make money once they graduate, rather than simply being able to tell someone they have a degree. The millennial generation cares very little for paper diplomas and tassels anymore. They want to believe that they’re going into debt with better chances of well paying careers.

During the credit bubble of the last thirty years, families were more than happy to send their children, most of whom were first generation attendees, to school under the pretense that paying off loans would be a cinch with a prestigious certificate. These days, those who already have them are churning out horror stories of debt serfdom to what is sometimes perceived as a profit driven franchise that sold them a fairytale.

The universities that will make it through the next decade may well be those that can adequately demonstrate both the importance of the experience and that their graduates move on to jobs in thriving sectors of real economies.

Finances Determine Everything Moving Forward

Like the US government drowning in deficit spending, over a third of US colleges look like major banking and investment firms. Their books are riddled with overleveraged debts, and dwindling incomes/investors. Their expenditures are through the roof, while their attendance is less than spectacular and doesn’t always cover basic operational costs.

This research put together by www.thesustainableuniversity.com suggests that the landscape of higher education may look like the banking sector soon, with more and more going bankrupt and disappearing.  They would suggest that liquidity is the name of the game, and only those that can get their books in order are going to weather the fiscal storm.  They state the following: “Institutions have more liabilities, higher debt service and increasing expense without the revenue or the cash reserves to back them up.”

Simply raising tuition isn’t going to work. Exponentially inflating costs of living, commodities, and basic necessities will see to that. Instead, the lion’s share of success is going to go to (of those without huge endowments) those that can find ways to lower costs, while also giving students new services and options that they see as relevant today.

The old dynamic of spending more and more into success quite frankly looks insane even from a freshmen accounting major’s perspective these days.

Determining Risk Factors for Universities

Are those colleges that spend more and more without specifying their curriculum to suit new demands in extreme danger? It seems that for nearly any institution that isn’t currently considered cream of the crop, the downward pressure is immense.

With potential hyperinflation right around the corner, millions in endowment money is becoming chump change, and serious reorganizing is in order for those that don’t fall into the billions category.

US assets aren’t the only thing being downgraded. If the books are in complete agony, and tuition becomes a crutch, bond downgrades are likely to take a chunk out of survivability.

Colleges that have, out of necessity, had to turn to drastic measures like lowering standards, laying off faculty, or poignant tuition hikes will be perceived to have a short shelf life.

Digital Salvation & Outsourcing

From strategically putting money where the innovation is, the growth of ecommerce, and outsourcing data center and IT work, universities are scrambling for digital salvation. At the end of the day, even if they get their books completely in order, get their real estate values in line with reality, and cut down on a plethora of unnecessary expenditures – without adequate numbers of students, obviously failure is inevitable.

And so they say, the challenge facing higher education has never been greater; the risks have never been sharper; and the incoming tsunami of the higher education bubble has already pulled out the tide by a mile. Here are four things in my view that set apart those that are likely to succeed from those that are staring down the barrel of a financial gun:

  1. Colleges with a concise, and well defined strategy of change and evolution, coupled with a stringent focus on providing value and a higher job placement rate.
  2. Institutions that incrementally cut down on both support and administrative costs, while still managing to give students access to modernizing research and development.
  3. Determined and smart investment in innovation that is perceived by students as both valuable and constructive.
  4. Universities that legitimately conjure up free capital in non-essential assets.

It would seem that only the universities that take the time to regularly examine positive and negative perceptions of their perceived value and react accordingly will stand the best chance to leverage what they need to compete with the likes of Stanford or Harvard.  I doubt this is any longer an optional exercise, as students increasingly begin to view their tuition and time as an investment rather than a requirement of the status quo.

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