“Why are administrators putting the lives of faculty, staff, students, and our broader populace at risk? The ugly truth is many college presidents believe they have no choice.”

Scott Galloway, Professor of Marketing at NYU Stern

With this series, I hope to show you my view of higher education, split into four parts:

1. Costs: How out-of-control costs have fueled the industry’s financial disaster
2. Revenues: How university revenues are becoming more concentrated and why this is dangerous
3. Covid-19: How Covid-19 is affecting the industry and why schools are getting desperate
4. Solutions: What (limited) solutions exist to break out of this crisis

In this post, we look at Part 3 of this series, Covid-19, to understand how Covid-19 is affecting the industry and why schools are getting desperate. In case you missed it, you can find Part 1 here and Part 2 here.

A Quick Refresher: The Super TLDR of the Problem

Universities are stuck in a vicious cycle that is deteriorating their financial health. Here’s what’s happening:

In its simplest form, the problem is that costs are being driven upward at a rate that revenues cannot match.

Pre-Covid-19: Which Colleges Were Most At-Risk?

Factor 1: Less prestigious universities

• Why: Less prestigious universities have 1) less pricing power, 2) smaller waitlists, and 3) higher acceptance rates. While Tier-1 universities can ride the wave of growing tuition prices (as there will always be students and parents willing to pay for a top degree), Tier-2 and Tier-3 universities will face greater financial hardship as students reconsider the value of a college degree from these universities. Additionally, smaller waitlists and higher acceptance rates may be an underlying signal that a university cannot easily grow its student base (and thus its revenue).

Factor 2: Smaller endowment universities

• Why: Universities with smaller endowments make less money from their endowment. Since endowment revenue is the interest earned on the endowment, simply put, a smaller endowment means less revenue from the endowment.

Factor 3: Private universities

• Why: Universities that are private get less funding from the government and have to charge higher tuition. This means that 1) private universities are more tuition-dependent (aka riskier business models) and 2) students will likely explore cheaper (public) university options as private university tuition prices continue to grow.

How has Covid-19 Affected Higher Education?

The Big Idea: Covid-19 has amplified the effects of the vicious cycle by exerting significant pressure on each element. Let’s take a look at how this is playing out.

Element 1: Enrollment

• The Broad Numbers: According to the National Student Clearinghouse Research Center, undergraduate enrollment this year is down 4.0% compared to that of last year. More worrying however, is the trend that first-year enrollment is down 16.1% from last year. While some of this drop may be from students who are taking gap years, this is still a dramatic decline and a worrying sign for future tuition revenues.

• International Students: International students at universities typically pay full-tuition since they aren’t eligible for US government financial aid. Sources at the University of Arizona and the American Council on Education have predicted that because of Covid-19, there will be 25 – 30% fewer international students enrolled in universities this year than last year.
  • What does this mean for higher education? Simply put, the industry’s most profitable customers are the key ones that the pandemic is hurting the most.

• (Somewhat) Mitigating Force: Interestingly, graduate school enrollment is up 2.7% over last year’s number. This is likely because of the general uncertainty and recession caused by the pandemic. In the past, recessions have forced students back to school rather than to the job market. Still, there are over 9 times as many undergraduate students as graduate students, meaning that trend isn’t enough to make up for the sharp decline in undergraduate enrollment.

Element 2: Tuition

• Big Idea: There has been extreme pressure on universities to cut tuition or freeze tuition increases. For instance, there have been over 100 lawsuits filed by students seeking refunds from universities because of the shift to online education. Additionally, public sentiment is shifting towards tuition cuts as people see that students are receiving a worse experience online for the same price as in person.
  • While only a handful of universities have actually cut tuition (notably Princeton, Johns Hopkins, and Georgetown), this downward pressure and negative public sentiment will undoubtedly make it tougher for universities to raise their tuitions as normal after the pandemic.

Element 3: School Spending

• Big Idea: I believe that university spending has increased amidst Covid-19. The university model is largely fixed-cost intensive, meaning that the majority of university costs (tenured professor salaries, building expenses) cannot be cut on short notice, such as during a global pandemic.
  • Additionally, universities have seen a slew of new expenses because of the pandemic, including online education platforms, PP&E, and testing. For instance, Purdue has allocated $50M in their budget to spend on testing, sanitizing, PP&E, and building modifications. While it’s tricky to prove on an industry-wide level that spending has increased because of the lack of available data, it is clear that there are significant expenditures that universities are going to have to make to keep their business model intact during Covid-19.

Amidst a period of decreased enrollment, increased spending, and downward pressure on tuition, Covid-19 is accelerating the vicious cycle in a way that will have lasting negative consequences on the industry. With this acceleration, the pandemic is disproportionately hurting the most at-risk universities — less prestigious, smaller endowment, private schools.

Why are Universities Bringing Students Back to School?

To answer this question, I will refer back to Scott Galloway’s quote at the top of the page: “the ugly truth is many college presidents believe they have no choice.”

It’s true. As universities have gotten more and more tuition-dependent over time, their business models have become riskier, meaning that a small disruption in tuition revenues would cause an even greater amount of pain. Universities, especially ones that 1) are less prestigious, 2) have smaller endowments, and 3) are private, are now in deep trouble because of Covid-19.

I’ll leave you with an excerpt from the August 8^th edition of The Economist. The passage discusses the administration at Bolton, a university in the United Kingdom, exploring ways to retain highly profitable international students in the midst of travel restrictions. If this doesn’t reek of desperation, I don’t know what does…

“For those students not put off by [the] changes, other problems loom. The collapse of air travel means there may not be enough flights. Bolton is one of a number of British universities which is contemplating bringing students directly over from China and India. “We can charter a plane that will seat 300 people for around £300,000,” explains George Holmes, the vice-chancellor. Representatives would meet students in Delhi; on arrival, they would be whisked off to a hotel or halls to quarantine. The university would heavily subsidize the costs.”

The Economist, 08/08/2020