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As awful as the pandemic has been for higher education, some of the worst-case scenarios have not yet come true, which may have led some in academe to think that the worst is over. That would probably be a mistake.
In one of my earlier articles, way back in 2017, I identified three tipping points that suggested troubled times for colleges and universities. All three are still in play. In a more recent publication I identified several external factors (demographics, negative public opinions, cost & debt, the economy, and alternatives to traditional degree programs) that were conspiring to suppress enrollment and drive down revenue. Unfortunately, four of the five are getting worse and one, cost, is flat. And all of these were in play well before the COVID crisis.
At least as importantly, a substantial numbers of institutions were experiencing significant financial stress before the pandemic, with almost a third operating in the red. This is significant, because it means that many colleges have been operating at a deficit for up to several years and have already employed many of the options at their disposal to preserve liquidity. They were laying off staff, borrowing money, deferring maintenance, delaying accounts payable, and spending down endowments prior to the current crisis, which has further stretched compromised institutions.
A False Sense of Security
Although enrollment declined about 4% and revenue fell 14% overall in 2020, it was 10% in community colleges and the drop in first time enrollments for students of color was approximately 30%! Surprisingly, these numbers are quite a bit better than the worst case estimates for enrollment declines overall, which has contributed to a false sense of security. A bigger factor, however, is the recent emergency federal aid for higher education, totaling about $77 billion, close to $40 billion of which were direct payments to institutions with the balance going to students. As a result, the depth of the financial stress in higher education has been temporarily masked. The problem, of course, is that these are temporary payments that have helped colleges and students stay afloat. The federal relief funds also masked substantial state-level cuts in funding that are not likely to rebound soon. There will be no equivalent rescue next year or in coming years, yet enrollment will be even lower than it is now and years of financial stress that was temporarily papered over will come back quickly for many institutions. We might think of the federal funds as an overdraft line on an already empty checking account.
Of equal concern, recent research by Strada Education Network found that disruptions to education plans from early in the pandemic have not only not subsided, the number of people who say their plans have changed has actually increased over the last year. And of critical interest to colleges and universities, of those adults, 18 and older, who intend to pursue some kind of post-secondary education, over 50% said they will choose employer based or online non-college training options. In fact, only 33% said they would choose a community college or four year institution, suggesting that the pandemic has dramatically accelerated the move away from traditional higher education to other post-secondary alternatives.
One potential advantage from the pandemic is that many institutions made cuts to expense that they found impossible to make before the crisis. In fact, higher education in the U.S. laid off 13% of the entire workforce, totaling about 650,000 people! Schools also cut academic programs, sports teams, cancelled construction projects, refinanced debt and engaged in other expense reductions that will provide longer term decreases in overhead. While this may be helpful in some institutions going forward, it will be inadequate for the most distressed.
In short, neither 2020 nor 2021 are meaningful measures of the likely reorganizations, mergers, and closures to come. Ironically, the COVID crisis provided significant and unexpected emergency funding that has delayed insolvency for many institutions, but none of the structural challenges, other than modest reductions in overhead, have been addressed, leaving many schools uncompetitive in a shrinking market.
The Need for Transformation
About 85% of all traditional institutions of higher education are on a spectrum of risk from “some things need to change,” to “we can’t make payroll next month.” Because almost all traditional colleges function on a model that is structurally built for a different time and market, surviving and thriving will require far more than preserving liquidity. In fact, even before the pandemic, higher education was facing an existential moment in which the market was no longer capable of supporting all of the providers vying to enroll students and even those that had fairly stable enrollment were operating with unsustainable business models—and still are. When the emergency federal funds are used up, some material number of institutions will find themselves insolvent.
So, we will continue to see the higher education market shrink as fewer institutions serve fewer students overall. Some colleges are too far gone to recover and some will technically survive, but function as “zombie” schools, unable to grow or innovate. Those on the more dangerous end of the risk spectrum that survive and thrive will do so because they make a purposeful decision to reinvent themselves. Again, with the exception of the most exclusive and wealthy institutions, the current business, revenue, and operating models are so compromised that incremental change will simply not suffice. For institutions that are up to the challenge, the future could be incredibly exciting and innovative. If you’d like to chat about how we can support transformation in your post-secondary education click here or email email@example.com.