What Will Colleges Do When the Bubble Bursts?

Jane S. Shaw

The problem facing American colleges and universities is larger than even the term “bubble” implies. A bursting bubble would force change on the more than four thousand postsecondary institutions in the United States, but something even more destructive is going to hit higher education, probably at the same time.

Compare college to housing for a minute. The housing market collapsed when people began to realize that the houses they wanted to buy weren’t worth the prices that were being offered—nowhere near those prices, in fact. But people still want those houses; the massive adjustment that the country is going through is about price, not about the nature of housing itself.

In the case of higher education, the product, or at least the method of its delivery, may no longer be what most students and their parents want or are willing to pay to obtain. For example, students may be interested in vocational training, not in liberal arts education. Or they may want to learn while earning money full-time, not while taking a four-year hiatus from the real world. Or they may feel that a lecture class with three hundred others students is boring and dated given today’s technological opportunities.

In other words, the vast postwar expansion of enrollment in postsecondary education has created a crack within the foundation of traditional colleges and universities. We have an educational apparatus (highly trained and specialized research faculty, for starters) that is at odds with the goals of an ever-larger portion of the school body.

Given this context—the changing view and experience of education—let’s imagine what a bursting bubble might do.

The major sign that a bubble is about to rupture would be a decline in enrollment—one that might start slowly, but build fast. For private schools that depend heavily on tuition, and for public universities that count on rising enrollment funding from their states, decisions by potential students to stay away could spell serious financial trouble.

How will they respond? The outlines of a few responses are already visible. Let’s review them.

The Three-Year Degree

Administrators have come up with a way to cope with the rising price of higher education—getting a degree in three years. By combining advanced placement courses and summer school, and accumulating credits steadily over three years, students can graduate early—having spent less on college and now ready to start earning money one year sooner.

Schools as diverse as the University of North Carolina at Greensboro, Lake Forest College in Illinois, and American University in Washington, D.C., offer such degrees. Announcing the program in a 2010 news release, UNC Greensboro said that the savings could be about $8,000, or 22 percent, over four years.1

The trouble is that students aren’t flocking to these programs. According to the Washington Post, most current students don’t want to miss the fun of college or activities such as study abroad. And the intense focus of a three-year degree makes it difficult to earn any money while in school. The Post quotes the dean of the faculty at Lake Forest College: “We just really didn’t have any takers.”2

Attracting New Students

Colleges are more likely to try to raise revenue by making direct efforts to find more students.

Indeed, colleges have been expanding access for years, helped by enormous infusions of financial aid from the federal government. Access now is at the point where Washington Post reporter Jay Mathews says, “In 27 years of reporting on urban high schools, the sort of places where you would most likely encounter gifted and motivated kids denied a chance at higher education because of money, I have never found a single student who fit that description.”3 He challenged readers to share the stories of any talented students who couldn’t enter college; as far as I know, he hasn’t found any.

And faculty often say that there are too many students already—their classrooms typically include some disengaged, uninterested slackers, many of whom are poorly prepared for college.

In spite of this expanding access, however, traditional colleges haven’t been adding students as fast as for-profit schools have—and those schools now represent about 10 percent of all enrollment. Universities don’t make their schedules flexible enough to allow full-time workers to get degrees. Nor, it appears, do they really want the low-income, working adult market or to teach the vocational courses (respiratory therapy, culinary arts, etc.) that for-profits are willing to offer.

One potential market that looks good to universities is the foreign student. Many students in developing countries are well-prepared, ready to spend four years at an American university, and able to pay their own way. Writing in the Chronicle of Higher Education, Karin Fischer said that “global competition for top students has heated up” at a time when “American colleges seek to expand overseas enrollments to internationalize their campuses and bolster their bottom lines through full-fee-paying students.”4 If the bubble bursts, that effort will continue.

The High-Cost Model

Some prestigious schools—the elites at the top of the U.S. News & World Report rankings—will simply continue doing what they do, which is to provide an expensive but sought-after education. They can do that because demand will remain high in the foreseeable future, whatever their tuition.

A few colleges will be lucky enough turn their high costs into a virtue by exploiting them to the fullest. High Point University in High Point, North Carolina, reinvented itself a few years ago when a wealthy entrepreneur, Nido Qubein, became president and poured millions of dollars and lots of enthusiasm into the campus. As a result, High Point offers students concierge and laundry services, a hot tub, and deluxe rooms for an extra charge. It even created a “Director of WOW!” whose job is to make the campus fun by providing amenities such as an ice cream truck that dispenses free ice cream.5 It’s expensive to attend High Point, but enrollment has doubled.

But woe to the school that doesn’t have the financial backing and can’t bring that “buzz” alive. Schools that rely on costly investments in college sports, for example, may find themselves in bad financial straits. A recent NCAA report concluded that only twenty-two of the 120 schools with football bowl programs make money on their athletics programs. None of the 120 schools in the lower-tier football championship programs makes money on athletics.6

Cutting Tuition

In 2010, the University of the South at Sewanee announced that it would reduce tuition by 10 percent ($4,600) for the 2011–2012 academic year. “Higher education is on the verge of pricing itself beyond the reach of more and more families,” said Vice-Chancellor John McCardell.7 That news release also observed that many families are more worried about paying for their children’s college than about losing their jobs. While Sewanee’s tuition cut elicited media attention, it has not been copied.

Of course, for some years now, colleges have negotiated with many parents to create a tuition that is lower than the published price tag. But even that discounted tuition is going to be too much for some parents. Cutting prices is a classic way to cope with declining demand, and if the bubble really bursts, prices will fall, as they have with housing. So far, however, most administrators have avoided it because they are so dependent on expanding revenues.

Online and For-Profit Education

Universities perceive online education as a source of new revenue and some undoubtedly would view expansion as a way to get more students in the face of a bursting bubble.

Certainly, online education is growing. A study for the Sloan Consortium, which tracks distance education, reports that nearly a third of all college students now take at least one online course during their college years.8

Traditional schools recognize the importance of distance education: 63 percent of chief academic officers surveyed by the consortium study say that online education is critical to their future. But much lower numbers—only 48 percent at public universities and just over 30 percent at nonprofits—say that they have incorporated online education into their strategic plans.9 And Florida State, for one, is charging students more to take an online course.

Traditional universities may underestimate the work that needs to be done to have effective online classes. In 2009, David J. Koon, a graduate of the University of North Carolina at Chapel Hill, wrote on the Pope Center website: “In my view, the content is too easy, the online discussions are pretty much worthless, and the professors are rarely around.”10 In a private conversation, he added that the only reasons students took them were to get an easy A or to find a class that would suit a student’s schedule.

Of course, the geniuses of online education are the for-profit companies. With more than two hundred thousand online students, the University of Phoenix is the nation’s largest university. Companies like the Apollo Group (which owns the University of Phoenix) and Corinthian (which has schools using the Everest name) are Wall Street darlings, although their fortunes rise and fall.

While for-profits are diverse, and include students in face-to-face classes as well as distance students, they have figured out how to use online education to reduce teaching costs and have marketed it successfully, charging tuition that is similar to that of traditional universities. Most of their students pay with federal grants and subsidized loans.

For-profits also have a checkered history, although it’s difficult to know how much of the abuse they are charged with actually occurred. Clearly, they have aggressive recruitment tactics, and in 2010 Senator Thomas Harkin orchestrated a series of hearings to embarrass them and promote regulations that would inhibit their activities. His hearings included a Government Accountability Office (GAO) report detailing recruitment abuses and testimony by a Wall Street short seller, Steve Eisman, who had been predicting that the for-profits’ prices would fall, as they did after the hearings.11

Eisman’s motives as a short seller are inherently suspect. And it turns out that the GAO report was exaggerated. The agency quietly issued a revised report soon after the furor died down, which (in the words of a Washington Post writer) “changed several key passages” and made “several key edits.” A spokeswoman for Harkin, however, maintained that the revisions did not change the substance or conclusions of the report.12 Another problem with the hearings was that a purported abuse, recruitment of students from homeless shelters, was based on a letter from shelter executives who had been solicited by an investment company representative who was being paid to investigate for-profit schools. Even though they had signed the letter, some of the executives had only heard secondhand about such recruitment.13

A legitimate concern about for-profits is that they depend heavily on federal grants and loans,14 a fact that troubles many conservatives who would otherwise favor education supplied by the marketplace. Perhaps the most vivid illustration of this dependence is the fact that the Department of Education limits a for-profit school’s reliance on federal grants and aid to 90 percent of its income; exceeding that limit would cut it off from federal student aid. Some schools chafe even under that rule.

But this dependence should be put into perspective. Federal grants and aid are like a voucher program—students can use them for traditional colleges and community colleges as well, and many do. In 2007–2008, for-profits received 21.1 percent of all Pell grant dollars at a time when they enrolled 7.7 percent of all students.15 The for-profits obtained a larger share of these grants than did other schools, but that should not be surprising, given that one major target market is low-income working adults trying to better themselves, a group that traditional colleges tend to eschew. Furthermore, non-profits as a group have enormous federal, state, and donor resources that for-profits do not have.

Regulatory efforts to “crack down” on for-profits are likely to reduce their growth somewhat, but if the bubble bursts, profit-making companies are likely to be more agile than public universities and non-profit schools in coping with the effects. The business model for-profits use now—low-cost technology and high tuition—could change rapidly to a low-cost/low-tuition model. Thus, traditional schools could face a scramble with for-profits over online education. As I suggest below, the odds are strong that the for-profits would win.

Cutting Costs

Now we come to the solution that schools will undoubtedly try if students stay away in droves: cutting costs. Indeed, public universities are already beginning to trim expenses because a number of states have reduced appropriations. Cushioning that process, however, have been increases in tuition—but raising tuition will not be an option if the bubble bursts, since schools will need to attract students, not keep them away.

Cutting costs to the level necessary to stay in business after a bubble will be difficult or impossible. The reason why deserves some attention.

Universities’ Cost Problem

Robert E. Martin, an emeritus economics professor at Centre College, has laid out the reasons universities and colleges fail to cut costs in The Revenue-to-Cost Spiral in Higher Education, a Pope Center paper.16 I will summarize its salient points.

Think of colleges and universities, both public and private, as an industry—a thriving industry. Unlike other industries, however, the vast majority of the organizations are either governmental or nonprofit. This industry characteristic has many ramifications.

To begin with, there is no pressure to make a profit; nearly all revenues are to be used for the school’s mission. There is not even a way to measure profit and thus to know whether costs are properly controlled or too high. More fundamentally, there is what economists call a “principal/agent” problem. In profit-making businesses, this occurs when the agents (the company’s managers) take charge because the principals (the owners) cannot monitor them sufficiently.

With universities, there is not even any clear owner. The “owner” of public universities is the taxpayer, who has a trivial role in university decisions. The ownership of private universities is even more opaque, with trustees the putative owners but without much of a stake in their decisions.

Without owners, there is no market for control as there is in profit-making industries; that is, no potential buyer is looking to see if there are inefficiencies that could be corrected. According to Martin, the absence of ownership has led to shared governance among administrators and faculty. The faculty should be watching out for malfeasance by the administration, and that role may once have been an important one. Over time, however, faculty have abandoned this role in favor of defending their own prerogatives.

Meanwhile, the president of a university generally keeps the trustees away from detailed involvement in the school—too much congress between trustees and faculty might lead to excessive interference by the board. Again, because there is no profit pressure or measurement, the administration can keep most people, including trustees, in the dark.

Those factors mean that it is hard to make a university accountable—indeed, for what and to whom would it be accountable? Everyone involved has a different opinion of the mission of university education. That vagueness makes room for a lot of self-interested pursuit of multiple goals. As Martin writes:

Often we are unaware that our interests do not coincide with those of the institution. I’ve experienced this lack of awareness myself. As a faculty member at a private liberal arts college, I welcomed lower teaching loads and smaller classes, telling myself that these benefits gave me time and opportunity to improve my teaching and research.17

Without clear measurement and accountability, a school’s reputation—that is, perception, not reality—looms very large. The worst thing that can happen to a university from the viewpoint of administrators and trustees is to do something that leads to a loss of reputation. (The U.S. News & World Report rankings’ reliance on reputation strengthens this pressure.) Thus, administrators and trustees avoid antagonizing the faculty; they want to avoid embarrassing incidents. No one wants to rock the boat.

The results are well known. Administrators can’t fire tenure-protected faculty without spurring embarrassing faculty senate meetings or even lawsuits. For similar reasons, they are extremely reluctant to rearrange academic programs, change the allocation of office space, or measure faculty workloads—to mention just a few possible methods of controlling costs.

The ultimate result is high costs. And because all revenue goes into the mission, additional costs become embedded in the system (new faculty will expect raises; new buildings need annual operating funds, etc.). These facts dictate an inordinate focus on gaining more revenue; that is why presidents are typically chosen for their prowess at raising money.

So, sufficient cost-cutting, even in the face of a bursting bubble, may not occur. With enrollments falling, a lot of schools would be in serious financial trouble.

And then there is the growing competition from nontraditional schools. Let’s take a look at online education from a different viewpoint—not the university’s but that of Clayton Christensen, author of The Innovator’s Dilemma and coauthor of subsequent books that explore the potential impact of online education on existing schools.18

A Disruptive Technology

Distance education appears to be a disruptive technology (Christensen’s term). That is, it is a technical innovation that will fundamentally and permanently change people’s habits and in so doing destroy industries. Christensen contrasts “disruptive” technologies with “sustaining” technologies, those that enhance and improve an existing product.

Let me illustrate by going back to the 1950s and 1960s, when big companies such as RCA and Zenith used vacuum tubes in their radios and televisions. An alternative power source, the transistor, had been discovered at Bell Laboratories in 1947. It had great potential and RCA, for one, spent millions of dollars trying to figure out how to use it to power TVs and radios. Unfortunately, the transistor was too weak—too primitive—for those purposes.

Thus, the transistor wasn’t a threat to the establishment. Even when a Japanese company, Sony, figured out how to use transistors to power tiny pocket radios, it didn’t damage RCA or Zenith, whose customers would never countenance their tinny sound. Sony had to find a new market, and it did. Teenagers—whom Christensen calls “non-consumers” of radios up to that point—loved them. They had never had their own radios before and now they could listen to music at any time.

For years, Sony radios couldn’t compete with RCA’s quality, but gradually they got better—indeed, the stereo “Walkman” was a breakthrough in 1978. At a certain point, Sony’s radios became good enough to take away RCA’s long-time loyal customers and completely demolish RCA’s business.

A similar story can be told about the personal computer, which eliminated giants such as Digital Equipment Company and Wang Laboratories from the marketplace. Those companies were highly admired—until they fell over and died.

A disruptive technology unleashes the “creative destruction” that economist Joseph Schumpeter wrote about. That total destruction occurs because the older companies can’t organize themselves in a way to serve totally different customers. They are making too much money doing a good job serving their current customers, who would never want the upstart’s product. But at a pivotal moment the upstart product turns out to be superior. At that point, the long-time loyal customers of the long-standing industry leaders leave in droves.

Are universities like the industrial dinosaurs RCA and Wang? American colleges and universities are almost universally admired and until recently, supremely confident. But are they more vulnerable than they seem?

According to Christensen, yes. As he and his colleague Michael B. Horn recently wrote in Harvard Magazine, “Examining the traditional universities through the lens of innovation, we see that a muddled business model is causing the industry’s ruinous cost increases.”19 Unless universities drastically change their models by creating separate units that welcome and exploit the new technology, most of them are doomed.

Traditional universities have not been able to overcome their own culture and take on the hard, hands-on work necessary to make online their own. They don’t invest enough in online education; they can’t break the resistance of faculty to teaching the courses effectively; they can’t revise the academic calendar to make their offerings more attractive to nontraditional students; they don’t want to modify their courses. And on and on.

Holding them back is complacency. After all, the education they provide is mostly better than the for-profits offer, and they still feature traditional liberal arts curricula and rigorous science programs—hallmarks of university status.

But for-profits aren’t standing still. If the bubble bursts, they will be able to cut prices because they have developed a low-cost model. They will get better and better at delivering information, ideas, and skills, and will reach out to more and more students—eventually touching those that are the bread-and-butter customers of the traditional universities.

Thus, the onslaught of a disruptive technology is likely to hobble many traditional universities. That onslaught—a mere rearguard action now—is likely to accelerate if the college bubble bursts; that is, if students start avoiding college because its value is less than its cost.

The combination of a bursting bubble and the new technology will give traditional colleges and universities problems that can’t be fixed by three-year degrees or 10 percent tuition cuts. It will be too late.

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