By Richard Vedder
Everything created by humanity is subject to a cycle of creation and destruction. Humans live 70-80 or sometimes even 100 years; their business enterprises rarely last that long. A generation ago, there was no Facebook or Google, but Enron and Eastman Kodak were going strong. Even buildings seldom last more than 200-300 years.
Until recently, higher education has seemed immune from this reality, as few colleges or universities ever died or closed. The perpetual gain of college enrollments, combined with increasing government subsidies and private philanthropy, shielded higher education from the discipline of market forces that lead private businesses to face relatively high mortality rates. That's changing. As tuition revenues and outside subsidies stagnate and cost-saving innovations fail to materialize, more and more schools are facing serious financial problems.
The latest casualty is Mid-Continent University, a Baptist school of over 2,000 students in Western Kentucky that announced it is closing its doors. Other schools are teetering. Georgetown College, also in Kentucky, recently announced it was dismissing 20 percent of its faculty and shedding several majors in an effort to remain financially viable.
Iowa Wesleyan, a school dating from the mid-19th century, is making even more drastic cuts - dismissing over one-third of its faculty. Urbana University, a struggling Ohio liberal arts college with large debts, just announced it was being sold to neighboring Franklin University, a financially somewhat stronger private school trying to expand its residential campus franchise.
Nearby Antioch College, a school with something of a national reputation, closed in 2008, although strong alumni support has allowed it to reopen on a modest scale. Further east, both New York's Nazareth College and New Jersey's College of Saint Elizabeth, facing severe financial challenges, have slashed faculty and other staff.
As Moody's Investor Services' Karen Kedem said last November "tuition-dependent colleges and universities will be challenged to...remain competitive over the longer term." And the problem is not confined to undergraduate schools: Moody's recently downgraded the bonds of the Vermont Law School to junk status, as plummeting enrollments are threatening the survival of a number of law schools.
Why is this happening? Why now, and not, say, a generation ago? I think five big factors are at work.
First, we have overinvested in higher education, and the number of college graduates is growing far faster than the number of jobs in the managerial, technical and professional areas where graduates traditionally find relatively good jobs. Some estimates are that close to half of recent college graduates are "underemployed," working as baristas, janitors, taxi drivers, and in retail stores. Students with degrees in, say, anthropology or ethnic studies often find it nearly impossible to get a good job, a problem that may afflict liberal arts colleges hard because of their lack of emphasis on seemingly more vocationally relevant majors.
Second, aggravating things, in order to finance the rapidly rising costs of attending college, students went on a borrowing spree, so now there is an extraordinary $1.2 trillion in student loan debt. The loan default and delinquency rate is greater than it was on home mortgages at the height of the financial crisis. The ratio of debt to income is precariously high for growing numbers of Americans. Prospective students are becoming aware: going to college involves significant financial risks, a perspective rarely heard even a decade ago.
Third, the impact on student demand of these changes varies dramatically from institution to institution. There has been a "flight to quality," where students have become much more discriminating about the type of school attended. Over the last decade applications rose at the most selective institutions, because applicants believed that their students usually graduate on time and get good jobs. By contrast, schools perceived either to be costly (small liberal arts colleges with small endowments), or of mediocre quality (some state universities) are facing enrollment declines. These schools are highly tuition dependent, and they simply cannot raise fees without losing a huge portion of their customers. Moody's estimated last November that 28 percent of public schools and 19 percent of private ones are facing net tuition revenue declines, and the proportion rises if inflation is taken into account.
Fourth, in past situations like this, the schools would get revenue infusions from government or through private donations. State appropriations for public schools fell in the face of the Great Recession, and are not growing rapidly even now. And sluggish economic growth is limiting the willingness and ability of wealthy individuals to greatly expand support to colleges.
Fifth, colleges face growing competition. Both online programs such as MOOCs and for-profit colleges have a larger presence in the higher-ed industry, threatening the traditional model.
Colleges heretofore have lacked incentives to change their business model to make college more affordable or vocationally relevant. Subsides have made them too big, too inefficient, too non-responsive to market signals. But as those subsidies become constrained, creative destruction--the death of colleges--is coming to higher education.
Richard Vedder directs the Center for College Affordability and Productivity, teaches at Ohio University, and is an Adjunct Scholar at the American Enterprise Institute.