Monday, August 13, 2012

The Fiscal Cliff for Higher Education - Next - The Chronicle of Higher Education

The Chronicle of Higher Education

August 12, 2012, 12:23 pm
The talk in Washington these days, when not about the presidential election, is about the coming fiscal cliff, the result of tax increases and spending cuts set at the start of next year. On campuses, talk of a different kind of fiscal cliff is the subject of much speculation. The question on the minds of many college leaders is whether this is the year that they have been fearing since the economic collapse of 2008.
After years of hyping their record numbers of applications, fewer colleges seemed to tout those numbers this past spring. This summer, at meetings of admissions officers that I attended in New York and Minnesota, I heard plenty of concern over rising tuition discount rates, flat or falling net tuition revenue, and declining yield numbers. Keeping that trifecta in balance is a juggling act for most tuition-dependent colleges, and for years, it was only a concern of private colleges. But as state support of public colleges has dropped, their finances have become more dependent on carefully managing enrollment as well.
Among the college officials I talked with this summer, some felt fortunate to “make their class” this fall, but only with freshman discount rates that approached 50 and 60 percent (that rate is the proportion of tuition revenue used for student aid). The average discount nationwide last year was 43 percent. There is no number that automatically triggers an alarm because in some ways the figure that matters more is net tuition revenue, but on many campuses that number is also not moving in a positive direction. In other words, colleges are spending more to enroll students and getting less cash from them.
Other colleges resisted raising their discount rate for this fall, “yield” went down (the percentage of accepted students who enrolled), and they missed their target for this fall’s freshman class. Now those places will pay the price in another way: fewer students, less tuition revenue, and a possibly a budget deficit. Admissions officials from those institutions told me they were already considering whether to boost their discount rate the next year in order to maintain enrollments.
This anecdotal evidence seems to be supported by reports in the past several weeks on the financial state of higher education. An analysis by Bain & Company and the private-equity firm Sterling Partners found that one-third of all colleges and universities in the United States face financial statements that are significantly weaker than before the recession and find themselves on an unsustainable fiscal path. Another quarter of colleges are at serious risk of joining them.
Meanwhile, two major credit-rating agencies, Standard & Poor’s and Moody’s Investors Service, released warnings that put a negative outlook on all but the name-brand market leaders in higher education. “We’re seeing prolonged, serious stress,” Karen Kedem, a vice president and senior analyst at Moody’s, told me.⁠ What is significant about the move by Moody’s is that it typically rates only colleges with strong balance sheets to begin with.
Moody’s notes that the number of students accepting admissions offers from colleges that the agency rates has been dropping at a fast clip since 2008. That comes even as those institutions are spending more to enroll those students. The trend, Moody’s said, is particularly serious at the lower-rated private colleges, “which are increasingly competing with lower-cost public colleges and feeling the most pressure to slow tuition increases and offer more tuition discounting.”
The worldwide search for students willing to pay higher tuition prices is showing signs that the well is running dry. In the United States, the economic crisis has left the median American family with no more wealth than it had in the early 1990s.⁠ With household budgets tight, families are beginning to take another look at the public colleges in their backyard, or trading down even further to less-expensive community colleges, or unfortunately, no college.
We can imagine how the current pricing model in higher education can easily turn into a death spiral for some institutions. Year after year, colleges increase published tuition prices in an effort to keep pace with their rising discount rates. They succeed in sustaining enrollment levels but spend heavily to snag those students so their revenues barely grow or actually drop. Their options for survival are limited. They don’t have large endowments that they can dip into. They can’t lower their academic standards to enlarge their pool of potential students without exposing themselves to new risks. If they are located in the Northeast or Midwest, demographics are not in their favor. And public institutions can no longer count on their states to help them out. Indeed, if the current trends continue, every state will be out of the business of supporting public higher education by 2044.
To those who still believe the current financial model of higher education is sustainable for the long run, these reports and numbers should provide a dose of reality. The question now is, What do we do about it? Most of the debate about the future of higher education continues to happen at the extremes: those who want to preserve what we have at all costs, and those who want to throw the current model out and start all over. Ideas near the middle have been lost.
The reality is while everyone is looking for a silver-bullet solution to the future (online education, international, three-year degrees), the pathway will be different depending on the institution. Paul LeBlanc, president of Southern New Hampshire University, likes to talk about how the solutions to the future depend largely “on the problems we think need solving and what jobs need doing.”
LeBlanc was one of the presenters earlier this month at a conference at the American Enterprise Institute on “Stretching the Higher Education Dollar.” The group (of which I was a part) was a bipartisan gathering of some of the leading journalists, policy makers, and researchers seriously thinking about innovative approaches to containing costs in higher education.
You can view all the papers from the conference here. Below are just a few of the proposals for getting more from the higher-education system for what we’re spending (a link to the specific conference paper is included with each idea below). Weigh in with your thoughts, or propose your own solutions:
One institution with multiple jobs. Southern New Hampshire could easily have been one of the many struggling small private colleges in the Northeast, but under LeBlanc it has transformed itself into a test-bed for ideas on the future of higher education, and in the process, has bolstered its bottom line. A highly successful online operation for working adults subsidizes a traditional residential undergraduate college for 18-year-olds. Now, the university is planning a competency-based learning model aimed at work-force development for those who need an associate degree, all for a target price of just $4,000. All of these solutions, in LeBlanc’s mind, fulfill different jobs that need to be done by higher education.
College credit earned outside the classroom. Any credits not earned through classroom instruction at traditional colleges tend to get ridiculed by many academics. But some high-profile experiments in recent years to test competency-based education (Western Governors University) or prior-learning assessment (a partnership between Wal-Mart and American Public University System) could move these once fringe ideas more into the mainstream and provide an alternative path to and through college for mostly working adults, especially those one in five American adults who attended college but never earned a degree.
Improving student services. Some colleges have stepped up academic advising, tutoring, and financial-aid counseling with personalized “success” coaches in recent years in an effort to improve retention. In some cases, these services have led to fewer students needing remediation and helped students complete their degrees on time, all of which reduces the price of higher education for families.
The unbundling of the college experience. There has been a lot of talk about how fragmented, simplified services on the Internet could replace the less tangible aspects that define the college experience. The best example of this are the commodity introductory courses taught at nearly every college. They could be supplemented or at least the lectures largely replaced by online courses offered by some of the best institutions and instructors online. There are plenty of other examples of companies in Silicon Valley looking to take a piece of what traditional colleges are doing now. You can get a sense of who they are and what they are doing by reading this paper.
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  • Unemployed_Northeastern 20 hours ago
    This is the natural result of having a very unnatural marketplace, due to several factors, the foremost among which is the federal government's policy of essentially lending and/or guaranteeing as much money as each institution wants, no questions asked, no cost-analysis done. Combined with the perception that college is a Veblen Good, and we have a generational disaster about to befall the country. By the end of this year, Americans will owe nearly 3x what they owed in 2008, and nearly 6x more in student loans than they did in 2000 (~$1.15 TR v. $440 B v. $200 B).
    Some small suggestions:
    - restore consumer protections to student loans. Dischargeability in bankruptcy for at least private student loans is a start. However, depending on the type of loan and the year in which it was made, the Truth in Lending Act, FDCPA, state consumer protection laws, state usury laws, the statute of limitations, and so forth. Nowhere else in America can one find loans with such "generous" carveouts for the lenders.
    - eliminate (or reduce) default penalties, which can nearly add 50% of the balance of the defaulted loan to the principal, in addition to raising the interest rate on it. Given the economic climate, and recent indicators that maybe only half of college graduates in the last six years have full-time jobs at any wage, those penalties are overly draconian. In fact, in the handful of other nations where college is expensive enough to have to borrow money, default is not treated as the punitive state as is the case in the US.
    - The reason for this is, of course, lender avarice. Far from merely inuring themselves against any possible losses in their lending (the funding of which came from the feds under the old FFEL program!), default means enhanced profits for the lenders (thanks to those onerous penalties), at least on the accounting ledgers. Unsurprisingly, student loan providers own most of the authorized collection agencies for federal student loans, providing yet another reason to NOT work with students and grads so as to avoid default in the first place.  If penalties must continue – as is likely from our current fire-and-brimstone-for-the-middle-class Congress – at least split them between the student and the institution from which they graduated or attended.
    - Eliminate the SLABS market. As readers here may or may not know, private student loans have been, for about two decades now, sliced and repackaged into securities (Student Loan Asset-Backed Securities), the same as subprime mortgages, and then sold to pension funds and the like. SLAB transactions run into the hundreds of billions per year.  One of the major desires for SM et al to eliminate bankruptcy protections for their products was that it made for a wonderful marketing line for the sales staff to use on institutional investors: these securities are bulletproof because they are inescapable!
    - Rework IBR.  At present, for those IBR-ed grads whose 10% or 15% of their salary is not equal to the growth in interest on their student loan balance, their balance grows month-to-month, year-to-year.  Which means that after the 20/25 year window (if IBR lasts that long, which it almost certainly won’t), they will have an enormous balance.  The loan forgiveness of that balance currently counts as income for taxation purposes, so those hapless souls, having lived largely hand-to-mouth for the past few decades, will now be faced with a tax bill for what could easily be several hundred thousand dollars in “realized” income.  This needs to be rectified.  On a side note, to incorporate private student loans into the program would be tantamount to eliminating defaults for private loans – a possibility that should be investigated.

    - Separate the financial interests involved in higher education. One example - Sallie. Sallie was the inventor of the aforementioned SLABS, from which they profited enormously (their longtime CEO lives on a 200-acre estate just outside DC, replete with his own personal 18-hole golf course). They also own a number of collection companies, and were the principal lobbyists for the nondischargeability in bankruptcy back in 2005. They also operate under contract, if I am not mistaken, the ombudsman for federal student loans. They also cofounded and funded the Lumina Foundation, which is invariably behind every study/policy paper/talking head ringing the alarm that we will become a third-world nation if we don’t have the highest percentage of college grads in the world (a title currently held by Russia, which of course has the world’s healthiest economy, right?).  Yet for all of this sermonizing, LF does not spend a penny of its $1.5 billion endowment on scholarships.  This is a complete, soup-to-nuts infrastructure of influence, in the same vein as the doctors who used to hawk their paymasters’ brand of cigarettes as healthiest, or the scientists whose institutes are underwritten by Exxon-Mobil or Royal Shell who decry global warming as unproven science.

    Lest we forget, only about 1 in 2 outstanding student loans are in active repayment at the moment, with 1 in 4 in delinquency.  Compare this to the maybe 1 in 10 houses in foreclosure at the height of the crash, and you can see how serious a problem this may become in the future.  I should add that many of those folk not in active repayment are because unprecedented numbers of grads are heading right to grad school, having essentially doubled down on their educations.  There is no feasible way the economy can handle the numbers of college and advanced degree grads we are currently producing, regardless of what various politicians and Lumina say to the contrary.  Expect the default rate to increase dramatically in the next few years, as recent college grads who stuck around for their MA/MS/MBA/JD/PhD realize that those letters have no more worth in the marketplace than their BA/BS/BSEE/etc, and in some instances (*cough* JD *cough*) have made them LESS viable job candidates than they were as mere bachelor’s degree recipients.

    Unfortunately, it would seem that DC has little interest in any of this.  Obama’s IBR program is a start, but grossly insufficient.   Romney’s head education adviser is the CEO of for-profit Full Sail University in Florida.  Enough said about that.  Obama at least has had the experience of owing “a mountain of student loans,” as he has called it, but as one half of a couple with four Ivy League degrees, he never seriously had to worry about being able to FIND a job with which to pay those loans back.  For all that, though, student loan reform, both future and current (IBR), are but one “Entitled Millenial” speech away from extinction.  One demagoguery-tinged speech about Horatio Alger, personal responsibility, and caveat emptor away should be enough to turn a majority of the public against college students who chose not to attend the very cheapest college in the country, work part-time to pay their tuition (if it worked 50 years ago, it must still work today!), be one of the vaunted STEM majors (let’s put aside the unavoidable fact that STEM jobs don’t even add up to 5% of the American workforce) or have the temerity to not be manor-born.  Since history tends towards irony, this speech will likely be given by a Boomer politician whose patrician parents paid his/her $4000 HYP+S tuition from their dividends of their IBM/GE/PG stock, then spent four decades in high finance creating such vulgarities as SLABS that are the cause of so much misery in the first place.  Ultimately, nothing will be done until there is another housing/consumer spending crash – one whose direct cause will be a generation of underwater degree holders utterly unable to support any aspect of the economy.  And so it goes…

    Let me end with the words of another.  From law professor William Henderson over at The Legal Whiteboard http://lawprofessors.typepad.c...
    "[T]he current "system" of federal higher education financing is near perfect insanity. We set tuition and, no questions asked, the federal government writes us checks in exact proportion to students' willingness to sign loan papers. For young people who have never worked, it is all like Monopoly money. The only way the math works is if the real earnings go up en masse for virtually all college and professional school graduates. In a rapidly globalizing world in which our students are competing against Chinese and Indian professionals, the assumption of mass rising real incomes is implausible. See, e.g., views of economist Alan Blinder in this NPR article.
    Right now we--higher ed and the nation as a whole--are maintaining the illusion of prosperity through debt financing heaped on naive young people. This is immoral in the extreme. Moreover, in the long run, it is economic and political ruination."

    See also
    (Edited by author 20 hours ago)
  • Congratulations on a great post.
    I would add that the amount of federal loan available to any student for undergraduate education as well as certain graduate progarms like (cough)  law school (cough) should not exceed the cost of attending the flagship state university in the state where the student is a resident.
  • Unemployed_Northeastern 11 hours ago in reply to edwoof
    Thanks.  There are a few grammatical errors, here and there, but I find that the CHE-Disqus cabal sometimes deletes comments that are edited more than once.
    I like your federal loan/state flagship ceiling idea, but there are a few issues.  BRIEFLY, this time:
    1.  It's government-enforced price-fixing of private institutions.  Won't fly in this economic climate, and legally worrisome regardless of politics.  One might say that the top 100 to 250 colleges are engaged in price-fixing already, but similar claims have failed in the past and the DOJ is in a spineless rut of many years' duration.
    2.  Have you seen in-state rates lately?  CA, MI, VA, etc.  Since you mentioned law schools, I should mention that Boalt Hall (UC Berkeley Law) stickers at about $73,000/year, in-state.  Only about 45% of the Class of 2011 found jobs at firms of >100 attorneys (the ONLY jobs that can pay down that kind of debt), according to the ABA, and that is the #7 or #8 law school in the country.
    3.  As long as they are nondischargeable in bankruptcy and excluded from many consumer protections, private student loans will swoop in to fill the gap between federal lending and asking price.  Frankly, most colleges don't give a damn how the cow is slaughtered as long as they get the veal.  Not too long ago, an UG graduate of one of Boston's many universities made headlines when she started a charity to help her pay down her $189,000 in private student loans (no family cosigners).  I believe she landed a secretarial job of some sort.  I can't think of a better example to show how little thought higher ed puts into the financial plight of its wards. To be perfectly blunt, that student's alma mater has probably destroyed her life.

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