Popping the Higher Education Bubble

Nearly a decade ago, my then colleague Andrew Gillen suggested that one could say that higher education was in a bit of a “bubble”: over-exuberant “investors” in human capital, better known as students, were potentially misallocating their resources, becoming increasingly underemployed after graduation, leading to adverse financial consequences. In the private sector, bubbles, like those in the housing or stock markets, usually lead to “crashes” and sharp falls in prices along with diminished volumes of activity. In higher education, massive government subsidies mute the decline in volume (enrollment) and prevent big price (tuition fee) crashes, but some sort of correction is nonetheless observable.

Lots of signs show the bursting of the bubble is underway. Enrollments are down, lower today than six years ago –a first decline of that duration in modern peacetime American history (including the Great Depression). Tuition increases are moderating and a few colleges are even starting to cut published tuition fees (sticker prices). Even some prestigious schools such as Oberlin College are having financial problems because their freshman class is smaller than anticipated. Student loan delinquency is high and rising, remarkable since the economy has been having the best performance in years, with real output growing at over a three percent annual rate and the unemployment rate at a very low 4.1 percent.

Related: Let’s Scuttle the University as Hotel

Even more ominous is a clear decline in public support for colleges. This is critical because higher education depends on governments, directly through grants or indirectly through the student financial assistance programs, for a large portion of their financial support. If higher education loses political appeal, declining public financial subsidies will quickly follow. Three surveys in 2017 show many are skeptical of higher education’s contribution. For example, a Pew Research Center survey showed 36 percent of Americans believed higher education had a “negative effect on the way things are going in this country.” A strong majority (58 percent) of Republicans had that opinion, which is no doubt one reason why a number of provisions in the recent Republican-led tax reform bill adversely impact on universities.

There are even potentially some legal clouds on the horizon. Universities are populated by lots of attractive young persons, so the possibility of sexual harassment lawsuits is certainly high. To cite an example, at my own school, Ohio University, an English professor recently lost his job (after a good deal of legal maneuvering), and the university faces potential meaningful damages in civil proceedings brought by female graduate students who allege they were sexually harassed and that university officials did nothing to stop it. Prominent faculty at other schools (for example, Columbia) are facing accusations of misconduct.  Also, as evidence mounts that football head injuries have significant long-run adverse effects on human cognitive function, the potential of expensive lawsuits against universities rises dramatically.

Enrollment demand is not likely to surge soon, in large part because of a demographic reality: a stagnant population in the 18 to 24 age group, along with a longer-term problem of general declining population growth. Moreover, increased visa restrictions and the growing reputation of universities elsewhere are stifling the long-term increase in the enrollment of foreign-born students.

Universities are inadequately preparing for the bursting bubble, for good reason. To be successful and maintain popularity and job security, university presidents typically need to please their campus constituencies – powerful administrators, superstar faculty, wealthy alumni, students, even popular football coaches. The way they do this is to raise a lot of money and use the funds to bribe the various constituencies by giving them what they want – higher salaries, lower teaching loads, better parking, new facilities, etc. Many schools have increased their debt loads to finance some of this, and added to already oversized staffs (especially in the administrative area), raising costs and making university finances more precarious. Thus university presidents often seem oblivious to political reality –the world outside the Ivory Tower.

A Nightmare Future of Higher Education

It is the role of university governing boards to correct excesses, to deal with precarious finances, and to bring a real world business-minded perspective to the Ivory Tower. Yet, many of them fall down on the job. They are wined and dined by the administration, thereby weakening their inclination to question and criticize.  They rubber stamp administrative wishes and are often ignorant of what is really happening on campus: they only look at the information the administration provides, often providing unrealistically rosy scenarios of campus life. They sometimes contribute to public criticism of universities by giving senior staff large salary increases.

To be sure, there are exceptions, and the bubble is bursting unevenly across academia. Harvard, Yale, and Princeton, for example, could close their doors to new students and operate with billion-dollar budgets forever doing absolutely nothing of importance, given the size of their endowments. Purdue’s president Mitch Daniels is bucking many conventional trends, for example, freezing tuition fees for six years, making the institution more affordable to students and popular with the general public. Berea College and the College of the Ozarks effectively are free, using endowments to lower costs rather than engage in spending extravagance. Hillsdale College’s decision decades ago to not take any form of federal aid is looking like a good one –the school seems to be prospering.

The solution? A bit of Schumpeterian creative destruction might help. The number of colleges closing or merging is inching up, and nothing challenges universities to change their modus operandi like the possibility of going out of business. The age of boom and expansion that characterized mid-twentieth century higher education is over. Will higher education’s problems be temporary, or will there be a slow decline like that of ancient Rome or Venice in the late Middle Ages? Stay tuned.