Unlike a normal business, colleges and universities can shift much of their costs onto taxpayers through government subsidies and financial aid. The result is a system that weakens incentives to control spending, encourages price discrimination, and diminishes the competitive pressures that drive efficiency in other industries.

Those costs begin with labor. At most universities, faculty, staff, and administration account for more than 60 percent of operating expenses. Much of the remainder goes toward real estate and the costs of maintaining it, including maintenance, depreciation, and utilities. Then there are debt services, consulting and legal fees, marketing, athletics, medical and hospital services, and numerous discretionary expenses, from payments to local governments to investments in new academic programs. Together, these costs consume university finances.

Equally important is how efficiently universities use those resources. For labor, that means how many hours faculty actually teach and what their teaching loads are. For buildings, it means occupancy: how many hours a day classrooms, offices, and other facilities are actually in use.

By both measures, colleges and universities compare poorly against private-sector organizations and even research institutes. Many professors spend only a small portion of their workweek in direct classroom instruction while receiving full salaries and benefits. Campus buildings often sit vacant for much of the day and, even when occupied, are only partially used.

Administrative costs add another layer. At more than a few colleges and universities, administrators outnumber students. As economist Richard Vedder argues in Let Colleges Fail, administrative expansion has become one of the defining characteristics of modern higher education and a significant contributor to rising costs. At senior administrative levels, compensation has climbed to rival—and sometimes exceed—that of comparable private-sector positions, creating what amounts to a private “millionaires’ club.”

Then there is financial aid, which really isn’t aid. Some readers might object: Universities such as Yale and the University of Chicago advertise that only the richest 10 percent of students pay full tuition and that, for everyone else, tuition is “free.” But that is not quite accurate.

In business there is a saying: TANSTAFL, or “there ain’t no such thing as a free lunch.” Nothing is really free. Someone else is paying for it, or you are paying without realizing it. The same is true of “free tuition.” Other students, families, and taxpayers are footing the bill. Free tuition is less an act of charity than a pricing strategy that allows universities to charge different students dramatically different prices for the same education. Much like airlines, colleges use sophisticated yield management, with students sitting in the same classrooms and graduating with the same degrees while paying vastly different tuition prices.

Universities also maximize revenue through admissions practices. Early-decision applicants provide more predictable revenue. High-priced terminal master’s degrees, executive programs, and foreign-student enrollment generate additional income. Pricing decisions are frequently coordinated with financial-aid strategies, and those practices have increasingly drawn antitrust scrutiny.

Indeed, both the U.S. House and Senate Judiciary Committees, along with their antitrust subcommittees, wrote to the president of Princeton University: “We are particularly concerned that Ivy League member institutions appear to collectively raise tuition prices while engaging in price discrimination by offering selective financial aid packages to maximize profit.”

As the Wall Street Journal reported, 16 major universities, including Yale, Georgetown, and Northwestern, were sued for allegedly coordinating financial-aid formulas in ways that fixed prices and unfairly limited aid.

Adding to what I am calling a “cost spiral” is student enrollment expansion, driven in part by reductions and uncertainty in federal research funding. Universities often present larger enrollment goals in idealistic terms of expanding educational opportunity, but internal economics also play a significant role. Universities such as Yale, Columbia, and the University of Chicago have announced plans to increase their undergraduate populations, while admissions yield has become an increasingly intense source of competition as universities fight for every profitable tuition dollar to support administrative growth and overhead costs.

Whether this ultimately diminishes educational quality is open to debate. The more pressing question is whether the American higher education system is already overbuilt and underutilized as the pool of traditional college-age students continues to shrink. Some observers have described this as the “looming college-enrollment death spiral.” Declining enrollment has, of course, also contributed to what Minding the Campus has previously called the “wave of college closures.“

The evidence is suggestive. One study found that university capacity increased by approximately 26 percent between 2009 and 2019, while enrollment grew by only three percent over the same period. The same analysis estimated that the system has between three million and five million excess full-time-equivalent seats. Maintaining that excess capacity costs an estimated $27 billion to $51 billion annually, a figure roughly equivalent to annual new student loan debt.

These numbers raise an obvious question. If excess capacity is driving costs upward, why is the emphasis on recruiting more students rather than reducing costs and improving utilization? Empty classrooms, underused facilities, and expanding administrative structures increase the cost of higher education just as surely as rising tuition. They also raise questions about whether universities are giving sufficient attention to efficiency, affordability, and the long-term sustainability of the system.

Learning and knowledge creation are inherently imperfect processes, but they have become encumbered, much like excess government, by an overgrowth of institutional interests that have taken on a life of their own. If the higher education system truly possesses significant excess capacity, the answer is not simply to recruit more students to sustain existing cost structures. It is to ask how colleges and universities can make better use of the resources they already have.

A comparison from aviation may help explain why this matters. Pilots speak of a “death spiral,” a dangerous condition in which each turn downward becomes progressively steeper and faster. It usually begins with a pilot misreading—or refusing to accept—the aircraft’s true condition, leading to spatial disorientation. Recovery is possible, but only through recognizing reality and acting decisively before the spiral becomes unrecoverable.

Colleges and universities face a similar challenge. If they are to escape their own cost spiral, they must first acknowledge the economic realities confronting higher education and then restructure accordingly. That means right-sizing institutions to a lower-cost base capable of producing balanced budgets and, ultimately, operating surpluses. Some universities will need to eliminate outdated or low-value academic programs, while others may find that mergers or other forms of consolidation are unavoidable.

They must also reduce waste by making far better use of the assets they already possess. Classrooms, laboratories, residence halls, and other facilities should operate at much higher utilization rates, while faculty and administrative labor should be deployed more efficiently. Some institutions are already exploring second and third instructional shifts, treating summer semesters as fully integrated into the academic year and making greater use of evenings and weekends.

The savings from those efficiencies should be directed toward lowering tuition and strengthening universities’ long-term financial health rather than perpetuating ever-expanding administrative structures. With student debt now exceeding $2 trillion and demographic pressures reducing the pool of traditional college-age students, the current model is unlikely to remain sustainable. If quality, accessibility, and public trust are to become the defining goals of university leadership, these are the reforms that will be required.

In aviation, survival depends on developing disciplined habits that override instinct when conditions deteriorate. Higher education now faces a similar test. Universities that recognize their true condition and respond decisively will have the best chance of remaining financially sound, academically relevant, and worthy of the public’s trust.