Business Columns & Blogs

Bill Virgin: Financial squeeze hits students and institutions

When last we strolled the tree-lined walks of academe, we were waving farewell to the Class of 2012 with an admonition for the institutions those graduates were leaving behind: The financial woes of colleges and universities make major change not just likely but necessary.

Today we welcome back to campus the classes of 2013-15 as well as members of the new Class of 2016 – or whatever year they plan to depart – with even more stern warnings that the worsening financial peril facing higher education holds significant long-range implications for those institutions.

Aren’t we just the life of the kegger.

The latest gloomy outlook comes from a report issued by the ratings agency Standard & Poor’s, “Higher Education Affordability Squeezes Students and Institutions Alike.”

The first component of the affordability issue we know about, with students and their families taking on ever increasing amounts of debt for degrees with declining prospects for payback, to finance tuition that also appears to be ever increasing.

It’s the second part that everyone is just now wrapping their heads around. We know that public colleges are having to raise tuition because of less support from state government, and that revenue sources for both public and private sources have taken a beating.

Here, according to S&P, is where the squeeze comes in. The sticker price of a college education has climbed to levels ensured to induce sticker shock, not to mention a plethora of scare stories in the media. But college tuition and room and board rates are a little like the posted prices on new cars, or the list price of a Boeing jet – almost no one actually pays what’s on the sticker. Indeed, schools are quick to emphasize the wide array of options and programs available to trim the top-line figure.

But that aid doesn’t come without a price. Notes S&P: “The challenge of affordability affects enrollment trends and pressures colleges to offer more financial aid to attract students. Increasing financial aid, in turn, diminishes a college’s balance sheet and operating performance. In fiscal years 2010 and 2011, many colleges and universities increased financial aid, resulting in net tuition revenue declines.”

Colleges with sufficient financial cushions from endowments may be able to increase their financial-aid budgets, S&P adds. Others, however, will have to find new revenue streams, attract more full-pay students or hold the line on financial aid, all while maintaining enrollment levels.

But revenue is just half of an income statement. What about costs? S&P says schools struggle with those too, “seeking to trim expenses without endangering real or perceived educational quality.” Schools are cutting staff, using more non-tenured faculty, delaying maintenance and construction, and experimenting with on-line instruction and restructuring programs. “We have not seen much consolidation or merger and acquisition activity within the sector, but it could become a consideration over time if these challenges persist.”

S&P says the higher-education sector has historically had investment-grade credit ratings and stable outlooks. Over the long haul, however, that could change for some of the more tightly squeezed schools, which in turn will affect choice and access for prospective students.

If they do get accepted and find a way to pay for it all, those students may run across in their studies a hugely useful bit of economic wisdom known as Stein’s Law, which says (roughly) if things can’t keep going on the way they are, they won’t.

Higher ed finds itself in the latter stages of the first part of that postulation. It matters to a lot of people – today’s students, tomorrow’s students, their families, communities such as this one, a nation that still counts as a competitive advantage an extensive and excellent higher-ed system – what happens when we move to the stage after the comma.