After Housing And The Stock Market, Is Higher Education The Next Bubble To Burst?

Few industries today have a worse business model than higher learning institutions.

Simply put, colleges are slowly pricing themselves out of existence. Tuition has consistently increased faster than inflation and household income, to the point that it is now four times more expensive to attend college than it was a generation ago. The result is that the average college senior carries $25,000 in student loans at graduations. The debt can follow students around for years, sometimes to the end of time, literally: $36 billion in loan debt is held by people over 60-years old!

Colleges are now faced with the challenge to the long held belief that a degree is worth the student loan burden because it leads to a lifetime of good paying jobs. However, the recession and the tepid recovery made make this belief more questionable as new evidence points to a much lower lifetime earnings. As a result, last year a whopping 41% of all colleges saw their enrollment fall.

Faced with declining enrollment, many colleges across the country assume that they have a marketing problem and are hiring CMOs to build their brands. However, the lack of branding or coordinating the admissions offices’ sales pitch is not the reason for a shrinking student body. While whitewashing substantive and largely self-inflicted problems with advertising campaigns may be an appealing quick fix, transforming the business model itself would be a better approach – better for the colleges, for students, for the nation as a whole in the long run.

Schools suffer from an administrative bloat, as they are expanding their bureaucracies significantly faster than the numbers of instructors and researchers.

While higher education institutions benefit from hundreds of billions in budget increases every year, most of it goes toward benefiting administrators, not educators. Since the early 1990’s,  spending on administration per student increased by 66%, while instructional spending per student rose by 39%.

A big reason that colleges get away with an inefficient model that favors administrators over faculty is that students pay only a fraction of the expense of running a school, despite the oversized increases in tuition. The lion’s share of university resources comes from the federal and state governments, as well as private gifts. These subsidies for higher education fuel the expansion of bureaucracy because the college model lacks transparency.

In fact, the 2010 Goldwater Institute study stated, “universities have in recent years vastly expanded their administrative bureaucracies, while in some cases actually shrinking the numbers of professors.” Less than 40% of students are actually taught by tenured professors, while the majority is taught by assistants, instructors, and adjuncts,  directly contradicting the core mission of any university.

With the federal government and states looking for ways to trim their budgets, appropriations to colleges and universities are likely to be scaled back as students and institutions sort through what they want from a university education and how much is it worth. The higher education bubble has been inflating for decades, propagating the myth that heavy student debt burden is justified by high paying jobs. But costs can’t outpace household income forever, and the debt based model is not sustainable as long as administration cost grows exponentially.

Higher education institutions now face pressures similar to those that reshaped other inefficient industries, like the car industry or the airline. Soon it will be colleges day of reckoning  as they have to balance the reality of high costs, debt burden and lower degree value.


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