The age of ‘hypercompetition’ could make or break US higher education

College revenue in the United States has been battling with restricted funds on one hand and a need to attract new enrolments on the other. To make this happen, many universities joined the amenities arms race and continued to expand with the confidence of a sector flourishing. But the reality is rather different.

In a hypercompetitive market and enrolments flatlining, the higher education sector is looking at a difficult future.

It’s not all bad news. In a report released last week, rating company Moody’s Investors Service predicts the sector will stabilise over the next 12 months. And, defying the odds, a fifth of colleges and universities grew their reserves faster than inflation.

But – and it’s a big but – the researchers assigned the whole sector a negative outlook for the second year running as it continues to battle against a number of serious headwinds.

Fighting serious headwinds

While one fifth may have grown their reserves, more universities reported losses.

“For fiscal 2019, we preliminarily project that 15-20 percent of universities will have grown reserves above our 3 percent estimate for higher education inflation while over 30 percent will have had greater than 3 percent declines in cash and investment levels,” the report said, as reported by Inside Higher Ed.

The days of relying on tuition to cover this are gone. Affordability is becoming a key issue for most prospective students as they see their older peers leaving college saddled in crippling debt. This has forced even some of the big names in higher education to offer discounts on tuition fees, sometimes slashing them by more than half.

According to a recent survey from the National Association of College and University Business Officers (NACUBO), those discounts are set to hit a record high in academic year 2018-2019, with the average tuition discount rate for first-time, full-time first-year students at private, nonprofit four-year institutions expected to reach 52.2 percent.

This all links back to the hypercompetitive nature of the sector at the moment.

Colleges are battling a decrease in the supply of high school graduates, shrinking their applicant pool and making them compete for a smaller market.

The declining birth rate over the last few years is starting to see its first victims.

Nathan Grawe, an economist at Carleton College in Minnesota, told US News that he predicts the college-going population will drop by 15 percent between 2025 and 2029 and continue to decline by another percentage point or two thereafter.

“When the financial crisis hit in 2008, young people viewed that economic uncertainty as a cause for reducing fertility,” says Grawe. “The number of kids born from 2008 to 2011 fell precipitously. Fast forward 18 years to 2026 and we see that there are fewer kids reaching college-going age.”

Strong economy = declining college revenue

On top of that, the US economy is strong. While for most industries this would be considered a good thing, a strong economy usually draws potential students away from the classroom and into work. With more high school graduates choosing the debt-free choice, college revenue in the United States continues its downslide.

On an oddly positive note, that might be about to change. Just in the last week, global markets have gotten jittery over US President Donald Trump’s escalating trade war and the threat of another global recession.

An economic slowdown would actually drive students back to education and produce a boost in enrolment for colleges and universities, according to Moody’s. But it will also spell trouble for their balance sheet reserves, endowment returns and fundraising efforts.

This will have a knock on effect on a college’s ability to grow and maintain facilities, something many institutions are already using college debt to fund in a bid to keep up with the competition.

Keeping up with the competition

Despite enrolments stagnating, colleges have continued on a building binge on a destructive race to attract increasingly scarce students who demand state-of-the-art amenities.

The hope was that the development of new amenities and support services would make campuses more attractive to millennials and Gen Z potential students. But that doesn’t appear to have been the case and has instead saddled universities with sizeable debt.

Cost containment is going to be a key focus for many institutions going forward, as debt mounts and college revenue growth in the United States remains low. Moody’s predicts 20 to 30 percent of the sector will face difficult budget choices which could ultimately lead to closure.

“With the exception of universities in the South where the numbers of high school graduates are still increasing, enrollment and competitive pressures, combined with a state and student policy focus on affordability, will likely result in low to negative net tuition revenue growth for many regional public and private colleges and universities for academic year 2019-2020,” the report said.

“As a result, there will continue to be a high focus on cost containment over the next year, with continued programme rationalisations and potentially more colleges considering merging, collaborating or in some cases closing.”

The hidden silver lining

While it’s undoubtable some institutions are going to struggle in the coming 12 months, there is a silver lining under this cloud.

After years of slashing state funds for public colleges, most states are now changing their tune and increasing support.

Since the 2008 global financial crisis, states have collectively scaled back their annual funding of public colleges by US$9 billion, according to the Center on Budget and Policy Priorities.

But while states may be slowly changing their tune, the “greatest uncertainty” for the future of the sector lies at the federal level and the impending 2020 presidential election.

Many of the Democratic candidates have their own version of debt relief or lowering tuition costs, with pack leaders Elizabeth Warren and Bernie Sanders calling for free college for all.

This could send major waves through higher education. While they have plans to shore up the funding for higher education through federal funding, this is still likely to have an impact.

Any major changes, however, are likely to “take several years to devise and implement,” according to Moody’s.

So for the near future outlook, things are stable but with storm clouds ahead.