Scale back to create sustainable institutions

For decades America’s public regional universities enjoyed both the relative security of state funding and the benefits of governmental financial aid to their students. Federal and state governments provided aid to qualifying students at the same time that these same institutions steadily increased their tuition fees.

Annual tuition fee increases did not dampen the broad support for these populist initiatives. The students’ burden was at least partially relieved as the public saw their elected officials assertively responding to a chronic problem.

Then, as tuition fee charges steadily increased and federal and state budgets became more and more strained, the student loan industry quickly became a strong supporter. But, if the goal of these aid programmes was to subdue these annual tuition fee increases, they have failed.

Both levels of government appear to have ignored fiscal reality. Institutions lacking elite status with its accompanying endowments are heavily tuition dependent. Their annual need for additional tuition income is driven by the unavoidable increases in their operating costs.

Some of these costs, such as inflation and multi-year contractual obligations, are beyond the institution’s immediate control. In sum, they annually escalate operating costs which they must balance with increased revenue.

Well-intended US federal and state government financial aid programmes provided only partial counters to annual tuition fee increases. In reality they addressed the symptom rather than the underlying cause. Institutions have had to meet increased operating costs with additional revenues with each new budget cycle.

Federal support programmes

A late February New York Times commentary observed that tertiary education tuition fees had increased by more than 1200% since the late 1970s. In that same interval, federal support programmes were bolstered by periodic broadening of eligibility criteria and modest increases in subsidies.

As a result federal support grew to an amount that prompts questions about the programme’s sustainability. Federal subsidies have not kept pace with the nation’s ever-increasing tuition fee rates and nor have the majority of subsidy programmes sponsored by the states.

Inevitably, students have had to fill the gap in their education budgets with debt. Borrowing now, and with deferred repayments, appears to mask the immediate impact of the tuition fee increases. In 2014, the aggregate student debt was widely reported as totalling more than one trillion US dollars.

Since student out-of-pocket expenses were at least partially eased, academic institutions benefited as well. Directly assisting students to pay even a portion of their current tuition fee charges did little or nothing to encourage colleges and universities to restrain their annual tuition increases by controlling their operating costs.

These grant and loan programmes have played an important role in giving students the incentives to begin and subsequently continue their tertiary studies, while failing to shield them from tuition fee increases frequently exceeding the Consumer Price Index.

Former US Secretary of Education William Bennett posited in 1987 that the subsidies had incentivised the nation’s tertiary education institutions to continue to raise their tuition fees. He restated his position in 2012.

Even the Great Recession of 2008 failed to dampen annual tuition fee increases. As state publicly funded universities saw their once reliable funding drop, tuition fee charges continued to wax. In spite of reduced state support, these institutions were unable to contain their operating costs and tuition fees continued to increase.

Even as the business cycle’s recovery phase emerged and state funding of public institutions partially rebounded, tuition fees continued to increase, albeit at a moderate rate.

A sustainable future

As the US economy continues its halting recovery it may be presumptuous to anticipate that funding will soon return to previous levels. Moody’s has posited that a return to the prior higher funding patterns is unlikely.

Unfortunately for the institutions, the efficacy of their once reliable balancing strategies, increasing tuition fees and enrolments, has been diminished by two factors. A 2013 Moody’s report notes that net tuition revenue dropped by 25% at regional public universities.

More than half of all public institutions reported no growth in enrolments or a decline in the autumn of 2013. In July of the following year, Moody’s repeated its 2013 gloomy outlook for tertiary education amid declining revenue and stagnant or falling student numbers.

Neither subsidising students nor reducing funding have encouraged the tuition fee-dependent sector to contain their annual tuition fee increases. Short of draconian measures, their multi-year budget obligations prevent major operating cost reductions in a single budget cycle.

Freezing vacant full-time faculty positions and filling them with adjuncts, closing low enrolment sections and such like are merely trims at the margins. Sources of major cost savings, such as closing weak programmes or entire colleges in a single budget cycle, are clearly inhumane, resulting in financial and career damage to faculty, students and staff.

The combined challenge of uncertain revenue and enrolment levels should prompt an exploration of strategies to curtail the growth of operating costs. The era of ever-increasing growth may be giving way to one of determining each institution’s sustainable size.

Both federal and state governments might consider assisting institutions as they scale down their aspirations and operating costs to sustainable levels. Their traditional response – quality costs – might be recast within sustainable limits that minimise tuition fee increases.

William Patrick Leonard is dean of SolBridge International School of Business in Daejeon, Republic of Korea.