Student debt, rising tuition push
industry's limits
by Megan Rogers Albany Business
Review
Diminished
job prospects, student debt and a shrinking middle class are all hanging over
higher education. It matters in a region that's home to nearly 20 colleges and
universities. What they are doing before the bubble bursts.
Financial
analyst Hugh Johnson was optimistic in his forecast for investors and business
owners in 2014: An expanding economy, a lower unemployment rate in New York and
more opportunities because of technology.
But
higher education? Pop.
A
bubble is looming over the higher education industry, said the chairman and
chief investment officer at Hugh Johnson Advisors LLC in Albany, evidenced by
dipping enrollments, fast-rising tuition prices and growing student debt. It's
impossible to predict when the bubble will burst, but the higher education
bubble "is staring you in the face," said Johnson, one of the
foremost economic analysts in the country.
If
the higher education business model collapses, colleges and universities that
didn’t alter their business models will face draconian cutbacks or closure. In
the Capital Region, home to nearly 20 higher education institutions, the
watermarks of a burst bubble would be devastating.
Rising
college costs have been part of the national conversation for at least a
decade, said Amy Laitinen, deputy director for higher education at the
nonpartisan think tank New America Foundation. But as more students graduate
with debt and are unable to find jobs to pay off loans, whispers of an
unsustainable business model have become louder in the past five years, she
said. It’s the next two years that could be the most fascinating, she said.
As
tuition has skyrocketed, outpacing the increase of median family income,
enrollment has declined at many colleges and more students are taking out
loans. Student loan debt topped $1 trillion in 2012, and topped credit card
debt last year. Simultaneously, colleges and universities are investing in
infrastructure and programs, like a new student center at Siena College and
more online programs at The College of Saint Rose, based on the assumption that
they’ll be able to draw more students.
"They've
had no choice," Johnson said. "If they're going to continue to expand
and increase their enrollments, which is their lifeblood, they're going to have
to compete."
Johnson
said the industry is in a stage of distress and headed toward the final stage
of a bubble, the stage of revulsion, where colleges and universities resort to
extreme measures because they haven't generated enough tuition revenue to repay
infrastructure upgrades built to bring in more tuition dollars. In that fourth
stage, colleges that aren’t generating enough money from tuition or elsewhere
will be forced out of business. Others could default and reorganize, unable to
pay bondholders loan interest. Private colleges that rely on tuition and
endowments are at increased risk, he said. Johnson isn't the only one with
these concerns. Mark Cuban, owner of the Dallas Mavericks, recently penned an
article for the Huffington Post, asking if colleges will go out of business.
The
median family income rose 22 percent between 1970 and 2010. At the same time,
public four-year tuition rates increased more than 200 percent and private
four-year tuition rates increased slightly less than 150 percent, according to
the Delta Cost Project at the American Institutes for Research, a nonpartisan
research organization.
As
tuition increases, so does student debt. New York's Class of 2012 graduated on
average with $25,537 in debt, below the national average of $28,400, according
to the Project on Student Debt at the Institute for College Access and Success,
a nonprofit research organization. In 2005, the average student debt in New
York was $18,795, according to a Project report.
Among
local colleges analyzed, The College of Saint. Rose's graduates had the highest
debt average of $34,919 and Skidmore College graduates had the lowest at
$22,753. The Sage Colleges had the highest proportion of graduates with debt at
88 percent and Skidmore College had the lowest at 42 percent. The project did
not have data on Union College in Schenectady.
Private
colleges are likely to face more serious repercussions than public
institutions, which will be able to rely on public funds, Johnson said. And if
the stock market falters, private colleges would be in worse shape without
revenue through endowments. An increasing stock market would be "the
unexpected gift horse" for private colleges, he said.
For
those graduates who fall behind in student loan payments, the bubble is about
to burst, too, Johnson said.
RPI
student Timothy Breen anticipates he will graduate with $90,000 in student
loans. His roommate, Frank Abissi, hasn’t taken out loans yet, but said he’ll
likely graduate with $35,000 in student loans and then pay them back over 10 or
20 years. The juniors, both of whom are studying mathematics, said it was the
value of an RPI education, not the price tag, that brought them to the private
college in Troy.
"If
it's a good enough school, you pay tuition with the expectation you'll be able
to get a job," Abissi said.
College
costs are rising at the same time more people feel they need a degree to make a
living and reach the middle class, Laitinen said. The two forces are on a
collision course as some students get priced out of traditional residential
colleges, she said.
"There's
clearly the sense, and a growing sense, that higher education is becoming too
expensive and maybe it's not providing all that is needed," she said.
If
there's an industry bubble, the reverberation could be deep in the Capital Region,
where education is a big piece of the economy. Independent colleges and
universities in the Capital Region employed more than 11,200 individuals and
contributed $3.7 billion to the state economy in 2011, according to a study by
the Center for Governmental Research Inc. for the Commission for Independent
Colleges and Universities.
Colleges
will need to soul-search, Laitinen said. Are they providing enough value? If
yes, how can they relay that message to potential students? And if not, how can
they offer more value?
Some
colleges, like Converse College in South Carolina and Concordia University in
Oregon, gained attention in recent years when they reset tuition, cutting their
sticker prices by 43 percent and 33 percent, respectively.
Sage
College's vice president for marketing and enrollment management, Dan
Lundquist, who also researches families' willingness and ability to pay for
college, doesn't think the trend will catch on. Colleges won't follow suit
because they worry that if they cut tuition, "it looks like they’re having
a fire sale," he said.
Sage
Colleges took a different approach and froze tuition for five years. The
strategy has increased both the number of applications by 1,627 between 2008
and 2013 and tuition revenue by $7 million in the same time. It’s a
controversial move among board members, Sage President Susan Scrimshaw said.
"There's
a whole strategic set of issues for colleges today. How are we going to survive
with the changing demographics? With the fact that we have to contain costs
(which we have at Sage)?" she asked.
There's
no simple solution. Siena College is taking a two-pronged approach. It has
invested in multimillion dollar infrastructure improvements since 2010,
including plans to remodel the student union, to increase enrollment. The
Catholic liberal arts in Loudonville is looking to add some graduate programs
to broaden revenue streams from its education programs, Siena College President
Father Kevin Mullen said.
"We
have clearly heard the message: You can't just have one offering, like
undergraduate program and expect to be competitive in this market," he
said.
Sage,
Siena and other local colleges all saw their endowments investment returns grow
between 2012 and 2013. While most increased tuition prices in the past 10
years, enrollment numbers have remained relatively flat. RPI’s enrollment grew
by 543 students over the 10 years, second to Fulton-Montgomery Community
College's 832. Both the Sage Colleges and Skidmore College saw an increase of
216 students. The College of Saint Rose's enrollment dipped by 139 students,
Maria College's by 125 and Siena College by 116.
"A
lot of folks would argue a number of residential, mostly private, colleges that
will thrive because people always want to go and can afford to go," said
Thomas Begley, dean of the Lally School of Management at RPI.
Still,
many in education are anticipating some sort of shakeout because of technology
disrupters. Colleges are exploring offering alternatives to traditional higher
education, like competency-based education programs, certificate programs or
online modules to harness some of the appeal of new educational models. For
now, area colleges say they're prepared to weather the economy. But they need
to be wary, Johnson warns. The burst will move in slow motion across the higher
education industry.
"None
of this happens real fast. It happens gradually over time," Johnson said.
"My bottom line is, I see it coming."
