The Future of College Finance: Is the Liberal Arts College at Risk?

by Dr. Sandy Baum

Sandy BaumHeadlines with dire predictions about the future of traditional higher education are hard to ignore: College has become unaffordable for all but the wealthy; private colleges — especially private liberal arts colleges — will become irrelevant. In a few short years, online learning will have replaced the classroom, with MOOCs (massive open online courses) leading the way. Students are drowning in debt and no longer getting their money’s worth from colleges. We should focus only on providing students with the technical expertise needed to save our economy from falling behind the rest of the world.

How can people committed to high quality, personalized liberal education put these warnings into perspective? We know that an education like that offered at Scripps transforms lives, creates meaningful and rewarding careers, and provides the basis for an informed and engaged citizenry. We know that colleges like Scripps are doing everything they can to enroll and support a diverse student body. We also know that while the financial structure is sound, the long-term viability of our cost, pricing, and discounting models is far from assured.

Looking more closely at some of the common concerns may allay some fears.

A dwindling number of college students are interested in paying for an education that does not prepare them for a specific occupation.

The number of students enrolled in colleges and universities increased from 12 million in 1981 to 21 million in 2011, with over half of that increase in the most recent decade. In 1981, 54% of recent high school graduates went straight to college; 30 years later, that figure was 68%. While students from lowincome families are the least likely to enroll, that is the population in which there was the most growth over these years.

Of the five million new postsecondary students in the decade from 2001 to 2011, only 770,000 (15%) enrolled in private nonprofit four-year colleges and universities. Only the for-profit sector enrolls a higher percentage of all students than it did a decade ago.

But this does not mean that many new students who would have enrolled in private colleges a decade ago are looking elsewhere. It means that the added population of students is making other choices. Adults returning to school because of high unemployment and the increasing skill demands of the labor market are looking for specific occupational training. Young people who would have gone straight to work a generation ago are not flooding the gates of liberal arts colleges — they are also seeking specific job skills. But these are not people who would have been going to Scripps or a similar college before.

The core constituency of liberal arts colleges has always been small. About 20% of postsecondary students attend private nonprofit institutions. About one-third of those students are in four-year colleges, not universities. And less than 10% of this small group is enrolled in colleges as well endowed as Scripps. So Scripps and its closest comparators together serve less than 1% of the postsecondary student population. General trends tell us little about the likely choices of that distinctive group of students.

The fact that student debt has reached $1 trillion dollars and exceeds credit-card debt means that students are mortgaging their futures.

Almost every story about student debt now includes these two “factoids.” But they don’t mean much. Most of the growth in outstanding student debt arises from the sharp recent increase in the number of students — particularly students from non-affluent households. What we should be concerned about is the debt levels of individual students and their prospects for repaying that debt. Those prospects have been significantly improved by the development of an Income-Based Repayment Plan that assures that borrowers will not have to make payments on their federal student loans that exceed a relatively small percentage of their incomes.

And the credit cards? Credit-card debt plummeted with the economic downturn, as personal bankruptcies skyrocketed and credit markets tightened. And who would be better off if students put their expenses on credit cards instead of taking education loans?

The student loan market is likely to be the next subprime market to collapse, following in the footsteps of the mortgage market.

Defaults on student loans — like defaults on other types of debt — are up. In the mid-2000s, an aggressive private student loan industry captured about a quarter of the education loan market. Many students with few resources and little chance of success — many enrolled in for-profit institutions — took loans with high interest rates that in many ways resembled sub-prime mortgages. But that market has faded and now issues less than 10% of education loans, with much tighter underwriting requirements. Unlike mortgage debt, mostly held by heavily leveraged private financial institutions, the bulk of student loan debt today is held by the federal government, which, whatever its woes, is not fragile in the way financial institutions turned out to be.

People bought houses they couldn’t afford, thinking they would make money flipping them. When housing prices fell sharply, this plan failed. People don’t buy educations expecting to sell them for a higher price. They invest in themselves, expecting to earn a high return over their lifetimes. That doesn’t work for everyone. But it does work for most people, and there is no sign that this will stop being the case. Whatever bad news there is for college graduates, the news is always much worse for those without college degrees.

With the high price of college tuition, for many students, education no longer pays off.

In 2011, the $30,000 gap between the average earnings of 25-to-34-year-old males with bachelor’s degrees and those with only a high school education was a 78% premium — the same as in 2001. For women, the $24,000 gap was an 86% premium — 10 percentage points higher than a decade earlier.

Paying off an average of $25,000 – $30,000 of debt (for the two-thirds with any education debt at all) looks less daunting with this perspective.

There is a cost crisis in higher education that can only be relieved by changing the nature of the faculty and the learning environment and making mass, remote education the norm.

Colleges do have to worry about finding ways to provide the quality education that is their mission at lower cost. Unless there are dramatic changes in our economy, with more rapid growth and diminishing inequality of incomes, asking people to pay 5% more each year for a great education is not likely to be viable. Only so much discounting is possible without leaving institutions with no funds. Declining net tuition revenues at too many top colleges signal a very real problem.

Technology is certainly part of the solution. Some of the courses at the core of colleges like Scripps could certainly be taught as well or better with fewer faculty hours and more technology. Students will surely be demanding that more of their credits from low-cost online providers be accepted. But the business models for on-line delivery have a long way to go. Moreover, Scripps and other colleges focused on personal experience, the development of critical thinking and communication skills, and the development of intellectual communities offer considerable content and experience that is not likely to be replicated any time soon without bricks and mortar and dedicated, high-quality faculty devoted to their students.

Where does this leave us?

These realities do not describe a crisis. We do not need a revolution. But we do need creative thinking, flexibility, and a determination to evolve with changing circumstances into institutions that maintain their historic values and mission, but achieve their goals in new and imaginative ways.

Sandy Baum is an independent higher education policy analyst and consultant, senior fellow at the George Washington University Graduate School of Education and Human Development, and professor emerita of economics at Skidmore College. Dr. Baum is a senior associate at the Institute for Higher Education Policy, Affiliated Consultant for HCM Strategists, and consultant to the College Board. She has managed and co-authored the annual publications Trends in Student Aid and Trends in College Pricing for the College Board since 2002. She also developed and co-authors Education Pays: The Benefits of Higher Education for Individuals and Society for the College Board. Dr. Baum earned her BA in sociology at Bryn Mawr College, where she is currently a member of the Board of Trustees. She earned her PhD in economics at Columbia University. She has written and spoken extensively on issues relating to college access, college pricing, student aid policy, student debt, affordability, and other aspects of higher education finance.


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