Rethinking the College Business Model

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December showed the for-profit sector’s troubles are not over. Education Corporation of America (ECA) became the latest major for-profit operator to close abruptly, leaving 20,000 students scrambling to find transfer options or discharge debt. Less than two weeks later, Missouri-based Vatterott Educational Centers (whose deal to sell itself to ECA fell through earlier last year) followed suit. These events happened under an Education Department whose deregulatory agenda is explicitly more sympathetic to for-profits’ business models. Regulatory environment aside, poor student outcomes have led to negative publicity that has made some prospective students more skeptical about attending a for-profit.

Dropping the for-profit tag is one way to lighten regulation and brighten their reputation. Roughly a dozen for-profits in recent years have changed or are in the process of changing their status to become nonprofit colleges, Education Dive reported in December. Others, such as the parent companies of Strayer University and Capella University, have merged. Kaplan, meanwhile, sold itself in a $1 acquisition by Purdue University. Still others are transitioning into online education service providers.

Resources are continually more difficult to generate. The average annual return on endowments over the last ten-years is 5% which is only slightly above the average spending rate of 4.4%. This does not allow endowments to keep up with inflation and is likely to lead colleges to reevaluate their spending policies which provide for spending rates between 4% and 5%. Tuition at private institutions has increased by 54% over the last ten years while net tuition per student has been almost flat as the tuition discount rate has approached 50% for new students. At public colleges, tuition has increased 62% over this same period due in large part to anemic funding from state and local governments in support of higher education. Further worsening this challenging climate, the public is beginning to question the value of higher education given the large debt incurred by students and their often-perceived poor prospects for employment. Although this is the public perception, data shows that the return to a college degree ranges from $600,000 to $1.3 million compared to a high school degree and the average unemployment rate for college graduates did not reach 5% during the 2008 recession.

More prevalent and smaller-scale changes to the business model relative to activities to increase enrollment and net tuition revenue include changes to pricing and discounting policies; additions of new programs to increase institutional attractiveness, especially pre-professional programs; recruitment of new student populations including part-time, transfers and international students. More and more institutions are considering resetting their prices down as the gap between the published price and the average price paid reaches 50% at private institutions. Many institutions are partnering with third-party providers to put programs on-line usually using revenue share agreements that minimize risk to the institution. These changes often take an institution beyond its originally stated mission. The majority of the institutions which have been successful in increasing their revenue stream from students have broadened their missions and many have strayed far outside their initial lanes.

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