Is This the End of Higher Education as We Know It?
Higher education has entered a prolonged period of structural contraction driven by demographic, financial, and operational pressure. Institutional survival will depend on liquidity, realistic strategic planning, and asset optimization.
The Perfect Storm?
My friend, Hilco Global colleague, and renowned restructuring lawyer, Jamie Sprayregen, often references a conversation between two of the characters in Hemingway’s The Sun Also Rises: “’How did you go bankrupt?’ Bill asked. ‘Two ways,’ Mike said. ‘Gradually, then suddenly.’”
From the founding of our republic, higher education institutions in the United States have been essential threads in the fabric of our national experience. From small and mid-sized nonprofit colleges to our large, public and private research universities, these institutions have made incalculable contributions to society and the economies of the communities that surround them. These schools, many grounded in faith-based traditions, have throughout history gone through cycles of growth and retrenchment, but most have endured.
At a time when use of the word “unprecedented” seems, well, unprecedented, the current cycle of retrenchment does appear to be different, more pervasive, and likely more long-lasting than earlier periods of change and uncertainty.
In the off chance that you haven’t read your news feed in the last year, higher education has reached a tipping point. While nearly everyone knows about high tuition and the student debt crisis, and many have read about enrollment challenges, especially post-COVID, the over-dependence on international student revenue, and the on-going “is college worth it” colloquy, until recently, few outside the ivy-covered walls and Wall Street have been aware of the impending institutional debt and liquidity crisis facing many small to mid-sized colleges and universities—and a few larger schools as well.
The challenges for higher education as we know it have been growing for decades. Most nonprofit colleges and universities found the means to adapt during those years, while some did not. Over the last twenty years, the number that did not survive remained relatively small. In recent years, we have begun to see that number accelerate, and nearly everyone I know expects that number to grow even larger.
“Gradually…”
For decades, the erosion of higher ed’s sustainability occurred “gradually,” facilitated by cheap debt, robust stock and alternative investment markets, a seemingly unlimited supply of international students willing to pay full price, government largess, growth of sports revenue, and a belief that graduating from college was essential to the American Dream. The flood of money into colleges and universities over the last generation has had many positive impacts. Higher education became far more accessible and inclusive, college graduates could expect to earn significantly more over their careers than those who did not have a degree, schools and their surrounding communities saw new investment in housing and infrastructure, and wages and salaries increased, especially for faculty and administrators.
“…then suddenly.”
The challenges facing higher education have been growing for years. Some institutions tackled the challenges while others chose to delay action or ignore the problems altogether. Fueled by COVID, rapidly changing demographics, technology, artificial intelligence, and, of course, the policies being pursued by the current federal government, higher education’s difficulties have become more acute. Like the impacts on the Colorado River system after multiple years of drought, revenue streams, like those flowing from international students, will slow over the next few years for many small and mid-sized private nonprofit institutions, and larger public institutions as well. Moreover, other revenue streams, like large federal research grants, may dry up completely. As rating agencies continue to downgrade the higher ed sector and more schools watch their financial grades from Forbes and other publications lowered, donors, prospective students, and debt holders will take notice. For many schools, endowments have served as the reservoir that powered institutional capacity for tuition discounting, campus building booms, regulatory compliance, and increased costs of faculty, administrators, and staff. With the Dow Jones Industrial Average recently crossing 50,000, we know a correction will occur at some point, and what will happen to schools already struggling when, not if, that correction occurs?
It’s Not Too Late
Whether your institution is relatively healthy, stressed, or distressed, maintaining liquidity while providing capacity to invest in new, innovative programs and technologies may be the difference between the schools that survive and thrive and those that close their doors. As schools rush to update or revise their strategic plans, all too often, the primary focus of those involved in drafting the plan is revenue. Raising revenue is everyone’s hope, but hope, as the old saying goes, is not a strategy. Materially increasing annual fundraising, especially in the current environment, is at best a multi-year effort. Similarly, the likelihood of materially increasing net tuition today is a long shot. The financial challenges are immediate, and the revenue side of the equation is not fixable for most schools over the near-term. Investments in growing revenue should, of course, be part of any strategic plan, but funding those investments must come from somewhere. Consequently, strategic planning must focus on reducing costs, understanding the current value of assets, and increasing liquidity. Schools that have appropriately reduced costs to stay even or ahead of declining revenues are more likely to have longer runways than those that have not. Similarly, those institutions that have reduced debt in relation to the current value of their assets are the schools that will have a greater chance of growing existing or developing new sources of revenue. Incorporating these concepts into your school’s strategic planning will also enhance the prospects for partnership and merger opportunities.
Higher Education leaders, presidents, provosts, deans, faculties, and boards are facing tough decisions that cannot be avoided or postponed. While understanding and respecting the deliberative nature of higher education’s shared governance models, stakeholders must come together with a sense of urgency to:
- Extend Runway
- Increase Liquidity
- Reduce and Align Costs
- Obtain Independent Asset Analysis and Valuation
- Monetize Non-Core Assets (e.g., sale-leaseback to convert illiquid equity into cash while preserving use; long-term ground leases for alternative, compatible uses; and selective dispositions with reinvestment commitments to support core academic mission.)
Higher education institutions are not just another business; they are mission-driven communities with unique histories that have made immeasurable contributions to our economy and the greater good. However, they are not immune from basic laws of business and economics. The financial choices schools make in the weeks and months ahead are critical. Your school’s ability to align costs with reduced revenues and to understand, maximize, and monetize the value of your assets, especially real estate assets, can help maintain your core mission, extend your runway, and provide liquidity to pursue new programs and create pathways to a financially sustainable future.
