Colleges in Crisis

As costs spin out of control, funding is in retreat. Bottom line: Some fundamental changes lie ahead

The students at Virginia Tech should have been jubilant. On a sunny Friday last October, the Hokies, their beloved football team, was still undefeated. But as 2,500 students gathered on Drill Field -- the grassy heart of this conservative institution in Blacksburg, Va., rich in military traditions -- they were organized for an angry protest against looming cuts in classes and teachers. Storming onto the field, they assembled in formation to spell "CUT THIS?" in huge letters.

To no avail. The following week, the state slashed its appropriation for Virginia Polytechnic Institute & State University, to bring the total cut to $62 million, or 23% of the aid the college normally gets. In response, the school raised tuition to $5,095 for the coming year, up 38% since the fall of 2001. Worse, in that time it has eliminated 154 teaching positions and nearly 400 course sections. "Classes have gotten a lot larger, and many [courses] are no longer offered," says Sterling Daniel, student government president. "Students are pretty irritated [that] their education is being compromised." President Charles W. Steger is on their side: "Are we seeing the abrogation of the implied contract between a state and her citizens?"

Similar dramas are playing out across the country. At the 63,000-student Dallas County Community College District in Texas, a 12% budget cut is making it tough to provide enough classes to meet a 20% jump in enrollment since 2001. The 403,000-student State University of New York (SUNY) has proposed a 35% tuition increase. Last fall, 16 states jacked up tuition by more than 10%, and this fall promises to be worse.

The democratization of its higher education system was one of America's great 20th century achievements. Before World War II, college was reserved for an elite minority. Since then, generous financial aid programs, coupled with large taxpayer subsidies of public universities and community colleges, helped to usher in a tenfold increase in enrollments. The U.S. became the first nation to embrace mass higher education, gaining an enormous advantage in a world economy that puts increasing value on knowledge workers.

But suddenly, this cornerstone of the U.S. economy is threatened by escalating costs, diminished revenues, and a troubling inability to manage the crisis. College costs "are rising faster than any other major sector of the economy except health care," says Patrick Callan, president of the National Center for Public Policy & Higher Education. Many factors are responsible, including some created by the institutions themselves, from huge inefficiencies to rampant tuition discounting at many private colleges. The elite schools, meanwhile -- such as Yale, Brown, and Harvard -- have massive endowments that largely insulate them from the squeeze, creating a world apart. They keep adding costly programs and fancy facilities to attract the best students but in the process have fueled a veritable arms race that's crippling many poorer private colleges trying frantically to keep up. Indeed, in early April, Moody's Investors Service downgraded the debt of 18 private colleges, the largest number in years.

Meanwhile, public universities and community colleges, where 80% of undergraduates are enrolled, are having to shoulder the expense of a tidal wave of new students, as the children of baby boomers hit college age. Because a larger share of these are from poor, immigrant, and minority families, they require additional finan-cial aid and often cost more to educate because they arrive at college generally less well-prepared academically.

At the same time, the revenues of public and most private colleges have run smack into an ivy-covered brick building. The public systems are being squeezed as many state governments face their worst budget crises in 60 years. The country's 1,600-plus private colleges are crimped by falling endowments and donations, just as more students are unable or unwilling to pay the full retail price. "American higher education is confronting a perfect storm of more limited public resources, increasing demand, and an increasingly difficult-to-serve customer base of poor and minority students," warns David Longanecker, executive director of the Western Interstate Commission for Higher Education.

A vanguard of colleges has begun to grapple with the problem and is winning what amount to big productivity gains through technology. Ohio State University redesigned its core statistics course by reducing time spent in class, instead offering a rich menu of online components that allows students to work on material more relevant to their majors. The payoff? "We've opened up 150 new slots for students and cut the cost of offering the course by 31%," says Susan Metros, the university's executive director for e-learning. Campus operations, too, are ripe for efficiencies. At Harvard University, consultants McKinsey & Co. recently told President Lawrence H. Summers that the university could save up to $30 million a year just by consolidating its purchasing power. So Harvard brought its law, business, and other schools together to seek competitive bids for all their computer equipment, a contract won by IBM that will save Harvard $3 million a year.

Some colleges have reinvented themselves completely to keep afloat. Champlain College in Burlington, Vt., has gone so far as to eliminate tenure, varsity sports, and a dozen marginal majors to keep tuition at $12,300 a year, vs. $18,000 at the average private college. The once-struggling school now runs a $2 million surplus -- money it's pouring into new buildings. "We can't afford the old management styles that have existed for decades," insists President Roger Perry.

But so far, such efforts remain paltry. In most other industries, such mounting pressures would have led to drastic cost-cutting and radical new strategies. Higher education is one of the few sectors of the U.S. economy that has not seriously restructured. Partly, that's because education is essentially a social good, provided mostly by nonprofit institutions in an environment in which the traditional laws of market economics have never really applied. On average, for example, tuition covers only about a third of total costs, with government subsidies and private donations making up the balance, estimates Gordon Winston, a Williams College economics professor.

What's more, the presidents of large universities have much less control than a CEO does over a company. Most schools have decentralized power structures, with quasi-independent specialty schools such as law and medicine, as well as hospitals, labs, and academic institutes. Many of these entities have their own budgets and don't rely on the parent university, so it's difficult for presidents unilaterally to order up cost-saving measures. More than that, it's not likely to be a high priority. Although they're acutely aware of the tightening financial vise, university presidents often shun even the easy reforms. They're less interested in efficiency than in competing to boost quality -- which only intensifies the cost pressures. After all, many insist, a college's mission is to educate students and advance knowledge, not produce black ink.

So as states continue to scale back support, the burden of getting a degree is pushed increasingly onto students. That squeezes all students, but those from low-income families could soon be hit hardest of all. In effect, in an age in which a sheepskin has become as important as a high school diploma was to earlier generations, higher education is being treated increasingly as a private goal instead of a public mission. Dwindling funds for financial aid programs, which lag exploding tuition costs, only exacerbate the problem. "We are heading toward reduced access, reduced quality, and reduced competitiveness in the international economy," warns David Ward, president of the American Council on Education (ACE). If more students can't afford a BA, more white-collar jobs could flow to countries like India, with fast-growing educated workforces. Worries Patrick Callan: "This may be the first generation in American history that won't be better educated" than its predecessors.

Add it all up, and there's a growing danger that higher ed will be less able to deliver on its historic promise of providing a ticket up the socioeconomic ladder. Instead of giving motivated students the chance to offset the disadvantages of poverty, college will "become one more force toward stratification," says Williams President Morton O. Schapiro.

Higher ed is in so much trouble partly because its executives are almost culturally averse to even some of the most obvious business fixes. Remarkably, most colleges don't even know how much they spend to educate a student. After months of hearings, the congressionally appointed National Commission on the Cost of Higher Education came up mostly empty-handed in 1998, concluding that "many academic institutions have permitted a veil of obscurity to settle over their financial operations."

Still, it's possible to paint a broad-brush picture. The U.S. shelled out about $240 billion on higher ed in the 1999-2000 academic year, according to an analysis of the latest Education Dept. data by ACE. Although this figure isn't perfectly comparable to earlier years, it suggests that total spending has been climbing at a 6% annual pace, more than twice the pace of inflation (charts).

Part of what's driving up spending is simply that there are more brains to educate. Undergraduate enrollment has climbed by 8% since 1999, to more than 13 million, requiring more teachers, labs, and classrooms. Enrollment at the 415,000-student California State University system is growing by 25,000 a year. To meet the demand, it will have to recruit 1,000 faculty a year and boost spending by 9% annually.

Even where enrollment is stable, many costs outstrip inflation. Just to keep pace with the explosion of pricey technical journals, college library budgets have climbed 113% since 1986, almost twice the inflation rate, according to the Association of Research Libraries. The tab for personnel -- colleges' single biggest expense -- is also hard to control. It's not so much tenure blocking the ability of colleges to dump costly faculty but the price wars that regularly break out among schools vying for top scholars in a given field. That has been a key factor driving up faculty pay, which has outpaced inflation by more than 50% since 1997, according to the American Association of University Professors (AAUP). Administrative overhead has exploded, too, as universities add layers of marketing and public-relations staff -- and ratchet up college presidents' pay. Former University of Michigan President Lee C. Bollinger decamped for Columbia University after turning down a $500,000 annual salary from Michigan that came with a year's sabbatical paid at that rate, plus a further $500,000 in deferred compensation over five years. College board members often come from business "and tend to judge competence in terms of pay," so they inflate top-level salaries, notes Mary Burgan, general secretary of the AAUP.

Four-year universities have an extra burden: the mounting expense of cutting-edge subjects such as molecular biology or genomics. To offer courses in fast-changing fields, many colleges are shelling out big bucks to hire new faculty and build costly research facilities. Williams College, for example, sank $46 million into a new science center, a capital cost equal to $23,000 for each of its students (page 79).

Even many traditional courses are more expensive these days, as science faculties, for example, require everything from supercomputers to electron microscopes. Teaching a basic course in chemical engineering today runs about $360 per credit hour at the University of Delaware, vs. just $100 an hour for philosophy. Such courses have proliferated as more students take basic science courses. The number of undergrad degrees in biology has surged by 60% since 1990, to 64,000. "Much of our enrollment growth has been in fields that are more expensive to teach," says Michael F. Middaugh, Delaware's vice-president for institutional research.

The smart administrators are finding ways to cope by tackling bloat in the ivory tower. Management consultants Bain & Co. recently found that 24 Massachusetts public college campuses, most of which are now run as separate fiefdoms, could save a total of $100 million just by centralizing purchasing and streamlining their back-office functions.

At the University of Central Florida, in Orlando, President John C. Hitt has launched an all-out campaign for efficiency in the face of dwindling state support and a doubling of enrollment in a decade, to nearly 40,000. Classrooms, which sit empty much of the day at many colleges, are now used from 7:30 a.m. to 10 p.m. That helped the space crunch, as did Web-enhanced courses that meet just once a week and require most work to be done online. UCF has even scrapped small flower beds in favor of cheaper-to-maintain larger ones, while standardizing purchases of everything from carpets to toilet valves. The payoff? UCF spends just 4.4% of its core academic and administration budget on operations and maintenance, vs. the 7%-plus common at comparable public universities.

Similarly, some private colleges are achieving impressive savings by working with nearby schools. In Minnesota's Twin Cities, Macalester College and four others with a combined enrollment of around 11,000 have saved $1 million a year by collectively buying copiers, printer cartridges, and other supplies. The five colleges also work together to avoid duplicating low-demand courses. Italian, for instance, is offered primarily by Hamline University. Now the consortium, Associated Colleges of the Twin Cities (ACTC), has hired two veteran business execs to recruit other colleges. It wants to pool purchases of uniforms, insurance, and even trees and shrubs. "We're seeing opportunities around every corner," says ACTC Executive Director Jim Smiley, a former US West executive.

But there's one cost the country's elite colleges, at least, can't seem to tame: the ruinously expensive race to boost prestige. The wealthy ones are almost obsessed in their drive to attract high school grads with the best grades and test scores, thereby climbing up the influential college rankings. The top hundred or so schools, public and private alike, try to match or even top one another with fancy facilities, famous professors, and generous financial-aid programs. Yale is shelling out $500 million to bolster its science programs. Brown plans to hire 100 new faculty, a 20% increase, and is building a $92 million life sciences center. Such competition pushes up the cost of higher ed by up to two percentage points a year, estimates James E. Morley, president of the National Association of College & University Business Officers (NACUBO).

This has raised the bar dramatically for the less-well-endowed schools. For decades, Boston's Northeastern University provided a low-cost, practical education to a largely blue-collar student body. But today, President Richard M. Freeland believes NU must jump from being a third-tier college into the top 100. To elevate the school's image and draw top talent and students, he has launched a massive building program, expanded biotechnology and nanotechnology, and beefed-up financial aid. The price tag: debt of $540 million, twice that of 2000. The sticker price for resident freshmen will hit $35,060 this fall, up 34% since 1998. "We need to achieve quality that matches our costs," says Freeland.

At the same time as costs spiral out of sight, endowments have plunged by 10% in the past two years, the first two-year decline in 25 years. That's partly because the fallen stock market is undercutting colleges' investment holdings. But new donations fell 1.2% last year, to $24 billion, the first drop in 15 years, according to a recent survey by the RAND Corp. So while colleges are sitting on $50 billion more than they had four years ago, they still must adjust. The richest have suffered the largest losses, since more than half of the country's $222 billion in college endowments is held by the three dozen wealthiest universities, such as Harvard, Princeton, and Duke, according to NACUBO. Duke plans to cut up to 50 faculty, while Stanford will slice operating funds by $25 million, or about 4%.

Meanwhile, fewer students are paying the full sticker price, sending the weakest private colleges into a tailspin. In the past decade, the average private college tuition has doubled, to $18,000 a year. To remain affordable, private colleges -- led by lower-ranked schools with small endowments -- have jacked up their financial aid offers by nearly 200%, to $6,000 per student, according to the National Association of Independent Colleges & Universities. Nearly 80% of their students now get aid, vs. 63% a decade ago.

The financial drain is worse when aid is used as a competitive weapon. Most of it still goes to poor and middle-class students, but about one-third is now used for pure merit grants. These discounts further undercut revenue: The average private college rebates fully 40% of its tuition income to students, up from 25% in 1990, says Mercy College President Lucie Lapovsky, who conducts an annual survey of the practice for NACUBO. "It's become a vicious cycle," she laments.

Some smaller private colleges are getting squeezed out of the market completely. Wisconsin's Mt. Senario closed its doors last August after years of struggle. It was debt-free as recently as 1995 but took on short-term debt to fund desperately needed improvements, even as students demanded more aid. By last year, the $17,000 annual bill for a deteriorating program had cut enrollment nearly in half, to 250. The school had little choice but to close and put the woodsy compound up for sale.

A few pioneers, though, have junked rampant discounting, instead lowering tuition for all. Muskingum College, a liberal arts campus in Ohio, slashed tuition 29% in 1996, to $9,850. Since then, applications have doubled, the student body has grown 60%, and Muskingum is doing so well financially that it's putting up its first new academic building in 30 years. "Higher education has to find more creative ways to make their product reachable," says former AT&T Executive Vice-President Harold Burlingame, who chairs Muskingum's board of trustees.

If the private colleges are struggling, the public ones are hurting that much more. State spending on higher ed inched up just 1.2% in the current academic year, after climbing more than 6% a year in the 1990s, according to the Center for the Study of Education Policy at Illinois State University. Next year, as states face collective deficits of some $70 billion, the number is likely to head down for the first time in a decade.

With so little largesse coming from the states, asks University of Colorado President Elizabeth Hoffman, why not seek more freedom? So Hoffman has asked the legislature to grant CU "enterprise status." That would "give us far more flexibility to set tuition" and other policies, she says. After all, Denver provides only 10% of her budget anyway -- the rest comes from tuition, a hospital, and other contracts. Likewise, Massachusetts Governor Mitt Romney wants to make that state's flagship institutions, the University of Massachusetts at Amherst, more independent of the state system and more reliant on tuition.

Most state schools don't have that luxury. The regional systems, which serve 3.5 million students, including many immigrant and blue-collar youth, still rely on the states for 40% of their budgets. Community colleges are more vulnerable since they get up to 80% of their funds from state and local governments. Yet these schools will bear the brunt of the coming enrollment boom. Texas expects to add 500,000 students by 2015, even as its flagship schools -- University of Texas at Austin and Texas A&M -- are capping enrollment.

As the U.S. system of higher education heads into the 21st Century, the challenges are clear. Do taxpayers come up with more money for colleges, demanding in return better-run systems and more accountability? Or should fewer kids aim for a college degree? With a financial crisis looming, these tough questions are becoming ever more urgent.

Corrections and Clarifications In "Colleges in crisis", we incorrectly said that Duke University planned to cut 50 faculty members. Duke says it doesn't plan to fire any professors, but it will consider eliminating a smaller number of positions through attrition if the economy remains weak.

By William C. Symonds

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