Education: The Bleak Writing On The Blackboard

>>State budget deficits will mean stingier spending on public schools
>>The bright spot: Test-prep and tutoring firms are thriving

The nation's $800 billion education industry has never faced greater expectations. The 2002 No Child Left Behind (NCLB) law sets the wildly ambitious target of raising all elementary and secondary students to standards higher than ever before -- even as the knowledge economy demands that higher education produce far more graduates. But the money needed to meet these goals has rarely been so tight. Record state budget deficits severely constricted growth in education in 2003, and 2004 doesn't look much better.

Even though education tops the priority list in most states, the need to close a record $80 billion combined budget gap will limit the growth of state spending on K-12 education to just 2% in fiscal 2004, down from 7.5% as recently as 2000, according to the National Conference of State Legislatures. That's forcing many states to cut back on initiatives to improve performance, from smaller classes to after-school programs. As a result, "many schools don't have the resources they need" to meet the lofty goals of NCLB, complains American Federation of Teachers President Sandra Feldman, who predicts the law will become a major issue in the 2004 Presidential campaign.

Public colleges and universities, which serve 80% of college students, are being hit even harder. Indeed, many states are actually cutting higher-ed appropriations. That has forced four-year public universities to hike tuition an average of 14.1% in the current academic year -- the biggest real increase in at least 30 years. Many colleges are also cutting classes, programs, and staff. "This is the first time in the modern era that we've had recession budgets combined with sharp increases in high school graduates," says Patrick M. Callan, president of the National Center for Public Policy & Higher Education. "That's severely constraining access to college in fast-growing states like California and Florida." Given the record federal deficit, "it is very unlikely Congress will significantly improve financial aid," says David Ward, president of the American Council on Education.

Online Bandwagon

The slowdown in government spending has also helped crimp growth of the burgeoning for-profit education industry. Overall, the for-profit sector should expand 6.6% in 2004, to $80.5 billion, according to Boston-based researcher Eduventures Inc. Although that's up from 5.2% growth in 2003, it's far slower than the blistering pace of the late '90s. The business of running K-12 schools for profit took a hit in November, when industry leader Edison Schools (EDSN ) went private.

But business is booming for tutoring and test preparation firms such as Kaplan Inc. and Educate Inc., which now runs Sylvan Learning Centers. These help students meet NLCB'S goals. And for-profit colleges are exploding by catering to such nontraditional students as working adults and high school graduates not in the top 25% of their classes. Overall, for-profit colleges should grow 14%, to $15 billion.

No area will be hotter than online higher education. "The best of these programs is now comparable to bricks-and-mortar education," argues Todd S. Nelson, CEO of Apollo Group Inc. (APOL ), parent of the University of Phoenix Online. UOPX already has 80,000 degree-seeking students, and by this time next year it will have 120,000, predicts Nelson. Some of the nation's best-known universities, including Harvard and Yale, are still moving cautiously in this arena. But with many other colleges jumping on the bandwagon, Eduventures predicts that in 2004, overall revenues from online higher-education programs will grow 48%, to $4.6 billion. Even in tough times, there is still a market for the most promising ideas.

By William C. Symonds in Boston

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