• US colleges and universities are suffering across the board.
  • Enrollment is down, government funding is limited, and students newly sent into virtual learning are clamoring for refunds.
  • More than ever, schools will be relying on the performance of their endowments, the pool of donor money meant to help fund operations in perpetuity.
  • To convince students to attend, these schools will need to do a better job showing the value of a college education by preparing students for career success.
  • Visit Business Insider’s homepage for more stories.

Minh Phuc Tran, a student at the University of San Francisco, has been just about as present and involved in campus life as you can get.

His LinkedIn reads more like a Silicon Valley stalwart than a 19-year-old college student. He’s founded clubs and non-profits while racking up scholarships and awards, not to mention his speaking four languages.

He also may choose not to come back to school if classes stay online next academic year.

“My experiences with classes the past couple of months have not been so great,” he told Business Insider.

He’s found that once-lively seminars are less engaging over Zoom. And there are other practical complications that make virtual learning less than ideal – he had to move back home to Kentucky once the virus broke out in the Bay Area, so one of his night classes now ends at 11 P.M.

“For me, for college, you really have to be there and be present,” he said. He chose his college partially based on location, so he could be in San Francisco and network.

“The dynamics now just aren’t the same,” he added.

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Minh Phuc Tran

Foto: 19-year-old Minh Phuc Tran just finished his first year at the University of San Francisco. Source: Courtesy of Minh Phuc Tran

Aakshi Agarwal, meanwhile, was supposed to spend her summer ranking possible law schools. The 21-year-old Yale student has just one more year left before she graduates, but isn’t sure if she’ll be taking classes in fall if the pandemic forces classes online.

“It’s really hard for me to weigh graduating on time versus all the experiences I was expecting to have,” she said.

She said everyone in her eight-person group of close friends is leaning toward taking leave for a semester or a year. She’d consider taking the online classes at Yale the coming semester if the school lowered the cost of tuition, but she already has plans to work on Telehealth Access for Seniors, the non-profit she started, and study for the LSAT if she takes a leave for the fall semester.

These experiences help explain why the US college and university system, a longstanding access point into adulthood and the middle or professional classes, is suddenly looking precarious.

The pandemic has exposed the harsh economic reality of the US higher education system, and it could be a breaking point for students and schools after years of mounting financial pressures, not to mention the debate over the benefits of a pricey degree.

Schools need to prove that they can replicate the campus experience virtually in order to survive – and many may not succeed.

Colleges close down. And it happens more frequently than you think.

University of Washington

Foto: The University of Washington. Source: Wikimedia Commons

When the University of Washington said it could lose up to $100 million in revenue because of the coronavirus pandemic, it was like a “stab in the heart” to one faculty member.

The 39-year-old has been juggling teaching at the university with taking care of her young child as daycare is closed. It’s her first time leading classes online, and she’s striving to make it a valuable experience for her students. She’s worried that she and her colleagues could lose their jobs. And she’s exhausted.

“I’ve done a lot of really hard things,” she said, “and I think this is the hardest I’ve ever worked in my entire life.” She requested anonymity because she was not authorized to speak to the media.

The pandemic has put 36 million Americans out of work since February. The ivory tower, like many industries impacted by social distancing, hasn’t been spared.

The Chronicle of Higher Education reported in May that at least 37,181 employees at colleges and universities have been laid off or furloughed, or haven’t had their contract renewed. (That number includes student workers.)

But continued job cuts aren’t even the biggest worry. Hundreds of schools could shutter entirely.

What happens when colleges run out of money?

college grad

Foto: For colleges, graduation is not guaranteed. Source: nirat/Getty Images

Estimates of how many schools could close in the coming years because of financial trouble range from 345 to 1,000. Even before the pandemic, colleges collapsed under financial pressure on a somewhat regular basis. Private colleges will be most at-risk in the post-pandemic era.

In February, for example, Concordia University in Oregon closed its doors because of financial challenges. The private, nonprofit school, with about 1,500 undergraduates in 2018, had been paying an outside firm to help boost enrollment in its online programs, OregonLive reported. That partnership ultimately backfired.

Consolidation is another possible route.

In March, Robert Morris Illinois, a private, nonprofit school with roughly 1,800 students, was absorbed into Roosevelt University, also located in the state. According to Inside Higher Ed, Roosevelt had reported operating deficits every year since 2014. Robert Morris had also been showing signs of financial distress.

The University of Washington faculty member said many faculty and staff at her school are worried about losing their jobs or seeing administrative cuts that could make their day-to-day more challenging.

The university said it expects to lose at least $50 million, and up to $100 million, in revenue that would normally come from student housing, food services, and athletics.

In general, it may also get harder for faculty to earn tenure, further undermining job security.

Ibrhaim Firat, the CEO of college-preparation company Firat Education, said some schools might consider having fewer full-time professors and more part-time instructors in order to cut costs.

At Grinnell College, a private liberal arts school in Iowa with about 1,700 students, cutting personnel is seen as a last resort. Keith Archer, the school’s vice president of finance and treasurer, said Grinnell has yet to lay off or furlough any faculty or staff.

But Grinnell is in a “unique” position, he said, because roughly 70% of its endowment is unrestricted, meaning the school can use it for general purposes. Archer said Grinnell has also been building cash reserves for years, to prepare for a crisis like this one.

The Iowa school is the exception that proves the rule: If colleges in the United States were a businesses, then short-sellers would be circling them.

How the business model of US colleges got so expensive (and fragile)

Richard Vedder, a professor emeritus at Ohio University, has been studying the economics of American higher education – and what he sees as its diminishing value proposition – for decades.

Colleges and universities have now been hit by a “triple whammy,” he said. Enrollment numbers were already falling; governments are now cutting funding for state schools; and many schools are being forced to refund students’ room-and-board fees after sending them home for the semester.

While universities can draw funds to operate from their endowment, a pool of donor money intended to provide an ongoing source of funding, these funds are not meant to entirely replace normal fees when times get hard.

There were signs that this model was precarious even before the pandemic hit.

A survey of 919 trustees by Gallup and the Association of Governing Boards of Colleges and Universities in 2019 found that more than half of respondents were concerned with the financial sustainability of the higher education model in the United States.

College tuition has skyrocketed over the last couple of decades, far outpacing the rise in household incomes and minimum wage. Business Insider has reported on the odd convergence of trends that’s driven that spike. More people want to go to school, which means you need more instructors and student support. There’s more financial aid, so colleges may be comfortable charging more.

State funding for public schools has fallen: a 2017 analysis found a 16% drop for funding per student since 2008.

Public schools, meanwhile, have been forced to raise tuition since the Great Recession more than a decade ago, as funding from state legislatures has yet to return to the same levels. Only five states – Indiana, Montana, Nebraska, North Dakota, and Wyoming – were found to be spending more.

For smaller, less prestigious private colleges, a combination of aggressive financial-aid outreach and an “amenities arms race” has turned college campuses in places like High Point, North Carolina, and St. Leo, Florida, into educational resorts, says Kaitlyn Maloney, senior director of research at education consulting firm EAB. These regional private schools, with student bodies typically below 5,000, are “heavily reliant on undergraduate tuition dollars” and were in trouble even before the pandemic, she added.

Whether you’re a State U or a nestled liberal arts school, the increasingly high fees students pay to live in dorms, eat dining hall food, and generally be a college student are increasingly critical to the survival of the institutions they attend.

These fees are a fixed source of revenue that is nearly identical for colleges of all types – a College Board review of the average undergraduate costs for the past academic year found that both in-state and out-of-state students at a public college pay about $11,500 to live in a dorm. Private colleges, where tuition is more than triple a public school on average, charge just under $13,000 to live on-campus.

At Wake Forest University, where students are required to live on-campus for their first three years, the school ended with net revenues of more than $27 million last academic year after accounting for students covered by financial aid, according to the school’s audited financial statement.

Schools of all sizes are cutting costs, with executive pay cuts, layoffs, and furloughs. For larger institutions, this might be to refund students and keep the balance sheet clean going into the school’s next fiscal year (which typically begins, for universities, after the second quarter ends in June.) Notre Dame, for example, announced a pay cut of up to 20% for senior leadership to fund a special student emergency fund.

Those smaller private schools – the kind that have students flinching at their high costs – may be leaning on their endowments more than ever.

What an endowment is for

david swensen yale endowment

Foto: David Swensen, Yale University Chief Investment Officer, speaks during an asset management forum in Seoul April 12, 2010. Swensen said on Monday he remained enthusiastic about illiquid assets such as private equity and real estate despite losses following the global financial crisis. Source: REUTERS/Truth Leem

An endowment isn’t a piggy bank that schools can crack open and empty, but rather an engine for ongoing investment income that a college depends on over the long term.

These investment pools are a key source of funds for a school’s operating budget, with the money coming in through donations. Running them can be a tricky balancing act between three factors: securing those gifts, managing spending needs, and aiming for sustainable returns on the investments in the endowment.

Further complicating the picture, endowments can be skewed towards investments with longer time horizons, and some assets can be hard to sell out of quickly without taking a big hit.

“There’s a misperception that they are rainy-day funds,” says Maloney, the senior director of research at EAB.

Right now, the financial pressure on schools is much greater because of the potential losses of recurring revenue from room and board, as students and parents weigh whether they want to pay full tuition for online classes. That in turn means tough decisions for the people who run the schools and those who manage endowments.

“They are going to have to consider things now that would have been crazy four months ago,” according to Sally Staley, who used to run Case Western University’s endowment. “Everyone will be evaluating everything.”

David Swensen became a celebrity in the investing world after running Yale’s endowment for decades, creating a model copied by dozens. The returns of massive endowments of Ivy League schools, MIT, and Stanford are followed like those of billionaire hedge fund managers.

Throughout Staley’s time running and consulting endowments, she was never asked for a special distribution to help a school make its budget for a year – but the amount of the budget the endowment was responsible for covering every year was increased slowly.

At some schools, according to Moody’s Investors Services, the investment revenue for the endowment can make up more than a third of the operating budget, much like how a wealthy individual investor can plan for passive income via investment returns.

At schools with large endowments where this is the case, like Princeton, Harvard, Notre Dame, and Rice, this isn’t too much of a concern, because even a minimal yearly gain in the endowment can meet their budgetary requirements.

But “a very seemingly small endowment that’s actually a big part of a school’s operating budget is much more important for the day-to-day survival of the university,” Staley said.

Compared to 2008 – when Harvard’s massive endowment lost more than a fifth of its value – endowment experts say funds overall are in a better position and have been more conservative.

A review of endowment performance done by National Association of College and University Business Officers and TIAA found that endowments have, on average, beat their target returns over the last decade.

There have still been isolated incidents of endowments getting slammed during the wild market moves that have characterized the first half of the year. Endowments run by the University of Texas and Texas A&M systems are extremely correlated with the oil industry – and energy prices have cratered.

So make that a quadruple whammy: not only are enrollment numbers falling, room and board fees evaporating, and funding from states drying up, but endowments, these financial devices meant to help schools chug along forever, have also been touched by the covid economy.

Colleges need to convince students that it’s still worth attending

Many students, at the University of Washington and elsewhere, are petitioning (and filing lawsuits) to get their tuition partially refunded for the half-semester they spent taking classes virtually.

These students may opt to leave four-year institutions and enroll – at least temporarily – at community colleges. High school juniors and seniors may decide not to apply to these schools at all, or to pursue alternative education pathways, like “mini MBAs” and certificate programs.

At the moment, it’s still unclear whether campus life will resume in the fall.

In a College Reaction poll of 835 students in May, 65% said they would return to in-person classes, even without a vaccine or cure for coronavirus. The California State University system has announced that the fall 2020 semester will be primarily online. Meanwhile, the University of California, San Diego, is planning to test students this summer; if the school can track and isolate new coronavirus cases, many students can return to campus in the fall.

In this environment, the key to survival for colleges may be clearly articulating to students that the schools are worth the money. Schools will need to be “lean and mean,” Firat said. Taking a tip from trade schools and community colleges, Firat said, they’ll need to “be much more vigilant about [students’] career readiness.” Firat added that some schools may need to cut funding for certain student services on campus and reallocate those dollars toward, say, career centers.

Colleges will also need to come up with a solid answer to students’ question: Why on earth would I pay hundreds of thousands of dollars to take classes online, when I could just as well take them at my local community college and save most of that money? In education, as in business, it all boils down to the value proposition.

Ultimately, colleges may find it’s in their best interest to team up with larger institutions. In an interview with New York Magazine, Scott Galloway, a professor at New York University’s Stern School of Business, used the example of the University of Washington partnering with Microsoft on technology and engineering; the university would provide the accreditation and the tech giant would help scale the programs.

Another option is for otherwise vulnerable schools to partner with each other.

TCS Education System is a non-profit partnership of higher-education institutions that share resources like IT, academic affairs and support systems, and finance and accounting. CEO Michael Horowitz said in the past he’s spoken with schools (that aren’t currently in the system) about merging because they provide similar student experiences and would be able to cut costs through a partnership. These schools typically scoff at the idea, Horowitz said, because they believe they’re “profoundly unique” and don’t want to muddy their brand.

Lydia Page, an online program administrator at New York University, said most schools haven’t yet proven the value of virtual classes – after all, the shift to all-remote education this semester was pretty sudden. The most important thing for colleges like NYU to do right now, Page said, is to be “transparent about how they’re shifting to online education.”

Page doesn’t think NYU is at risk of collapse. But she said she understands why students would second-guess the value of their education there if the school hadn’t made clear their efforts to develop strong online programs. “Tuition is extremely expensive,” she said. “If I had the perception that I was going to be paying for a lesser experience, I probably wouldn’t want to do that.”

For Minh Phuc Tran, the rising sophomore from the University of San Francisco, a couple months’ of Zoom classes has been enough to convince him that going to college is a lot more than just going to class.

“I would rather take a gap year,” he said, “and find some internships or work on something I’m passionate about and learn a lot more than focus solely on school at home with online classes.”