'' Immune No More: How the Principles of Econ 101 Are Shaping the Future of Higher Education - The Online Learning Curve

Immune No More: How the Principles of Econ 101 Are Shaping the Future of Higher Education

Bradley Safalow is the founder and CEO of PAA Research, a leading independent investment research firm with a particular expertise in higher education. Hear him speak in person at Connect 2013, our online higher education conference.

The laws of supply and demand, utility, and elasticity of demand are some of the key concepts taught in almost every single Economics 101 course around the country. Despite the ubiquity of these concepts, rarely have they ever been discussed in the context of total enrollment trends in the U.S. higher education system. Economics is defined as the following:

A social science concerned chiefly with the description and analysis of the production, distribution, and consumption of goods and services.

We don’t mean to disparage the copious amount of economic research that has been conducted on the U.S. higher education system, but for the most part no one thinks about the industry in terms of simple terms of supply and demand. Up until relatively recently, the concept of consumerism in higher education really did not exist. For many decades, the mission of higher education was to foster research, enhance citizenship, promote social and economic mobility, and to better understand the human condition, among other noble endeavors. Those principles still remain the primary focus of many higher education institutions across the country, but over the past 10 to 15 years hundreds of institutions (both for- and non-profit) have emerged with a more tangible mandate to facilitate employment opportunities for students. As a natural outcome of this mandate, many schools have in effect become highly sophisticated direct marketers that happen to deliver educational services.

One of the unintended consequences of the rapid expansion of the U.S. higher education system over the past 25 years has been the introduction of consumerism into the marketplace. As a result, we think it is instructive to evaluate changes in the higher education marketplace through the prism of the concepts taught in Econ 101: supply, demand, and elasticity of demand. Let’s go through the events of the past three to five years in the U.S. higher education space using simple supply and demand curves:

Using a basic supply and demand curve, it's possible to track a troubling trend in higher education -- more supply with weakening demand.

  • The shift up and to the right in demand. The Great Recession caused an unprecedented surge in demand for higher education.
  • The shift to the right and down of supply. Schools were able to nimbly meet the increase in demand (led by for-profit institutions) and for a period of time it seems every college and university in the country operated at maximum capacity. Total enrollment at U.S. higher education institutions increased by more than 1.9 million students from fall 2008 to fall 2010 – truly stunning. However, initially what was a simple absorption of excess capacity in the system became an actual shift in supply available. For-profit postsecondary education companies built hundreds of new branch campuses and online capacity increased by the hundreds of thousands.
  • Elasticity of demand steepened. The moonshot in demand obfuscated what had been a slowly building but troublesome trend in the higher education system. Consumers were increasingly questioning the merits of what had been the central dogma of the U.S. higher education system for decades: the more you learn, the more you earn. After the initial surge in demand, a more competitive landscape emerged for U.S. higher education institutions once characterized by a consumer increasingly leery of taking on student loans without a clear return on educational investment. Enrollments across the entire higher education system started to weaken appreciably.

The preceding might sound like an oversimplification of the sequence of events in the U.S. higher education system over the past three to five years, but applying the principles of Econ 101 helps to filter out all of the noise surrounding regulatory issues, state and federal student funding changes, and other issues impacting the space. Total enrollments are on pace to decline on a year-over-year basis in 2013 for the third consecutive year, something that has not happened over the past seven decades. The U.S. higher education system has now become dominated by price and brand unlike at any other time in its genesis. A sector that once seemed immune to the principles of Econ 101 now appears to be increasingly governed by them.

The Rise and Fall of For-Profit Institutions as Explained by Economics 101: A Cautionary Tale

There have been many attempts to explain the rapid market share gains among for-profit postsecondary education institutions over the past 25 years. What started as a small cottage industry quickly evolved into a critical component of the U.S. higher education system. In 1980 there were 111,000 students enrolled in for-profit postsecondary education institutions; by 2010, that number had grown to more than 2 million. For-profit education institutions were quick to bring working adult-oriented degree programs to the marketplace at convenient times and locations. They embraced online education rapidly. They simplified financial aid packaging for students. Their marketing programs were aggressive and highly formulaic. They focused on degree programs that offered employment opportunity (on paper). They offered educational opportunity to students that the traditional academic sector had shunned. That’s the best that can be said about the for-profit postsecondary education space and I would be the first to question the legitimacy or intent of each of those supposed merits, but for a long period of time that’s how they were positioned in the U.S. higher education landscape.

It didn’t matter that outcomes at these institutions were horrible (60%+ lifetime student loan default rates at many schools). That program costs were exorbitant. That job placement rates used in marketing were highly questionable. That the quality of education at many institutions was substandard. The mantra of “the more you learn, the more you earn” kept the student lead pipeline flowing and for the most part, all participants in the U.S. higher education value chain (students, administrators, and regulators) all fell for a classic mistake made in evaluating any business: they saw outcomes in the form of graduates and assumed process/academic rigor. Are educational outcomes at for-profit institutions better or worse than they were 10 or 15 years ago? That’s a tough question to answer, in part because of the lack transparency surround outcomes and a less effective feedback loop in the past.

So why have enrollments deteriorated so rapidly in the for-profit education sector over the past two to three years? Have regulatory changes taken a major toll? Has brand damage caused by Senate hearings resulted in reduced student interest? Have cuts in state and federal financial aid reduced interest in programs at these schools? Is the economy weighing on the sector (amazingly some think job growth would be good for demand, others think it would be bad)? Have for-profit institutions been slow to alter their program offering mix to meet new demand patterns? Are program costs at for-profit institutions generally too high? I would argue that the answer to all of these questions is a resounding yes, but these issues don’t explain the pervasive weakness in enrollments in the sector nearly as well as a simple application of the basic principles of Econ 101 does. Consider the following:

  • From 1970 to 1980, for-profit education institutions added 111,000 students and accounted for 3.2% of the total increase in enrollments in the U.S. higher education system over that time frame.
  • From 1990 to 2000, for-profit education institutions added 236,000 students and accounted for 15.8% of the total increase in enrollments in the U.S. higher education system over that time frame.
  • From 2005 to 2010, for-profit education institutions added more than 1 million students and accounted for 28.6% of the total increase in enrollments in the U.S. higher education system over that time frame.

For-profit education institutions helped expand the addressable market (online degree programs, working adult focus, target demographic), but more than anything their success over the past 25 years appears to be best explained by their role as the largest source of incremental capacity at a time of rising demand. Now we have entered a period where demand for higher education degree programs is falling and there’s a significant amount of excess capacity in the system. Based on current trends, there will be excess capacity in the U.S. higher education system for more than 1 million students by year end. Perhaps more worrisome, is that every single day, week, and month more lower-cost supply continues to enter the market. While there are some members of traditional academia that have celebrated the troubles that for-profit education institutions have endured over the past two to three years, my expectation is that many non-profit colleges and universities could encounter similar operational challenges over the coming years. Demand has shifted down and to the left and supply has shifted to the right, which suggests a material decline in average tuition prices is the most likely outcome to stabilize enrollment trends. As the principles of Econ 101 rule the sector with an increasingly tight grip, brand and price are all that matter.

Four Key Questions Every Institution Should Be Able to Answer in the Era of Brand and Price in U.S. Higher Education

In the era of brand and price in U.S. higher education differentiated supply of courses, demand for programs provided, competition, and return on educational investment are the determinants of enrollment trends. We think EVERY institution should be able to answer the following questions to successfully position themselves for stable enrollment trends and financial security:

  • What is my institution’s brand? Elite research universities and private colleges often view the U.S. News and World Report rankings as the de facto representation of their brand, but that only applies to a small segment of the market. For all other institutions, branding has become more important than it ever has been.
  • What is the return on educational investment for my students? The age of “the more you learn, the more you earn” is over. No longer can institutions assume that consumers will continue to pursue high-priced programs based on the concept that obtaining a degree is a surefire path to economic advancement. For hundreds of thousands of students around the country, the pursuit of a higher education degree has become the exact opposite a tool of social repression. The elasticity of demand for higher education in the U.S. has steepened dramatically over the past three to four years and will likely continue to do so as more and more high-quality but affordable programs become available. Tuition, which at one time was viewed as a proxy for educational quality, is now merely a point on the demand curve.
  • Does my institution offer unique programs? The rise of MOOCs, competency-based degree programs, and aggressive expansion of online programs will likely continue for the foreseeable future. In the U.S. higher education system, there is now excess capacity and the marginal cost of supply is dropping rapidly. That is a toxic mixture for pricing over time, particularly for institutions that offer programs that are fairly ubiquitous. Those that offer generic programs are the most likely to be caught in the crossfire of tuition price deflation.
  • Does my institution offer a unique experience and how can that be articulated to potential students? Many college-age students identify a unique college experience with sports teams, a sprawling campus, new facilities, and a vibrant campus life. While that still remains an important segment of the U.S. higher education system, it is an increasingly smaller piece of the pie. For those institutions that are not ranked (academically or in sports), the manner in which they differentiate themselves from competing institutions will ultimately determine the viability of their schools. Is it faculty, corporate relationships, student services, technology, facilities, or something else? Either way, in the era of brand and price in U.S. higher education system, these points of differentiation must be easily articulated to potential students.

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