Higher Ed Faces a Hard Road

A survey and discussions with top college officials highlight the industry's challenges.

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The leaders of many of the nation's colleges and universities aren't sleeping well these days. Mounting cost pressures, a moribund economy, and changing demographics are making life difficult for top college administrators and raising questions about whether major changes may be needed in the business model that has long sustained American higher education.

"Bubble" is the word that keeps cropping up among observers of the education sector. The concern is that even with government subsidies, college has become too expensive for many Americans, particularly when paired against an uncertain job market. If the steady stream of applicants to traditional four-year colleges were to drop, would the bubble burst?

[Read one expert's take on the higher education bubble.]

A slow leak seems to be more in line with the sentiments of college administrators. They clearly see the landscape changing, but aren't yet in panic mode. That's one conclusion that can be drawn from recent inquiries and conversations with top college officials, including a poll by U.S. News and Fidelity Investments that drew more than 1,500 responses. The unease the colleges have felt in recent years has been amplified by the decline in the national and state economies. Money pressure is the No. 1 issue, even as administrators must be mindful of the changing workforce, international competition, and the creative destruction that Internet technology is imposing on many industries.

Yet there was also some evidence of contradictions, if not delusion. Radical change is not afoot. This was most notable in the budget area where, despite all the pressures, virtually no one saw their budgets shrinking. And tuition, it seems, will continue to rise.

Among the key pressures concerning schools:

• Increasing student cost: For more than 20 years, college tuition has far outstripped the rate of inflation. Yet consumers keep paying for what has long been seen as an essential good. With the annual cost of private school often topping $50,000—and public school costs, while lower, rising at an even faster rate—everyone wonders when we will hit the breaking point.

Not yet, according to college administrators. The poll finds little expectation of tuition declining. This comes even though there is general acknowledgement that the pricing model is a mess. The sticker price is often not what students end up paying, as schools make individual deals to attract talented students. Those who pay full price are effectively subsidizing those who get a break.

Particularly for smaller schools, this is creating big problems. At the U.S. News/Fidelity Investments forum, Lewis Duncan, president of Rollins College, described it as, "if not a failing, at least an unsustainable business model." Said Duncan: "Our costs are rising faster than the consumer can pay. There are a number of small, private liberal arts colleges that are in very deep financial trouble."

One necessity, Duncan said: "The value statement of a liberal education needs to be better made. Why small classes, why the Socratic dialogue method of teaching has value for many students."

[See the rankings of the Best Liberal Arts Colleges.]

• Wary consumers: Value is increasingly on the minds of consumers. While academics talk about "outcomes measures," consumers are increasingly asking, "What do I get for my money?" A liberal education may be an amorphous if wonderful thing, but in the minds of consumers, a job is the tangible outcome they're looking for. Schools have a hard time answering that question, contending that it is too difficult to create any simple measures of student outcomes.

"The higher ed industry is not a homogeneous university," said Philip Hanlon, provost of the University of Michigan. "It's many, many different kinds of institutions. One single test does not work well."

Reflecting consumer sentiment, state legislatures and even the federal government have begun to apply pressure. Some states are demanding higher accountability standards and the Department of Education has begun to impose so-called "gainful employment" rules on the for-profit schools such as University of Phoenix and Kaplan Education.