In addition to enjoying the holidays, December is a good time to pause and take stock of the past year. This also is an opportune time to get out the crystal ball to contemplate what might happen in 2019.
2018: The Year in Review
There were a number of very nice gifts under the tree this year, but also a lot of lumps of coal. In 2018, we saw four big themes: marketplace dynamics; Washington follies; higher ed governance failures (which includes fallout from higher ed’s versions of #MeToo); and the Harvard admissions lawsuit.
Marketplace Dynamics: The Maturing and Decline of Higher Ed Markets
In our previous blog and podcast on M&A activity in higher ed, we discussed the product life cycle and where higher ed stands in relation to this concept. To briefly recap, the product life cycle (PLC) is a marketing tool that is applied to products, but also is relevant when examining market segments or industries.
The PLC is made up of four stages:
- The introduction stage, which is characterized by the organization building brand awareness;
- The growth stage, which is characterized by strong growth as the organization builds brand preference and increases market share;
- The maturity stage, which is characterized by diminishing growth as “competition” increases and competitors offer similar “products.” This results in the implementation of multiple marketing strategies, such as cutting prices, rethinking positioning and branding, and market consolidation; and
- The decline stage, which is characterized by a decline in sales (which may be potentially significant). In many cases, the product (or organization) goes out of business or, as a last result, finds a buyer (leading to a merger or acquisition).
Higher ed finds itself straddling the stages of maturity and decline, which is characterized by decreasing enrollment, lack of differentiation in the higher ed marketplace, and an increase in market consolidation and/or college closings.
Which brings us to now.
Breaking Down the Numbers. Over the last few years (2016-2018), more than 100 colleges haves closed. Many can be directly attributed to the decertification of ACICS by the Obama administration. However, the more relevant reason for many of these closures is the life cycle and current operating environment of higher education.
Over the past few years, 65 for-profits closed and seven merged with other institutions. Some of those mergers were huge (Purdue acquiring Kaplan, Strayer acquiring Capella, National University System acquiring Northcentral). In addition, 14 nonprofit universities closed and five merged while 36 public institutions merged or consolidated. This merger and acquisition activity makes perfect sense given that higher education is in the maturing to declining portions of the life cycle.
Transfer Students and Reducing Costs. We’ve also seen community colleges assume more of a role in reducing the costs of higher ed, as well as in degree completion.
State (and other) colleges are beginning to put more emphasis on attracting transfer students. For example, Gov. Jerry Brown (D-Cal) is withholding $50 million from the University of California system until the system increases the acceptance and enrollment of transfer students while also meeting auditor requests to fix accounting issues. Brown’s decision was based on his commitment to a 2-to-1 ratio of freshmen to transfer students. However, several system’s institutions reported a ratio closer to 4-to-1.
Privates are also emphasizing outreach to transfer students due to the costs to both the institution and the students. Some privates are renting space at community college, thus giving students an easily available and direct track to a four-year degree. This makes a lot of sense, especially given the current high cost of private education (e.g., one California private is charging $55,000 a year for undergraduate programs, amounts we see at Ivy League schools). Thus, students find more affordable options by first attending a community college and then transferring to a public or private institution. This approach reduces the amount of student loans needed to complete a degree.
This type of approach is especially important with students who start college without a clear idea of what they want to study or their pathway to earning their degree, and end up dropping out due to cost. This accounts for why we are seeing so many post-traditional students in higher education; they initially started college without understanding what they wanted to study and now are returning to complete their degrees. Having this community college low-cost option that transfers coursework to four-year colleges and university makes good sense because it minimizes the student’s time to completion and cost.
College Closures and Rejuvenation. We continue to see higher education closures. While higher education leaders may point to the resurrection of Sweet Briar, those types of reemergence are few and far between.
Sweet Briar was an interesting case. Although the school had a substantial endowment (unlike most schools), those funds were legally earmarked for specific things and could not be used for operating funds. This is an interesting (and possibly unique) situation and will make a great case study for future grad students who want to study the process of bringing a school back from the dead.
Department of Education and Washington
The second theme for 2018 is all about Washington, D.C. Frankly, there are so many things, it’s hard to know where to start.
ACICS. ACICS is (in)famous for its accreditation of Corinthian and ITT, both of which folded, leaving 100s of 1000s of students stranded. Not surprisingly, ACICS was decertified by the Obama administration in 2016. At its height, ACICS accredited 200+ universities, but in the time between 2016 (when ACICS lost its accreditation) and now, most of the institutions accredited by ACICS have moved to other accrediting bodies.
However, the Trump Administration has other ideas on accreditation. Secretary of Education Betsy DeVos reinstated ACICS’ accreditation authority this year in a process that had many missteps. However, the most egregious was that the department’s senior official who made the case for ACICS’ reinstatement is a former lobbyist who worked with for-profit universities, a clear conflict of interest.
In her justification for reinstatement, the former lobbyist, Diane Auer Jones, said the Department of Education determined that ACICS was in compliance on 19 of the 21 applicable criteria. Equally as important, she stated that ACICS was likely in compliance with these criteria when President Obama’s Education Secretary John King, Jr. removed ACICS’ accreditation certification. According to the Education Department, ACICS is still “out of compliance” with federal standards in the remaining two areas but has been given another 12 months to come back into compliance.
The carnage from ACICS’ original accreditation still continues. Just this month, the Education Corporation of America (ECA), which was once accredited by ACICS and oversaw Virginia College, shuttered its doors, leaving 20,000 students up a creek without a paddle. In fairness to ACICS, they removed Virginia College’s accreditation, but only after the college attempted to get accreditation from another accreditor and failed miserably.
Gainful Employment and Borrower Defense. Changes in gainful employment and borrower defense also emerged in 2018.
In relation to the former, the Education Department missed the filing deadline for the gainful employment rule so these changes cannot come into play until mid-2020. Furthermore, the Social Security Administration — which provides the earnings data needed to calculate gainful employment — decided not to renew the information-sharing agreement that expired in May. Because of this, the Education Department will not have the data they need to calculate earnings data. So, in essence, gainful employment is dead for now.
Borrower defense is another area on which Washington gets raspberries. Regulations put in place by the Obama administration protected students whose colleges (e.g., Corinthian and ITT) closed, leaving them with degrees that were considered worthless. However, the Ed Department under Secretary DeVos rejected the vast majority of the claims. It took Congressional pressure to turn the process around, and although the process has gotten better, it still not where it needs to be. I think we can expect to see some new regulations coming out of Washington over the next year in this area.
Title IX and Sexual Abuse. The Education Department put out their draft ruling on new Title IX guidance in November and, overall, colleges are not happy. The revisions make major changes to the standard that, in many cases, are as clear as mud and/or will discourage victims from coming forward.
New Title IX Guidance. The first of the changes narrows the definition of sexual assault. The old standard was “unwelcome conduct of a sexual nature,” and the new standard is “unwelcome sexual conduct; or unwelcome conduct on the basis of sex that is so severe, pervasive, and objectively offensive that it effectively denies a person equal access to the recipient’s education program or activity.” The Ed Department justified this by saying it is in line with the Supreme Court guidance, but survivors’ advocates have come out forcefully and said that this new definition will put survivors’ education at risk.
The second major change is the standard by which sexual assault is adjudicated. Previously, the standard was that the assault was “likely to have happened.” However, the new guidance provides for a higher standard, i.e., “preponderance of evidence,” the same standard that is used in civil suits. This is lower than “beyond a reasonable doubt,” the standard which is used in criminal trials, but it still creates a higher burden on the victim to prove that the incident happened.
In its guidance, the Ed Dept stated that institutions can use either standard, but this potentially opens the institution up to lawsuits, e.g., institutions may face a lawsuit by the accused if they use the lower standard or the victim if the institution uses the higher standard.
The third major change has to do with holding universities responsible. Under the previous guidance, universities and colleges could be held responsible if they “knew about or reasonably should have known” about an incident. However, under the new guidelines, the institution must have “actual knowledge” of the incident in order to be held responsible; this requires the victim to make a formal complaint through official channels. Telling a professor or resident adviser isn’t sufficient – it must be reported to someone who can do something about it, such as a school official who is involved in enforcement.
Additionally, schools can only be held responsible for incidents that happen on school property or at school-sponsored events, not at private, off-campus residences. Thus, if a fraternity house is located off-campus and an assault takes place there (as was the allegation in the Judge Kavanaugh – Christine Blasey Ford incident), the institution cannot be held liable, even if they have knowledge that these events have taken place in the past.
Lastly, the accused will have the chance to cross-examine the victim under the new guidance, and many feel this will discourage victims from coming forward and reporting incidents.
Whenever you get into sexual assault or similar types of accusations, the resolution process must be more than he said/she said. However, that is what it could come down to because of the cross-examination requirement. Many victims’ advocates and lawyers are concerned that we will revert to a previous time when a woman who accused a man of sexual assault would ultimately be the one on trial because of her dress or behaviors or whatever.
MSU and Sexual Assault / Harassment in Education. A subset of this area brings to light the #MeToo movement in higher ed, especially in the aftermath of the Supreme Court hearings with Justice Kavanaugh. It took a tremendous amount of courage for Christine Blasey Ford to bring up what happened to her after so many years and in such a public venue. Sadly, look at what ultimately happened – the good ol’ boys network derailed the investigation before it was able to go through to a conclusion.
We also are seeing the fallout from the Michigan State sexual assault case. MSU’s former president has been brought up on felony charges for lying to the police, and the institution’s undergraduate applications have fallen by almost 8.5 percent in the wake of the scandal. Not only is this situation tarnishing MSU’s reputation, it is hitting them in the pocketbook. And maybe that’s what has to happen for people to change.
Higher Ed Governance Failures and the Role of the Board
We are seeing a failure in the governance process in many higher ed schools. Three cases fall into this area at the following institutions: Penn State, Michigan State, and the University of Maryland. We must ask ourselves in all these situations, “Where were the Board of Directors/Regents/Trustees?”
In the Penn State scandal, some Regents were brought up on criminal charges. We haven’t seen that yet in the Michigan State scandal, but I believe we will. MSU’s interim president has not done a great job in reaching out to the victims – it has been pretty nasty in many respects, but one must ask where are their Board of Regents? Same with the University of Maryland football coach after the player died – the board directed the university president to retain the football coach, but the president refused (rightly so).
From all appearances, the majority of boards and Regents do not understand what their role is.
Regents at state schools generally are political appointees, and it is considered to be a feather in one’s cap to be appointed to a Board of Regents/Trustees for a state university. However, just because one is a political appointee to a board doesn’t remove their fiduciary duties as a board member. More training needs to be done to ensure Regents understand their duties as well as how governance has changed over the years.
This also goes for boards of private universities. The vast majority of these types of higher ed boards are made up of “friends of the president” or other large donors. This is especially egregious with many Christian colleges, whose boards are made up of religious affiliates or ecumenical personnel who have no experience sitting on the board of a multimillion-dollar organization and/or an understanding of higher ed.
Fallout from the Harvard Admissions Lawsuit
The Harvard lawsuit, in which a group of Asian Americans sued the university over its admissions policies, ultimately will impact a majority of higher ed institutions. Even though Harvard says that they are following the guidance from the Supreme Court, they get sued. Same with UCLA – they have been sued as well. Although a ruling is still forthcoming on the Harvard case, I think there will be ripple effects and we haven’t seen the end of this.
Predictions for 2019
While much of the crystal ball’s foretelling for 2019 is cloudy, there are some clear indications of what lies in the future.
An Acceleration of Consolidation and Closures
First, we will see an acceleration of consolidations and closures in higher ed. For example, just in the last couple weeks, Moody’s Investors Service and Fitch ratings both have declared a negative outlook for the higher ed sector for 2019. This is huge.
We have a marketplace that is saturated. In these types of markets, smarter institutions focus on economies of scale (mergers), as well as positioning and differentiation (why is my university and/or degree different)? Carnegie Mellon and MIT have done this very well. This is one way to combat saturation, but not a lot of schools understand marketing positioning and differentiation.
Consolidation (mergers) occurs for one of three reasons.
- Acquisition of a new technology;
- Market expansion and/or growth; or
- Eliminate competition and/or create market efficiencies.
Consolidation will continue to accelerate. One need not look any further than what is happening with Pennsylvania’s 21 state universities. These institutions are vying for a smaller number of students graduating from high school, so are closing multiple campuses and realigning programs to eliminate duplication. This impacts the towns in which they are located since they are the major employers, and any change they make in consolidating degrees and/or reorganizing the system affects jobs, creating a ripple effect.
Closures will also increase, but we think there will be far more consolidation rather than outright closings. The trend will continue toward the mega universities — the merger of Strayer and Capella or Purdue and Kaplan — or more shared services between universities. We will start to see far more of this with the privates as they struggle to survive.
The biggest challenge is going to be for the smaller universities that don’t have strong endowments. What are they going to do? Most of these universities rely solely on tuition and/or state and federal funding to keep their doors open. They have limited research dollars coming in as compared to the Tier 1/R1 institutions. Right now, the closure rate is below 1%, but it will accelerate.
The one wildcard in this is a potential recession, which could result in people going back to school to gain new skills and earn a different degree. Maybe that will help universities.
The other trend that we have not talked about is how many people are disparaging higher ed, saying a college degree is not worth the money that you pay for it. This is going to hurt higher ed and its ability to bring in more students. This too may lead to more mergers and closures.
Changing the Higher Ed Business Model
The business model for higher ed must change. We don’t see rapid transformational change in the next year. However, there will be many changes in the next five years that people will realize was part of a changing higher ed landscape as they look in the rearview mirror.
Neg Reg 2019 and its Implications. The upcoming negotiated rulemaking process by the Ed Department focusing on accreditation and innovation could be very impactful, especially with its focus on credit hours and online education.
Credit Hours. Moving away from credit hours as a measure of learning could be one of those breakthrough transformations that could spur the changing of higher ed’s business model. Once the Ed Department makes these changes, we will begin to see more institutions using CBE and giving credit for previous learning and life experiences.
If you take a look at the three colleges that have done very well using these models (Western Governors who is the poster child for CBE, Capella, and Southern New Hampshire), they have seen tremendous growth while reducing the cost to students. This is a win-win and I think we’ll see more of this.
Online Education. Although online education is an area that is beginning to get saturated because of for-profits, we will see far more privates and state schools moving into this area, as well as continued consolidations with online providers (OPMs), such as Learning House. Because so many OPMs exist, some of the smaller colleges will be able to expand into this area at a reasonably low-cost investment, and more for-profits will be acquisition targets.
We will start seeing institutions embrace the opportunity to share online courses. This too will require changes from the Neg Reg process with respect to accreditation, but once these types of changes come out, we will start seeing sharing of courses and services as we have not seen in the education industry.
Negotiations with Faculty. We will begin to see higher ed leaders toughen their stance with faculty. Market saturation with institutions and programs has resulted in price discounting, sometimes at a rate of more than 60%. This is not sustainable.
According to Inside Higher Ed’s 2018 Annual Survey of Chief Business Officers (CFOs), 48% of respondents strongly agree or agree that their college tuition discount rate is unsustainable. This is up from 34% in 2017. Furthermore, two-thirds of CFOs at the privates say the same thing. This is huge.
Institutions must start cutting programs that are not “profitable,” but in doing this, they must deal with faculty. Unfortunately, faculty look at programmatic cuts through the lens of job security instead of what graduates need to be attractive in the job market. When faculty start to do this, there will be security and jobs for nearly all.
Faculty Promotion and Tenure. We will start seeing changes in how faculty are promoted and assessed. Currently, faculty are promoted and assessed by their publication records. Going forward, we’ll see less reliance on citations and publications and more on teaching.
Additionally, faculty hiring and tenure will change. We will start seeing a review of tenured faculty every 5 to 10 years, instead of having a job for life. I don’t see tenure going away anytime soon – it is too institutionalized – but employment for life will become a thing of the past in five years.
Knowing Who Your Customers Are and What They Need. Many higher ed leaders have locked themselves in the ivory tower for too long, and it’s time they understood what students need to be taught and what industry needs to be successful.
Texas A&M is another really good example of this. They talk with stakeholder groups on a regular basis, including just completing a values survey. The institutional leaders currently are engaging in what they call Aggie 2030 to understand the future of higher education as a whole and where Texas A&M is going. This is the type of strategic planning that universities need to be doing with their alumni, stakeholders and the people who hire their graduates.
Student Enrollment and Impact on Marketing Research and Spending. Another trend involves students making enrollment decisions based on their own proximity to a college. This is important for universities to realize and understand. Unless you are a R1 or major university, your students are more than likely going to come from a limited geographical pool.
This has implications as to how and where you spend marketing dollars, but unfortunately, many institutions are wasting marketing dollars. As much as institutions would like to draw from a larger geographical area, institutions must put a greater emphasis on doing market research to understand where their students live and then spend the marketing dollars to get more students from that area. As the saying goes, fish where the fish are, because it’s a waste of money otherwise.
Harvard Lawsuit and Admissions. The Harvard lawsuit has the potential going all the way to the Supreme Court, and who knows how that will be decided with the current makeup of the Court.
Cost Containment. We also will start to see far more cost containment as institutions no longer have the same level of disposable income. I think we will also start seeing the salaries of chief executives start to come down, especially as transparency hits the budgeting process.
Higher Ed Funding. Cities and states will begin to fund college for students. The City of Chicago recently announced a new program where students will receive scholarships to cover costs of associate degrees that will be set up through DePaul University. And in another example, Starbucks is funding college for their people. We will start to see more of this as an employee benefit, but also as a way for businesses to invest in and retain quality employees.
International Students. International students attending U.S. universities will continue to be an issue so long as the Trump administration continues to mess with immigration. This will continue to impact U.S. institutions as international students pay full tuition and universities use those funds to keep their bottom lines in the green.
This is especially true with Chinese students. Because of trade wars and increased emphasis on background checks, we will see fewer Chinese students enrolling in the nation’s higher education institutions.
HBCUs. I think the other one to look at HBCUs. I think there could be some really good things to come out of the HBCUs over the next few years. I’ve no idea what it is, but the crystal ball says to keep an eye on them.
So long as the Trump administration is in office, we will continue to see turbulence coming out of the Department of Education and the rest of the government. One thing is for sure: it will not be boring!
Merry Christmas / happy Hanukkah, and wishing all the very best for 2019.