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Rising costs are often blamed for tuition increases. Larry Adams, a partner in CliftonLarsonAllen’s nonprofit group, agrees with this assessment, but only to a certain extent.

Navigating health reform

Higher Education in a Fiscal Balance

  • 4/17/2012

Higher Education in a Fiscal Balance

Parents of college students and college-bound children have grown accustomed to increases in education costs, as private and public universities have continued to raise tuition levels over the last several years.

Just in the past year, the College Board reported that the average tuition at four-year public schools rose 8.3 percent for in-state students, to an average of $8,244. For private schools, the average cost rose 4.5 percent, to an average of $28,500.

Rising costs are often blamed for college tuition increases. However, Larry Adams, a partner in CliftonLarsonAllen’s nonprofit group, notes that college inflation is nearly twice the general inflation rate. This leads him to believe that much more than tuition increases are needed to get higher education finances back on track.

High costs, flat revenues

Adams says he sees two problems: “Costs are rising, and at the same time, revenues are flat.” He says both are contributing to the budget shortfalls that colleges and universities have been experiencing for years.

He then points to three factors that are holding back revenues, in spite of almost annual tuition increases. One is the discounts that schools must offer in order to be competitive. In some cases, published tuition rates are discounted as much as 40 percent in order to attract the right students or the right number of students. So instead of $1,000 in tuition revenue, a school might only actually collect $600. If revenue projections don’t take these discounts into consideration, there is bound to be a shortfall.

Another factor is the aging population. Higher education institutions need to find ways to attract more students from a shrinking pool and expand offerings to nontraditional students, or face fewer students paying the same tuition dollars. Less tuition equals less revenue to cover fixed and semi-fixed costs like facilities and instructor compensation.

Finally, drops in governmental funding to state-sponsored schools and financial aid are also reducing the revenue earned by the higher education sector.

The question then becomes, “What can we do about it?” Adams says.

“How a school handles its fiscal imbalance will be unique to that institution. Strategies must take history, student population, academic culture, giving trends, government funding, academic traditions, and many other factors into consideration. Since no two colleges are alike, no single set of actions is going to be effective for everyone.”

Look at all of the options

Adams says that the primary emphasis should be on exploring all of the possible options for increasing revenue and reducing costs, and then building consensus strategies to find the money without losing the value.

  • Sources of revenue — Besides tuition, what are the institution’s other sources of revenue? Are those sources increasing or shrinking? Are they reliable? Are there new sources we haven’t tapped, such as corporate sponsorships, joint ventures, and for-profit enterprises? Would it be disastrous if one or more of those sources dried up completely?
  • Profitability of programs — Identify programs and majors that make the most efficient use of the funding they have available. Are those majors increasing demand and producing employment for students? Should program funding be reapportioned based on enrollment or outcomes? Should entire departments either be consolidated or eliminated? What is the appetite for change in your institution?
  • Using excess capacity — If a large section of a factory were left idle for long periods, management would look for ways to better utilize the space. Colleges and universities have conference centers, sports facilities, meeting rooms, and arts venues that are often inactive when they could be generating revenue. How can the college’s resources be more fully utilized? An institution may also have expertise that could generate alternate sources of revenue.
  • Use of technology — Online learning is has been offered by nonprofit and for-profit schools for years. What is the proper balance of classroom and online instruction in 2012 and beyond? Is online learning generating revenue without cannibalizing traditional student enrollment and eroding the academic culture?
  • Take a serious look at waste — “People get weary of cut, cut, cut, but very often there is no choice,” Adams says. It is somewhat easier to make choices like cutting faculty and staff, eliminating programs, and closing facilities, when they are still options and not ultimatums. Acting too late takes a greater personal and instructional toll.

Adams concludes, “Left unchecked, the gap between costs and revenues in higher education will continue to get bigger and bigger. The biggest unknown at this point is the potential for a significant decrease in student financial aid funding by the federal government, as well as the impact of health care reform once it is fully implemented in 2014. Long-term, it’s unsustainable if we want to maintain the quality of education and still keep it affordable.”

In fact, affordability is already a worry when college seniors are graduating with an average of $25,250 in student loans. Total outstanding student loan debt now exceeds credit cards.

Contact us to learn more about lowering costs and increasing revenues in higher education.