By: Diane Benjamin
Since Bloomington-Normal is a college town, this is an article that needs to be read. It was printed in Forbes
Will Half Of All Colleges Really Close In The Next Decade?
Harvard Business School Professor Clayton Christensen consistently turns heads in higher education by predicting that 50% of colleges and universities will close or go bankrupt in the next decade. Christensen and I made a more measured prediction with more nuance in the New York Times in 2013: “a host of struggling colleges and universities—the bottom 25 percent of every tier, we predict—will disappear or merge in the next 10 to 15 years.”
Some higher education media have, in turn, used the predictions to lampoon the idea that disruptive innovation has a role to play in creating more affordable, accessible and convenient higher education options for people who would otherwise have no educational option.
But the truth of the matter is that disruptive innovation is only part of why Christensen originally made his prediction.
The prediction arose out of an observation that the business model of traditional colleges and universities was broken.
Many colleges and universities are increasingly unable to bring in enough revenue to cover their costs. Indeed, the average tuition discount rate was a whopping 49.9% for first-time, full-time freshmen in 2017–18, according to the National Association of College and University Business Officers. That means that students are paying roughly only half of what colleges and universities say they charge. A tuition discount rate above 35% puts a college in a danger zone, particularly when it is heavily dependent on tuition. Many institutions have discount rates far above that now.
What makes this even worse is that the natural pressure in higher education is for costs to increase—thanks to the lack of economies of scale and the complexity of higher education operations.
According to Moody’s, at least 25% of private colleges are now running deficits. At public colleges, even in a good economy, expenses have outpaced revenue the past three years. And Moody’s examines only the stronger players in higher education—the 500 or so that issue debt through the public markets.
On top of that, demographics are beginning to work against traditional colleges and universities. The pool of 18-year-olds is starting to decline—with precipitous declines in certain regions forecast to begin in 2026. That’s a recipe for disaster for two reasons.
First, in the competition to attract students, colleges and universities will continue their arms race. For many, that will mean implementing copycat sustaining innovations— more faculty, more extravagant facilities, more administrative positions—that add cost. But this will further strain their business model because they are already struggling to bring in enough revenue from a mixture of tuition, government funding, endowment returns and donations. For those institutions that are largely dependent on tuition for revenue and have small endowments, they will be in big trouble.
Second, for those that can’t keep up and those that experience enrollment declines, their large fixed costs—thanks to tenured faculty, debt payments associated with financing their many buildings, and associated building-maintenance costs—place them in peril without an easy ability to adjust.
Against this turbulent backdrop ripe for colleges to fail, Christensen observed that the emergence of the first disruptive innovation in education since the printing press —online learning—could wreak even more havoc as students enroll in online learning experiences.