State of Higher Education Looking Up, But Still Facing Challenges

The general outlook for the higher education sector has been negative for a number of years, according to Moody’s industry reports for the past several years. Nonetheless, for selected revenue streams, the first half of 2018 experienced better growth than was expected. For the industry as a whole, this optimistic news is due in part, at least, to the following factors:

• The Fiscal Year 2018 Consolidated Appropriations Act, March’s omnibus spending bill, increased funding for the Federal Work-Study program, as well as for both Pell Grants and Supplemental Educational Opportunity Grants. The bill also increased funding to grant-making agencies like the National Science Foundation and the National Institutes of Health.
• Many investment portfolios for institutions had stronger returns, due to the favorable market conditions.
• With fiscal environments improving for many states, public university funding for FY2019 has surpassed predicted growth rates by 2.0% to 2.5%.

Although the above is good news for higher education, a comprehensive challenging business environment lies ahead for the industry sector at large. Some key realities of higher education, from a revenue perspective, are as follows:

• According to a study by Moody’s, private four-year college and university operating revenue is predicted to grow between 3.0% and 3.5% through FY2019, though smaller and medium-sized private institutions are forecasted to realize lower net tuition revenue growth than large private institutions. Expenses, meanwhile, are expected to grow at around 4.0%, which would surpass the anticipated operating revenue growth. Increases in labor, technology and other costs to competitively strengthen programs and facilities are the primary drivers.
• Nationwide, full-time equivalents (FTEs) are predicted to grow around 1.0% throughout the 2019 fiscal year, with the country’s West and South regions accounting for much of that increase. According to the Western Interstate Commission for Higher Education (WICHE), the Northeast and Midwest will continue to experience the brunt of the decreases in number of high school graduates seeking a four-year degree. In WICHE demographic research, the number of high school graduates will continue to decrease until 2025 when it will be more than 5.0% lower than 2009 levels for both regions, which leaves institutions in these areas in an especially unfavorable position.
• The market’s performance was of significant growth in fiscal years 2017 and 2018, though it’s not expected that market conditions will continue at the same level of favorability. After such a market surge, a market correction is always a possibility. Any market downturn would impact endowment income, representing a funding source on which most institutions consistently rely.

In this harsh higher education environment, it’s imperative institutions do their best to diversify revenue streams and develop metrics and other tools to measure and implement proactive strategies for today’s modernization. There’s a reason why the 2017 Inside Higher Education Survey of College and University Business Officers showed that 71 percent of chief business officers believe higher education is in the midst of a financial crisis. Maneuvering these challenging times requires careful planning, review of the existing model, and developing or modifying strategic plans to respond to an evolving market.

If your institution would like assistance in navigating your industry sector’s business conditions, we invite you to contact us and visit the Schneider Downs Educational Services Industry Group. For additional information, visit the Our Thoughts On blogsite.