Of Bursars and Bubbles

Where have all the students gone?

Photo: BHVP. Source: Wikipedia

College enrollment increased by 50% from 1990 to 2010. This is a big part of the reason that college tuition has gotten so high. While the general population in the US generally increases only 1% per year, college enrollment had been growing by about 2% per year. If demand increases without an increase in supply, prices rise. And colleges aren’t admitting a lot more kids.

There are lots of reasons why the demand for a college degree has been rising: the rise of the “information economy,” where data skills and specialized training are necessary for the simplest jobs. Research shows positive financial returns to more years in school, which encourages people to get more education. And the demographic wave of the Baby Boom’s children – the “millennial generation” – has been moving through the educational pipeline.

But everything comes to an end. College enrollment has fallen for the past five years. The millennials are getting past their prime college-age years. And the price of college has risen so much that the financial returns to a college degree are significantly less than they were 25 years ago.

Source: Department of Education

After peaking at 18.1 million in 2010, total college enrollment has fallen by over a million undergraduates, or about 6%. Enrollment at traditional four-year schools is still rising, though just barely – less than half a percent per year. But enrollment at 2-year colleges has fallen by 15%, and in for-profit schools by almost 40%. Curiously, part-time enrollment has fallen less (-3%) than full-time enrollment (-7%), suggesting that the cost of a degree – including the opportunity cost of not having a job while in school – may be having the most impact.

Demography is destiny, and schools can’t charge tuition on students that aren’t enrolled. It may be that the last 25 years of 6% annual tuition inflation – when general inflation has been 2% – is changing consumer behaviors. For years, we’ve heard that the only rational choice, when it comes to education, is to get more of it. But it’s never rational to ignore costs when making an economic calculation.

Source: Bloomberg

If there is any area of the US economy that is distorted right now it’s education. Student loan balances have been soaring, as have defaults. The number of colleges, after growing by more than 30% since 1990, is falling. Roughly one third of small, private schools generated operating deficits last year. Moody’s Investor Service expects a small, but notable, rise in closures and mergers among US colleges. There are going to be some lean years ahead.

The good news is that tough times spur innovation. There’s no need to change your business model when the cash keeps rolling in. But when your top line is shrinking, you have to think seriously about your cost structure. People usually only embrace change when it’s required. For educators, that time is now. It will be interesting to see how smart and adaptive American colleges and universities really are.

Douglas R. Tengdin, CFA

By | 2017-08-03T11:44:44+00:00 August 3rd, 2017|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. –
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