American Colleges and Universities Are Doomed

“I'd rather entrust the government of the United States to the first 400 people listed in the Boston telephone directory than to the faculty of Harvard University.” – William F. Buckley, Jr.

It pains me to write this piece. In so many ways, the American post-secondary education system is the envy of the world. The best and brightest from all over the globe compete to be a part of it. The graduate school system in particular produces wave after wave of newly minted scientists, doctors, engineers, artists and thought leaders who make truly substantial contributions to societal progress.

Alas, these positive attributes aren’t nearly enough to outweigh the rot growing from within these institutions. Nor will they shield them against the relentless assault of market forces. The American post-secondary education system as it currently exists is doomed to collapse – probably sooner than you think.

For a few years of my career, I was mainly focused on mergers and acquisitions (M&A). I scouted for targets, evaluated opportunities, integrated acquisitions, and so on. It was fascinating work. Over time, I developed a simple process for evaluating target companies that involved four basic questions. One could usually complete this exercise quickly, allowing for deeper valuation dives on only the best candidates. These four questions were:

1. How much value is created for customers?

2. What drives customer purchasing decisions?

3. What is the company’s current and future cost structure?

4. What is the competitive landscape?

The first of these questions is far and away the most important and it is worded very carefully. When I analyze a company, I’m not actually all that interested in current profitability. It is nice to see, to be sure, but current profitability is an equation that includes pricing strategies, procurement effectiveness, prior capital allocation decisions, and so on. A business begins and ends with how much value it creates for its customers – almost everything else is management discretion which can be optimized in the hands of the right buyer.

Can you pay expensive consultants to create hundreds of slides that give the appearance of deep analysis and certainty when presenting M&A opportunities to board members? Sure. Will it result in better decisions than spending a day thinking about these four questions instead? Not in my experience. Let’s analyze a typical American university through the lens of these questions. As you can probably predict by the title of this piece, the analysis is a sobering one. We’ll consider each question in order.

Question 1 – How much value is created for customers?

For most students, obtaining post-secondary education at an American college or university destroys economic value. Notice I did not say completing post-secondary education, because a substantial portion of students who enroll do not complete a degree. The numbers are quite staggering – see the data from educationdata.org below – making dropouts a substantial driver of revenue for these institutions. Approximately 56% of students who enroll in 4-year colleges don’t make it to graduation. This is the dirty little secret our current education power structure would rather you didn’t know.

These churn rates are even more incredible when you consider the binary nature of the benefits students are seeking. A huge number of jobs in our society require a college degree to even apply. For the students who don’t complete their degree, partial college credit is essentially worthless (there is some small option value because they can more rapidly complete a degree in the future, but this is modest in aggregate since most don’t).

Even for those students who do complete a degree, many would have been far better off pursuing an alternative education strategy. The research on this point is a little scattered and often biased, since it is usually written by educators with an agenda, but I would say with high confidence that the fully loaded net present value of a traditional college degree for the median student that graduates is negative. There are some degrees at some schools that are incredibly lucrative, but most graduates would have been better off obtaining alternative and job-specific educational training at much lower cost. The opportunity cost of 4-6 years of lost wages is not inconsequential.

Question 2 – What drives customer purchasing decisions?

Two things: artificially induced societal pressure and easy access to financing. The first driver is cultural and a full treatment of how it occurs and why it should change is beyond the scope of this piece. I’m more interested in the second, since it is a force that is coming to a head soon. Simply put, the customer financing model is unsustainable.

Most students who show up on campus wouldn’t be there without easy access to financing. The student loan industry is among the more nefarious and cynical in our society. For example, the lenders have lobbied to make it incredibly difficult to discharge student loans during personal bankruptcy proceedings while simultaneously working to make it easier for students to borrow. The calls by progressive politicians for massive student loan forgiveness are, in many ways, understandable.

There’s only one problem – the need to forgive these loans is proof they never should have been drawn in the first place. Mass loan forgiveness would also lead to a rapid (and likely complete) nationalization of the entire post-secondary education system. If the federal government is going to pay the bills of past customers, don’t you think they’ll also be forced by these same political forces to pay for future customers as well? Of course. Time and time again, one-time government injections morph into permanent entitlements.

Question 3 – What are the current and future cost structures?

Here, the picture is once again bleak. The ratio of administrators to educators continues to grow at most institutions, as does their mission creep. Despite skyrocketing tuition prices – which have been increasing at roughly twice the overall rate of inflation – most colleges and universities are in serious financial distress. As a rule, if revenue is growing rapidly but not finding its way to the bottom line, costs must be out of control. At most colleges and universities, they are.

This is bad enough, but it gets worse when you consider structural aspects – especially the tenure system. When I was working in M&A, we had one firm rule: thou shalt not buy a company with substantial operations in France. Nothing against the French per se, but France has some of the most stringent labor laws in the world, leaving almost no degrees of freedom for management to implement cost control measures with agility. The tenure system is a relic that dooms these colleges and universities to endless salary, benefit and pension costs regardless of the quality or usefulness of the professor.

Question 4 – What is the competitive landscape?

Finally, the competitive landscape for colleges and universities is ominous. With technology, the cost of high-quality instruction outside of the campus setting is rapidly approaching zero. Entire university course curriculums are freely available to be accessed by the motivated student online. YouTube has millions of hours of enormously insightful instructional videos on every topic imaginable. Tech company powerhouses are racing to disrupt the industry, recognizing the need to create a better trained and more adaptable workforce at lower cost. Major corporations, fed up with having to retrain new graduates unprepared for the work they are hired to do, are creating their own internal curriculums and tying the completion of specific course modules to internal career progression. These trends are only accelerating with the advent of remote work. As people become comfortable working from home, the leap to skipping the campus experience altogether is a small one.

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What will become of American colleges and universities? I don’t know. But one can’t destroy value indefinitely, especially with so many compelling alternatives. The ivory tower is headed for a painful restructuring. That which cannot go on forever usually doesn’t.

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