Do Colleges Have a Future?

I have been a professor for almost thirty years and thus my industry is higher education. Most of that time I have been optimistic, but in the last five to ten years I have seen big parts of my sector turn sour.

We face a fundamental problem of cost and revenue, which is not going away and very likely will get worse.

Here is the single most pessimistic fact about higher ed I know:

Four-year college graduates entering the labor market earned more money in 2000 than they do today.

That is a form of backwards motion and very likely that will put those individuals on a lower wage scale for many years to come.

(An academic aside: You may see literature suggesting that the “return to college,” relative to high school, is robust. This is true. Those who do not complete colleges have seen their entrance pay fall by even more. And thus you can see how depressing is the situation. The marketing pitch of many colleges, were it to be honest, would run something like: “If you don’t pay us money for our product, your decline will be all the more precipitous.” That is hardly an inspiring motto.)

The second most pessimistic fact about higher education is this:

A lot of colleges and universities have revenue plans based on the expectation of big tuition hikes stretching into the indefinite future.

Of course those two realities cannot and will not fit together. Something has to budge, as it is not clear those tuition hikes can be justified in the market. At some point students simply will not be willing to pay more.

On top of that core problem, higher education faces some additional difficulties, some of them daunting. Consider these problems:

1. The money spent on administration is rising rapidly, without obvious corresponding productivity benefits. In general labor costs are hard to control in colleges and universities, if only because of the existence of tenure.
2. The “student debt bubble” ran in the trillions over the last fifteen years or so. Even if you are optimistic about this money being repaid, this borrowing experience is unlikely to be repeated and that will limit the demand for higher education.
3. Technologies are changing faster these days. So whatever you learn at school may become obsolete more rapidly.
4. The returns to college seem to be more highly concentrated in a smaller number of majors. Yet not everyone can become an engineer or an economist, for reasons from both the supply and demand sides of those markets.
5. Online education, for all the bumps it has experienced, is on its way. It is unlikely that online classes will replace face-to-face instruction for the majority of students. Still, is it so implausible to expect that ten to fifteen percent of current (face-to-face) credit hours will switch to the online mode, if only for reasons of cheapness, time shifting, and convenience? The net result could be a switch of revenue away from many ordinary institutions to a small number of places which specialize in online modes of presentation.
6. We are already seeing some number of stand-alone law and business schools go bankrupt, due to a lack of diversified funding sources. This trend could spread to larger institutions. As I write Yeshiva and Howard University both seem to be in trouble.
7. U.S. immigration law makes it more difficult than needed for foreigners to study in this country.

Of course many institutions of higher education do not have these problems. The value of Harvard is high and rising, as is the value of their endowment. My own institution, George Mason University, has a very good salary record for placing its four-year graduates, in part because of the economic dynamism of its home in northern Virginia.

Nonetheless I see higher education heading for a major shakeout over the next ten to fifteen years. The flexible and innovative institutions will do very well indeed, but the days are gone when a college or university can consider its continuing existence to be something which it can take for granted.

Most of all this is a sector very much in need of a wake-up call.

What should colleges and universities do? I have a few recommendations:

1. If you are not Harvard or Stanford, set modest expectations and specialize in core functions. Realize that you could cope before administrative bloat came along.
2. Prepare some significant, quality online offerings and reward the faculty who create and maintain them.
3. Don’t take your students for granted, and pay ever closer attention to the quality of the student experience.
4. Devote more resources to teach students how to teach themselves. They will need this skill very badly less than ten years down the road.

Right now most colleges and universities are not taking specific steps in these directions.

This essay originally appeared on LinkedIn as “State of Higher Education: Do Colleges Have a Future?” Reprinted with permission of the author.

Tyler Cowen is a professor of economics at George Mason University and the director of the Mercatus Center. He writes for the popular blog Marginal Revolution and is the author of Discover Your Inner Economist, The Great Stagnation, and, most recently, Average Is Over.