05/05/2014 11:49 am ET Updated Jul 05, 2014

Colleges Must Rethink How They Finance Their Future


Word is leaking out from the spring meetings of college and university governing boards across the country that the most expensive institutions have now crossed the $60,000 level in their just posted annual comprehensive fees.

It's an important psychological threshold.

The comprehensive fee -- generally defined as tuition, fees, room and board -- is a complex combination of factors. The cost of labor can be as much as sixty percent of the college's operating budget. Buildings, and the depreciation associated with them, add additional significant ongoing expense. And the discount applied to the largest fee -- tuition -- can be as much as 30-65 percent of the announced tuition sticker price. There are also payments on debt that can further diminish wiggle room.

In short, there is little left for discretionary spending.

What's worse most of the freshly-minted budgets are roughly pegged to 1-2 percentage points above inflation, ensuring that college costs will continue to rise even if the pace has slowed somewhat.

It is unsustainable. Consumers, including the families of college-age students, have joined with politicians and the media to protest these increases. Fifty percent of the college-going population begins at community colleges. And perhaps more telling, many of the four-year colleges and universities did not meet their internal enrollment projections, including at some very good places last year.

To offset this dismal picture is the promise that endowment returns will rebound as America's economic health improves in the coming months. The problem with this broad brush analysis is that most American colleges and universities do not have respectable endowments. They typically draw down about five percent on a rolling twelve quarter average on endowments that are actually under $20 million at most places. The generated revenue cannot solve a growing fiscal dilemma.

Colleges cannot look to their endowment as a checking account if they do not have the cash generated and in place to write the checks.

And no president -- no matter how charismatic -- can rely on fundraising skills to fuel the aspirations expressed as consensus in the strategic plan.

This leaves colleges with a financial model -old, creaking and fueled by tired assumptions -- upon which to base a future shaped by new and evolving forces not addressable by the model into which they are supposedly factored.

The current financial model assumes that colleges can continue playing a shell game that forces no boats to rise on their own. If the college cannot support the full range of its academic offerings, some tinker with new delivery systems perhaps but most pay the bills by draining money from board fees obtained in depreciating dorms, refinance the debt to achieve savings, or cap employee raises and benefits temporarily. On many college campuses, it's surprising how long "temporary" can become.

It's tactics over strategy in the end.

The fact is that even if America's economy improves, the terms and conditions that shaped the old financial model that built and sustained American colleges and universities no longer apply to the needs that must be met by a global society.

Accordingly, higher education must look at least at three issues to preserve its historic presence, regain a stronger sense of self, and adjust to technology, changing consumer preferences and increased government regulation.

These are:

  • The higher education financial model must become more entrepreneurial, creative and flexible. Should colleges and universities fuel growth on debt and spiraling tuition increases, for example, and present a budget based on books that are at best only technically balanced to meet audit requirements? Where do partnerships exist -- at all levels -- to create economies of scale while not diluting the college's reputation or brand? Is inertia and resistance to change more of a staff than a faculty problem? How can cultural change be addressed?
  • New learning models must account for evolving trends in global society. Can higher education make better use of faculty, staff, scheduling and facilities to offer a defined, identifiable program that could accommodate different degree completions, residential learning experiences, and teaching formats? Does life based on a traditional academic calendar make sense today or should learning occur continuously throughout the year?
  • Higher education must prepare new leadership to think and behave differently than from those who hired them. How can American colleges and universities offer training that prepares faculty and staff leadership for the pace and scope of change facing higher education globally? Unlike medicine or law, why is there no ongoing, sustainable continuing education program to support development of new leadership tailored to the background, training and experiences of those recruited to lead?

American colleges and universities can continue to play using their existing financial models. Some will survive, insulated by endowments, alumni support, circumstances or good luck. But for most institutions, the failure of the financial model is producing a far more serious problem than financial exigency. The weaknesses in the model are a symptom of a bigger struggle coming.

For American higher education, the new test will be to look beyond the college gates, and link education -- including the vitality of the liberal arts itself -- to a flexible and creative financing approach that anticipates rather than reacts to changing student, consumer, and global workforce demands. Higher education must retrain itself to think differently about how it can continue to lead.