The US higher education system has earned formal accolades and received recognition worldwide. At the moment, as per the Times Higher Education World University Rankings, eight out of ten top schools around the globe are located in the United States. Yet, despite the prestige that has long been the defining characteristic of American education, the system’s financial health raises reasonable concerns. Throughout history, American schools relied on traditional economic models for maintaining financial sustainability. Hence, private institutions mainly count on stable enrollment rates, while public institutions are supported by state funding in addition to tuition revenue. However, external factors, as well as the changing landscape of the US education market, have given rise to a host of economic issues. This paper sheds light on said issues and gives recommendations regarding future development.
Critical Issues Facing Higher Education Institutions
Adequate state funding is a prerequisite for college financial health, and yet, in recent years, state funding figures have been on a concerning decline. Klein (2015) reports that in the United States, higher education accounts for one-tenth of total state spending, which makes it the third most significant component of total state expenditures. Yet, compared to 2000, the percentage is down from 12% (Klein, 2015). The decline becomes even more apparent if one takes a glance at per-student expenditures. According to Klein (2015), in the early 2010s, they had been the lowest in the last 25 years.
The US government might be using education as the “balance wheel in state finance” (Klein, 2015, p. 5). When state financial health is strong, universities receive larger funding, while the opposite is also true. The possible explanation could be that, unlike K-12, higher education is a discretionary subject of funding, which means that neither the US Constitution nor any court decision obliges the US government to support it. Further, as pointed out by Klein (2015), since its inception, Medicaid has been the largest component of state expenditures. While the new healthcare policy provided significant benefits to the population and decreased the share of uninsured Americans, it took priority over higher education. Another determinant of higher education funding is tax cuts that have been especially prominent since 2012. These factors, together with legislative professionalism and political leadership, define higher education state funding.
Barr and McClellan (2018) write that some public institutions ended up so deprived of state funding that they even made changes to their public rhetoric. No longer were they calling themselves state “supported,” preferring state “related” instead. However, public institutions are not the sole victims of reductions in state funding. Barr and McClellan (2018) list both direct and indirect ways in which private institutions are disadvantaged by the lack of state financial aid grants. In particular, as the funding amount remains static, it is the students who are forced to shoulder the burden of financial costs.
Cuts in higher education state funding are also often justified by the fact that universities have other potential sources of financial aid. Hence, it is not at all surprising that in recent years, universities have been steadily raising tuition fees in an attempt to substitute state aid. Wolniak et al. (2018) report that out of 2,800 postsecondary four-year US institutions, 700 are hundred, and together, they cater to two-thirds of all students. Because of the decentralization of the higher education system, there are no common guidelines for setting tuition fees or for sharing accurate information about them (Wolniak et al., 2018). On average, tuition fees increase by 8% yearly, which means that the cost of college doubles every nine years (Wolniak, George & Nelson, 2018). To sum up, higher education in the US has become more inaccessible than ever due to uncontrolled tuition policies.
One of the consequences of rising tuition fees is declining enrollment rates and falling international student numbers. Today, there is evidence that tuition fees impact students’ willingness to enroll in college programs. Hemelt and Marcotte (2016) found that in the last two decades, in states where tuition fees surged more sharply, enrollment rates have suffered the most. It comes as no surprise that students from low socioeconomic backgrounds suffer the most. For them, changes in tuition costs demonstrate higher price elasticity (Hemelt & Marcotte, 2016). Declining enrollment rates mean an unstable source of funding in the short term and a decrease in the perceived value of higher education on the whole in the long run.
Not only are US schools losing American students, but they are also experiencing a drop in the number of international students. Surely, rising tuition fees are one factor, but since 2019, it has been the COVID-19 pandemic that has impacted international enrollment the most. Burki (2020) writes that the US higher education sector’s revenues are 33% lower compared to 2017 ($30 billion vs. $46 billion). Moreover, since the beginning of the pandemic, the number of international students has dropped by 46% (Burki, 2020). These trends are unfortunate because international students are typically significant drivers of college revenues due to extra fees that they are paying compared to local students. The COVID-19 pandemic outcomes remain largely uncertain, which means that college financial health will be at risk for an indefinite amount of time.
Approaches Toward Resolution
College financial health is a longstanding problem that requires complex solutions. It seems that with the advent of technology, one possible prospect that will revive US postsecondary schools is online education. Online courses have been around for a while, but it was the pandemic that actually pushed US schools to focus on holding classes online. According to statistics, currently, at least one-third of college students are taking some courses online (Broadbent & Poon, 2015). Out of 2,800 US postsecondary schools, 2,500 offer online programs with enrollment rates around 50% for top schools (Broadbent & Poon, 2015). It seems that in today’s reality, online learning opportunities are not just preferred but actually necessary for the continuity of US higher education.
The question arises as to what is required to make universal online higher education a reality. Some evidence suggests that online learning programs, as they are right now, may be less effective than in-person programs, but their disadvantages are not insurmountable (Broadbent & Poon, 2015). Moreover, IT needs to make up only 5% of college budgets, which makes digitization especially challenging. Indeed, education is one of the least digitized sectors where technologies do not have easy adoption due to facing multiple bureaucratic barriers. Therefore, a transition to online education goes beyond writing programs for electronic platforms and making amendments to the curriculum. Besides, it is especially important to make online courses available to international students who might have difficulties entering the US and attending in-person classes for an indefinite amount of time now.
Apart from changing the modes of learning, colleges can respond to the looming financial crisis through structural change. It is not uncommon for postsecondary schools with little prestige and recognition attached to their brand name and modest endowments to merge with other schools. Cai et al. (2016) claim that higher education needs to change its attitude to mergers and acquisitions. Previously, these decisions were seen as desperate moves and the last resort. However, today, a merger or an acquisition can be part of a long-term strategy (Cai et al., 2016). They fill in gaps from which either of the schools suffers and can cater to student needs in a more comprehensive way. In particular, in the context of this section, it may mean consolidating efforts, experience, and technological resources to provide better online education.
The US higher education system is renowned for its many advantages around the world but significantly flawed. One of the main reasons for concern is college financial health. As of now, US schools are facing a number of economic challenges. State funding has been declining for a while now, which deprives many facilities of life support. When turning to other sources of funding, many schools have no other choice than to raise their tuition fees. Higher college costs translate into lower enrollment rates because higher education becomes largely inaccessible to general populations. The looming crisis requires a complex response that needs to include a range of measures. Such measures may be a faster transition to online education with better technological support. Besides, mergers and acquisitions may be viewed from a different angle and seen in a new light.
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Broadbent, J., & Poon, W. L. (2015). Self-regulated learning strategies & academic achievement in online higher education learning environments: A systematic review. The Internet and Higher Education, 27, 1-13.
Burki, T. K. (2020). COVID-19: consequences for higher education. The Lancet Oncology, 21(6), 758.
Cai, Y., Pinheiro, R., Geschwind, L., & Aarrevaara, T. (2016). Towards a novel conceptual framework for understanding mergers in higher education. European Journal of Higher Education, 6(1), 7-24.
Hemelt, S. W., & Marcotte, D. E. (2016). The changing landscape of tuition and enrollment in American public higher education. RSF: The Russell Sage Foundation Journal of the Social Sciences, 2(1), 42-68.
Klein, M. W. (2015). Settling a US senatorial debate: Understanding declines in state higher education funding. Journal of Education Finance, 1-29.
Wolniak, G. C., George, C. E., & Nelson, G. R. (2018). The emerging differential tuition era among US public universites. In Under Pressure (pp. 191-214). Brill Sense.