Club Ed: How some colleges became $41k-a-year gyms

Schools need to focus on what makes them unique and by allocating scarce resources to those activities that can create the greatest value for the institution.

By Jeff Denneen

First published on Σεπτεμβρίου 10, 2014
min read


This article originally appeared on LinkedIn. When college tour time rolls around this fall for high schoolers and their parents, they’ll hear a lot from bubbly guides about dormitory features (heated pool with cabana!) and culinary choices in the eating halls (locally raised organic beef!). But most will learn precious little about what makes each college truly distinctive academically. All these amenities are priced around $41,000 per year, on average, at a private college. With the sticker price rising more than four times the rate of the consumer price index over the past three decades, what incremental value do schools deliver for the incremental cost? Many wealthy families do eventually pay much of the sticker price, and many middle-class and low-income families receive some financial aid. But more and more people are emerging from college with debt, yet no degree. Median education debt has risen as well. Some students are voting no with their feet, preferring alternatives such as public colleges, community colleges and online coursework. Two years ago, my friend Tom Dretler and I documented how one-third of higher education institutions were on an unsustainable financial path, with significant declines in both equity ratios (equity as a percentage of assets) and expense ratios (expenses as a percentage of revenue) between 2006-2010. We termed it the Law of More, because most institutions believed that the more they spent, built and diversified, the more they would prosper. If Good Ol’ U built a world-class training gym, then Rival U raised the ante with a designer football performance center attached to its stadium (which now is likely to have more empty seats). Since we published our report, public debate and media attention have focused on the high and rising cost of college. Yet the financial problems persist. Financial data for 2010–2012 has just been released, and our analysis finds that more than half of colleges and universities have seen their expense ratios worsen by 5 percentage points or more. Historically, US institutions passed on their financial problems to students and families, or got more support from state and federal governments. These options have run their course. The recession left many families with stagnant incomes and reduced savings. And state and federal sources can no longer make up the difference, as state appropriations declined 4% per year from 2010 to 2014. The new data shows that most universities’ balance sheets have actually held steady or improved since 2010, largely because endowments have been bolstered by the stock market’s recovery. But the expense ratio is a different story. While many schools managed to slow their cost growth, costs still rose. The average public institution saw costs grow 1.9% per year from 2010 to 2012 and the average private institution, 5.3%. While this is better than the 7% annual growth of the past, it’s not enough to offset the declines in revenue at most institutions: -.2% for the publics, -3.2% for the privates. Schools outside the elite 100 have not been able to fill their seats or raise tuitions. We have to overturn the Law of More. Institutions have to wean themselves from the “me too” mentality and carve out a unique strategic position in their respective markets. That means allocating scarce resources to those activities that can create the greatest value for the institution. Yes, it’s hard to define value in the context of higher education, or to choose one activity or field as more valuable than another. But if campus leaders don’t make these strategic decisions, much of our higher ed system will slide into mediocrity. As you visit a school, is it clear what makes it unique and better than others? If your campus tour guide has no better description of the school’s core identity than “a good liberal arts education—and regular buses to the ski slopes, dude,” that $41,000 per year might be better spent elsewhere. In this brief video, I discuss the Law of More that's threatening many universities.

This article originally appeared on LinkedIn.

When college tour time rolls around this fall for high schoolers and their parents, they’ll hear a lot from bubbly guides about dormitory features (heated pool with cabana!) and culinary choices in the eating halls (locally raised organic beef!). But most will learn precious little about what makes each college truly distinctive academically.

All these amenities are priced around $41,000 per year, on average, at a private college. With the sticker price rising more than four times the rate of the consumer price index over the past three decades, what incremental value do schools deliver for the incremental cost?

Many wealthy families do eventually pay much of the sticker price, and many middle-class and low-income families receive some financial aid. But more and more people are emerging from college with debt, yet no degree. Median education debt has risen as well. Some students are voting no with their feet, preferring alternatives such as public colleges, community colleges and online coursework.

Two years ago, my friend Tom Dretler and I documented how one-third of higher education institutions were on an unsustainable financial path, with significant declines in both equity ratios (equity as a percentage of assets) and expense ratios (expenses as a percentage of revenue) between 2006-2010. We termed it the Law of More, because most institutions believed that the more they spent, built and diversified, the more they would prosper. If Good Ol’ U built a world-class training gym, then Rival U raised the ante with a designer football performance center attached to its stadium (which now is likely to have more empty seats).

Since we published our report, public debate and media attention have focused on the high and rising cost of college. Yet the financial problems persist. Financial data for 2010–2012 has just been released, and our analysis finds that more than half of colleges and universities have seen their expense ratios worsen by 5 percentage points or more.

Historically, US institutions passed on their financial problems to students and families, or got more support from state and federal governments. These options have run their course. The recession left many families with stagnant incomes and reduced savings. And state and federal sources can no longer make up the difference, as state appropriations declined 4% per year from 2010 to 2014.

The new data shows that most universities’ balance sheets have actually held steady or improved since 2010, largely because endowments have been bolstered by the stock market’s recovery. But the expense ratio is a different story. While many schools managed to slow their cost growth, costs still rose. The average public institution saw costs grow 1.9% per year from 2010 to 2012 and the average private institution, 5.3%. While this is better than the 7% annual growth of the past, it’s not enough to offset the declines in revenue at most institutions: -.2% for the publics, -3.2% for the privates. Schools outside the elite 100 have not been able to fill their seats or raise tuitions.

We have to overturn the Law of More. Institutions have to wean themselves from the “me too” mentality and carve out a unique strategic position in their respective markets. That means allocating scarce resources to those activities that can create the greatest value for the institution. Yes, it’s hard to define value in the context of higher education, or to choose one activity or field as more valuable than another. But if campus leaders don’t make these strategic decisions, much of our higher ed system will slide into mediocrity.

As you visit a school, is it clear what makes it unique and better than others? If your campus tour guide has no better description of the school’s core identity than “a good liberal arts education—and regular buses to the ski slopes, dude,” that $41,000 per year might be better spent elsewhere.

In this brief video, I discuss the Law of More that's threatening many universities.