The economics of higher education are only getting worse

Higher education in the US has been heading for a shakeout for a long time, and now it has come. Universities are facing a big, long-lasting funding crunch as demand for undergraduate education looks unlikely to return to pre-pandemic levels anytime soon. That means schools need to find new ways to pay their bills or risk going under.

At the beginning of the pandemic, there were many predictions of economic doom that happily failed to materialize, thanks in large part to ambitious government relief efforts. Unfortunately, the devastation of the higher education sector seems to be one prophecy that is coming true.

In 2020, employment in the higher-education sector fell by 650,000 — a decline of more than 13%. Nor is relief on the horizon; spring numbers show enrollment is not yet bouncing back from the declines suffered during the pandemic. Undergrad numbers are down 4.9% from last year. All sectors have been affected, but public 2-year colleges have been hit hardest:

And this merely exacerbates a trend of flat or declining enrollment that was firmly in place years before the pandemic. In the last five years, more than 50 colleges have closed down or merged. Probably the most high-profile institution to succumb recently was Mills College in California.

Why is this happening? It has to do with the history of how higher education is funded. Various programs of government-guaranteed and subsidized student loans over the past half century encouraged students to go into debt as a way to pay for college. As a 2015 paper by economists David O. Lucca, Taylor Nadauld and Karen Shen found, much of this increased student lending simply allowed colleges to raise tuition. The net effect was more expensive college and a much higher debt burden for graduates.

Decades of steadily increasing student debt was a process that couldn't go on forever. By now everyone has heard or witnessed the horror stories of graduates trapped in debt. For a long time, the lure of a college degree was enough to keep people borrowing and ponying up ever more cash, but they may have finally hit their limit. The earnings premium for college graduates has been constant for years, meaning that the benefits of college simply didn't keep up with the costs.

On top of that, the Great Recession then dealt a huge blow to college funding. Cash-strapped states made huge cuts to higher education spending that were only partially reversed when the recession ended. The result was that colleges were more dependent than ever on tuition dollars to stay afloat. They made up for the loss of public funds in part by letting in many more high-paying international students. But international enrollment peaked in 2016 and has fallen since then; Trump's xenophobia and attempts to gum up the visa system no doubt played a part.

So what are colleges and universities going to do now? A federal bailout as part of President Joe Biden's pandemic relief bill helped stanch the bleeding for some schools, but it's pretty clear that won't turn into a permanent federal takeover of higher-education funding. It's possible that Biden will be able to put some money toward making community colleges free, and perhaps bolster federal funding for lower-ranked state schools like Cal State and City University of New York that do the heavy lifting in terms of educating the broad middle class.

A Biden presidency could also restore the flow of high-paying international students, but I'm not overly optimistic; a great many tend to come from China, and US tensions with that country combined with widespread suspicions of espionage have led to a backlash against Chinese students on US campuses.

That means colleges are going to have to do some combination of cutting their spending and finding new funding sources.

What kind of spending can colleges cut? Administrative costs seem like the obvious target:

That probably means less-fancy dorms and fewer student life activities. That should be fine; somehow, young people will find ways to live rich and exciting lives without universities treating them like country club members.

Unfortunately, it also probably means that both teaching and research will suffer cuts as well. On the teaching side, expect the trend toward classes being taught by adjuncts, nontenured lecturers and grad students to accelerate. That's not going to make aspiring academics happy, but the quality of instruction probably won't be hurt that much.

Decreased research funding is a bigger problem. Though most researchers with expensive labs secure grants, universities pay their salaries and pay for the construction of various facilities that are used in research. With tuition money drying up, there will be less of that to go around. This threatens the economic competitiveness of the US as a whole, so hopefully the federal government can step in with increased research funding — at universities, and also at national labs.

As for new funding sources, philanthropic donations are one possibility. Billionaire MacKenzie Scott recently announced that she's giving $2.73 billion to community and regional colleges. Hopefully this becomes a trend; it would be nice to see endowment money flow to these institutions instead of to the Ivy League.

In any case, it seems like the shakeout in the higher education sector can no longer be avoided. For too long, universities enjoyed a world where they could keep charging students more and more, and students would grit their teeth and pay up. That era is over.

Disclaimer: This article first appeared on Bloomberg.com, and is published by special syndication