While we tend to picture higher education in the U.S. as dominated by public flagship campuses with tens of thousands of students, or small private colleges with thousands of students, in reality tiny colleges the size of many high schools are much more common in the market.
About 40 percent of American colleges enroll 1,000 or fewer students. Another 40 percent enroll fewer than 5,000 students. Since 2010, the smallest institutions, below 1,000 students, have been shedding the most enrollment, a decline of 5 percent compared to the institutions with more than 10,000 students, which have grown slightly, on average, according to the U.S. Department of Education.
The problem now is that there are too many colleges chasing too few students. The number of high school graduates in the United States reached a peak in 2011. After that, all regions of the country experienced a decline in the number of 18-year-olds, according to projections from the Western Interstate Commission for Higher Education.
While states in the South and West have already begun to experience an uptick in their share of high school graduates, populations in the Northeast and the Midwest continue to age. The Northeast’s graduating Class of 2028 is projected to be 10 percent smaller than in 2009, some 66,000 fewer graduates. The Midwest, which produces more graduates than the Northeast in any given year, will face an even steeper decline.
And guess what? The Northeast and Midwest have a larger concentration of colleges than the South and West given the historical migration patterns in the United States. Efforts by those colleges to expand their reach have largely failed, given that students typically enroll in colleges within 250 miles of their hometown.
In a report last year, Moody’s Investors Services said that college closures average about five a year, and predicted that figure would triple in coming years. A forthcoming analysis by Parthenon-EY, a consulting firm in Boston, has found that some 800 colleges face critical challenges because of their inefficiencies or small size.
At these colleges, there is zero margin for error. A first-year class that comes in even one or two students short of estimates wreaks havoc on the budget. About two out of 10 colleges are running annual budget deficits. Even as they raise their sticker price each year and look more unaffordable to families, they actually generate less revenue to invest in new academic programs, buildings, and faculty because tuition dollars account for nearly 60 percent of the revenue at colleges with enrollments of less than 5,000 students.
Even with a discounted price, tuition remains out of reach for families forcing students to take on high levels of debt, and too many of these colleges suffer from low graduation rates or poor placement rates into jobs paying wages that allow students to pay off their loans.
In most rational markets by now, these small players with high prices and poor outcomes would be driven out of business by more-efficient and less-expensive options. But colleges rarely go under, because they are heavily subsidized and regulated by the government. They receive hundreds of billions of dollars in direct subsidies (and indirect tax breaks as non-profits) and the only way to get access to those funds is to be an accredited institution, under a system controlled by the colleges themselves.
State and federal support for higher education is unlikely to dramatically increase in coming years. What’s more, family income is flat and declining, particularly for the middle class. In this era, unless a college is sitting on billions of dollars in its endowment, its size matters to its ultimate financial success. This is a departure from the past, when the philosophy was always that an increase in size comes at the expense of academic quality and prestige.
We’re likely to see more colleges close or merge, but in the process the financial footing of higher education across the country is likely to become stronger as students and dollars flow to institutions better able to get them to graduation and find success in the job market.