3 minute read 8 Dec 2020
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Who is paying for the cost of excess capacity in higher education?

By Kasia Lundy

EY-Parthenon Principal, US Higher Education, Ernst & Young LLP

Strategist. Education industry thought leader. Wife. Mother.

3 minute read 8 Dec 2020

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  • Quantifying the impact of excess capacity in higher education (pdf)

To reduce the expanding cost of higher education in the US, changes must be made to address supply and demand imbalances on both sides of the equation.

In brief

  • EY-Parthenon conducted a study in collaboration with Lumina Foundation to assess change in excess capacity in the higher education sector over time.
  • This excess capacity could cost up to $50 billion annually across the post-secondary system– roughly the amount of new student loan debt taken out each year.
  • States, systems and individual institutions can take steps to address the supply/demand imbalance and avoid negative financial consequences for students.

The US higher education sector has faced numerous operating challenges for some time. Flat enrollments, intense competition over students, increasing tuition discounting, rising costs and shifting demand preferences were among the myriad challenges US institutions have been managing. The 2020 COVID-19 pandemic accelerated and brought increased visibility to many of these challenges. Even before the onset of the pandemic, approximately one in five private institutions were facing substantial financial challenges. Up until the Great Recession in 2008, the higher education sector had experienced strong periods of enrollment growth and institution openings as it expanded capacity to meet the demand of new students each year. As the US began to recover from the Great Recession, growth turned into stagnation. Enrollments dipped. Previously built out “seats” at institutions became unfilled capacity. The cost of education on a per student basis continued to rise.

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As demographic challenges escalated and competition for students increased, institutions attempted to offer a broader set of programs and student services to attract students, increasing both academic and operational costs in the process. The cumulative impact of these trends was visible in the growing financial fragility of the higher education sector. If this fragility continues or deepens—which is likely as a result of continued demographic  but also because of the unprecedented level of uncertainty and volatility introduced by COVID-19 into the market—it could threaten the very foundation on which the higher education system in this country was created, to provide access to quality education to its people, regardless of age, income level, race, ethnicity, socioeconomic status, or gender.

Postsecondary institutional financial health is affected by a number of factors, both external and internal to an institution. External factors include macro elements such as the level of demand compared to supply (overall, by geography, by sub-sector) and perceived value of education (e.g., as measured by public perception and ability of higher education institutions to maintain “pricing power” over time). Internal factors include elements such as an individual institution’s ability to evolve and adapt in changing times, differentiate in a crowded market, adjust costs to match changes in revenues, to name just a few.

Quantifying the impact of excess capacity in higher eduation, written by EY-Parthenon and made possible through the engagement and support of Lumina Foundation, focuses on the macro factor of supply/demand balance, analyzes how this balance has changed over time, and attempts to quantify the level of over (under) capacity in the higher education sector over time. For a full description of the methodology, please refer to the Appendix in the attached report.

The question being asked before the pandemic “Is there excess capacity in the US higher education sector and what is the potential cost of this excess capacity and subsequent impact on students, especially under-represented students?” is increasingly relevant during the COVID-19 era, with so much of higher education operating in a remote mode of delivery. Key findings of our analysis include:

  • Capacity growth of 26% dwarfs enrollment growth of 3% (FY09-19): EY-Parthenon developed a capacity calculation approach that takes into account both enrollment capacity and instructional capacity. The EYP Capacity Calculation estimates that total capacity, across all sectors of higher education, has increased ~26% cumulatively between FY2009 and FY2019. Enrollment has increased 3% during the same time period (source: IPEDS). This may indicate a propensity for the higher education sector to overbuild and over hire.

  • 75% utilization implies excess capacity of 3-5 million seats: An analysis of the supply demand dynamics in higher education indicates that there is excess capacity in the sector. Today’s demand for higher education seats is roughly equivalent to 14.8 million full-time equivalent (FTE) enrollments (FY2019). The EYP Capacity Calculation estimates total existing capacity at 19.8 million FTE enrollments. With a target of reaching 90%-100% utilization in the system overall, excess capacity today could range between 3 million to 5 million seats.

  • The cost of excess capacity could be as high as $50b annually: Excess capacity costs in the US post-secondary system range from $27 billion and $51 billion annually (using 90%-100% utilization targets). At the upper end, this is roughly equivalent to the amount of new student loan debt taken out each year. This in turn is likely to create pressure to increase pricing (or at a minimum, makes it difficult to reduce pricing substantially) and could have a negative impact on students’ access to affordable quality education offerings.

Summary

State, systems, and institutions have several options to address the issue of excess capacity in higher education. They could address the demand side of the equation by attracting a more diverse group of learners (e.g., adult learners, certificate-seekers) and meeting changing workforce demands. They could also address the supply side of the equation by taking capacity offline (through consolidations, mergers or closures). Or, they could choose to create stronger partnerships among institutions to share academic programs or back-end services to drive efficiencies and reduce costs.

About this article

By Kasia Lundy

EY-Parthenon Principal, US Higher Education, Ernst & Young LLP

Strategist. Education industry thought leader. Wife. Mother.