Who is paying for the cost of excess capacity in higher education?

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.

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.

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.