Universities That May Disappear

On today’s show we’re taking a look at what’s happened in secondary and post-secondary education. Late last week The National Student Clearinghouse Research Center published data on the enrolment levels at universities and community colleges across United States.

In most economic downturns there is a loss of employment and out of work people use the opportunity to retrain. In past downturns, university enrolments have been seen as recession resistant. Enrolments have gone up as out of work mature students decide to focus their efforts on an area of the economy that has higher demand than their previous job.

This year has been different. Undergraduate university enrolment is down 4% compared with the same time last year. First time enrolments are down 16.1%. This number is significant because it will trickle through the system for the next four years.

Graduate student enrolments grew by 2.7% this year. So perhaps students who might have entered the work force elected to take their education one step further. Graduate students usually make up about 15% of the total university and so the positive contribution of these new graduate students to the overall student population is estimated at 0.4%.

Enrolment of international students is down by 7.5%. This makes sense with the global travel restrictions that come with the pandemic. But the percentages mask the economic impact. Tuition levels for international students are traditionally higher than those for local students. So the economic impact is disproportionately high.

The profit margin at most universities has historically been estimated to be in the 10% range. In the wake of the 2008 financial crisis, these grew to about 15%. At the end of 2019, profit margins across the industry were at an alarming 3.5%. Today average profits margins are averaging below 4.5%. So if enrolment is down in these bricks and mortar universities that have high fixed costs, many of them will be falling below profitable levels.

Universities are real estate anchors in most communities. Neighborhoods and commercial main streets are built around them.

The schools at greatest risk are the public schools and the private non-profit schools. But virtually no school is immune. The story of James Madison University, in Virginia is one of many possible case studies. They made the decision to extend spring break and graduation. By the middle of March, they had transitioned all of their classes online. They might be considered one of the most agile schools during this pandemic. They issued refunds for housing, food and parking and no refunds for tuition. The school lost $30M dollars in just 9 weeks.

According to credit rating agency Moody’s, 30% of colleges were running deficits before coronavirus. Not only that, 15% of public universities had less than 90 days of cash on hand!

This is despite the fact that college tuitions for a four year degree have multiplied by 1600% over the past 40 years. Universities used to rely upon the notion of scarcity. You could only have so many students in a class. For example, the law school at Yale has about 200 students. The classroom was only so big. That scarcity meant that they had to limit enrolment. But now, with the global reach of the internet, there is no real limitation on the number of students that can be reached. The incremental cost of adding a student in a virtual environment is small.

There is a prediction that as the internet democratizes knowledge, about 25-30% of universities will close permanently in the next few years.

As you are evaluating communities to invest it, you’re probably still assuming that the university is an anchor tenant in the community and more importantly that it will endure past the pandemic. I want you to examine the financial viability of the local college or university as part of your due diligence in any local community in which you invest.