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The Business Model of Higher Education Is Being Broken

The Business Model of Higher Education Is Being Broken

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Last Friday, Southern New Hampshire University (SNHU) announced that their fall classes would be held totally online. President Paul LeBlanc explained the decision in his blog that no one believes that a plan to open in the fall will restore life as normal to college campuses. He noted that until a vaccine is widely available, there are too many risks for spreading the coronavirus.

Why was SNHU able to make their fall reopening decision this early? Other colleges have announced that they are reopening in the fall or that they will make their decision in July, according to a Microsoft listing of the top 100 U.S. universities’ plans for the fall semester. I would argue, however, that there is a difference in the business models between most private, residential colleges and SNHU.

The story of SNHU’s growth from a sleepy, small residential college to one of America’s largest online educators is no secret. With a supportive board including the late Harvard professor Clayton Christensen, Paul LeBlanc built and developed a substantial online operation at SNHU. He separated it from the campus operation, but utilized surplus funds from operations to enhance and expand the traditional campus as well.

There are 3,000 students on the SNHU campus and more than 100,000 students online. Because the online operations generate a surplus, SNHU was able to cut its tuition to its campus students from $31,000 to $10,000 since it will now operate 100 percent online this fall.

The typical business model for a residential college does not resemble the SNHU model at all. Residential colleges have a fixed capacity (the number of beds in dorm rooms). If they’re lucky, they can increase that capacity with off-campus apartments and even study abroad programs. The annual costs are based upon meeting a specific enrollment target with the objective to cover the expenses to operate the college and the campus.

In the case of almost all campus-based colleges, the costs of operation are predominately fixed costs. There are buildings to open, close, and maintain; dining halls to operate; athletic teams to sponsor; student activities; and oh, by the way, academic programs taught by faculty.

Colleges that meet or exceed their student enrollment targets usually operate with a budget surplus and those that fail to meet their targets usually have a budget deficit. Without other sources of revenue, a decrease in enrollments of 10 or 20 percent can create a large operating deficit, because the cost to operate a campus with 1,000 students is likely the same as operating the campus with 1,100 students.

However, if those extra 100 students contribute $25,000 each to the college’s net revenues, losing them will reduce cash by $2.5 million. Many small college budgets do not have that kind of financial cushion or the flexibility to offset expenses.

Also, many of the colleges that have announced that they will reopen this fall have done so to reduce the numbers of students who opt to stay home or defer attendance this fall. Some outside observers believe that they have also made their announcements in order to avoid lowering their tuition for online classes like SNHU has done.

While the California State University System is the largest university system with over 500,000 students to announce that they will operate online this fall, they have not announced a reduction in tuition. However, they will forgo revenue from room and board fees and presumably will not keep food service and housing employees on the payroll while those facilities are not open.

Additionally, the System is subsidized by the state and theoretically can absorb a one-time reduction in fees, unlike many private colleges that are dependent on tuition and housing fees. If there are cities and states with rebound cases this summer, it will be harder to colleges to reopen in those areas with increased cases.

If COVID-19 cases rebound this fall, it is likely that many college campuses will close again to minimize the spread of the coronavirus. If that happens, it is likely that there will be more lawsuits from students asking for refunds. It is also likely that more families will observe that the costs to attend college online are less than the costs to attend a residential college.

Will this student shift to online education trigger a sea change in attendance patterns? Will it trigger a deliberate change in the basic business model of many residential colleges?

It’s too soon to tell. However, colleges with a business model of limited flexibility and no financial resources to cover deficits will be at a greater risk of closing their doors forever.

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Wally Boston Dr. Wallace E. Boston was appointed President and Chief Executive Officer of American Public University System (APUS) and its parent company, American Public Education, Inc. (APEI) in July 2004. He joined APUS as its Executive Vice President and Chief Financial Officer in 2002. In July 2016, he retired as APUS president and continued as CEO of APEI. In September 2017, he was reappointed APUS president after the resignation of Dr. Karan Powell. In September 2019, Angela Selden was named CEO of APEI, succeeding Dr. Boston who will remain APUS president until his planned retirement in June 2020. Dr. Boston guided APUS through its successful initial accreditation with the Higher Learning Commission of the North Central Association in 2006 and ten-year reaccreditation in 2011. In November 2007, he led APEI to an initial public offering on the NASDAQ Exchange. During his tenure, APUS grew to over 100,000 students, 200 degree and certificate programs, and approximately 90,000 alumni. In addition to his service as a board member of APUS and APEI, Dr. Boston is a member of the Board of Advisors of the National Institute for Learning Outcomes Assessment (NILOA), a member of the Board of Overseers of the University of Pennsylvania’s Graduate School of Education, a board member of the Presidents’ Forum, and a board member of Hondros College of Nursing and Fidelis, Inc. He has authored and co-authored papers on the topic of online post-secondary student retention, and is a frequent speaker on the impact of technology on higher education. Dr. Boston is a past Treasurer of the Board of Trustees of the McDonogh School, a private K-12 school in Baltimore. In his career prior to APEI and APUS, Dr. Boston served as either CFO, COO, or CEO of Meridian Healthcare, Manor Healthcare, Neighborcare Pharmacies, and Sun Healthcare Group. Dr. Boston is a Certified Public Accountant, Certified Management Accountant, and Chartered Global Management Accountant. He earned an A.B. degree in History from Duke University, an MBA in Marketing and Accounting from Tulane University’s Freeman School of Business Administration, and a Doctorate in Higher Education Management from the University of Pennsylvania’s Graduate School of Education. In 2008, the Board of Trustees of APUS awarded him a Doctorate in Business Administration, honoris causa, and, in April 2017, also bestowed him with the title President Emeritus. Dr. Boston lives in Owings Mills, MD with his wife Sharon and their two daughters.

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