The Business Model of Higher Education Is Being Broken

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.