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How Did We Get Here?

July/August 2016


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An array of higher education challenges elicit calls for a new economic model. A look back at the forces contributing to the status quo helps explain the past, while informing responses and solutions for the future.

Edited by Carole Schweitzer

The economic model of colleges and universities has at least four important dimensions: the financial environment, organizational structure and decision making, competencies and processes, and mission and value proposition. As these dimensions have changed, the economic model has evolved as well—but today’s challenges of access, affordability, and outcomes necessitate perhaps even greater changes in the future.

Indeed, the market forces behind declining public resources and increased competition for students, faculty, and “prestige” prompt college leaders and many others to question and debate the current model’s sustainability.

So, how did higher education arrive at this critical juncture? An exploration of the business model and the forces that mold it help explain.

Financial Environment

Until the 19th century, private colleges and universities, funded by individual donors and religious organizations, constituted American higher education. With the enactment of the Morrill Act of 1862, which established federal and state funding for colleges, the creation of more than 70 state universities changed the higher education landscape by making college more affordable and more readily available than before. Despite this growth, however, college remained largely available only to elite white males. (For a timeline showing these and other higher education historical highlights, see “Timeline Tutorial”.)

The next significant change in financing occurred in 1944, with the passage of the Servicemen’s Readjustment Act, commonly known as the GI Bill. The act was initially proposed to forestall a flood of returning veterans from overwhelming the still-fragile post–World War II economy. The legislation provided a wide range of benefits that included grants for attending colleges and universities.

The benefits caused a previously unmatched increase in demand, with more than two million veterans taking advantage of the educational stipends over the ensuing decade. No longer the elite man’s domain, higher education was introduced to the masses. For the first time, access to colleges and universities was not limited to the wealthy, and funding for such education was awarded on an individual, rather than institutional, level. As a result, the business model needed to be redefined to respond to wide expansion and complex processes.

In ensuing years, funding for public colleges and universities continued to reflect the nation’s view of higher education as a public good that benefitted both economic and civil development: State and local appropriations provided more than 80 percent of the educational costs at public institutions. Local funding proved particularly important to the growth of community colleges, which became the largest sector of higher education during the 1960s. Modest tuition paid by students made up the balance of institutional operating funds.

The egalitarian notion of higher education broadened in 1965 with the passage of the first Higher Education Act (HEA), while the introduction of the Pell Grant, in 1980, made funding more widely available. Despite the additional resources, the 1990s still proved difficult for private as well as public institutions, as inflation coupled with enrollment declines diminished revenue and budgets. That said, in 1980, state appropriations had still accounted for 83 percent of student educational cost.

While the 1965 HEA had included some student loans, the Middle Income Student Assistance Act in 1978 shifted access to loans to all students, and in 1980 parents became eligible to borrow. These legislative changes started the trend of borrowing for college education, which escalated in the 1990s with the introduction of unsubsidized loans and increasing borrowing limits.

The dramatic increase in for-profit institutions, which nearly doubled from the mid-1990s to 2010, also expanded the use of loans by college students. While not explicitly planned, the loan policies and insuring of the loans were the result, in part, of a confluence of legislative amendments and market conditions.

As the availability of grants and loans boosted resources available to potential students, tuition doubled between 1980 and 2000, according to Economics of Higher Education (Department of Treasury, 2012). Since 2000, tuition continues to increase across all segments of the industry. Although much of the increase is due to declining state support, tuition levels have altered the public perception of the price of higher education, and people now expect colleges to justify their costs.

At the same time, operational costs continue to increase because of institutions’ labor-intensive nature, growing costs of employee benefits, and capital expenditures (both for expansion and for repair and maintenance of existing buildings).

Organizational Structure and Decision Making

The distribution of power gradually evolved to a shared governance structure, which manifests itself differently in various institutions and institution types. In recent decades, tenure and shared governance have drawn criticism, within and outside the academy, in terms of the structure’s contribution to colleges’ inability to change and respond to new expectations. Some say that shared governance is a major factor in the intransigence of colleges and universities to transform themselves more rapidly in response to environmental changes.

Decision barriers. Observers of higher education cite the difficulties of negotiating timely decisions and undertaking institutional innovation, given the many voices that must be considered in a shared governance environment. At the same time, some institutions are moving to more of a shared governance model, in an effort to bring more consensus to decision making—and often involving the chief business officer in decisions that require a significant financial component.

Nevertheless, in many cases, shared governance’s unintended consequence has been the division of roles. Typically, this structure gives responsibility to faculty for the institution’s products, instruction, and research, while assigning responsibility for resource inputs to administrators. Often distanced from resource discussions, but seeing evidence of global success of American higher education, faculty rationally focus on academic excellence and desire to preserve the structures that have created past successes.

Further exacerbating the divide between administration and faculty are the vertical organizational silos of many institutions; sometimes the only official linkages among an institution’s financial and business operations, student services, and academics takes place in cabinet meetings, with communications and resource allocations functioning according to hierarchical structure.

Changing power centers. Traditionally drawn from academic ranks, college presidents played largely internal roles—focusing on providing academic leadership and representing internal constituencies and positions to external stakeholders. In recent times, these external stakeholders—boards, donors, politicians, and others—have been exerting more influence and power. The decentralized nature of the higher education industry, combined with increasing regulation and competition for resources, accentuates the power of external agents.

Such influencers often expect a pace of change at odds with the deliberative evolution of colleges and universities. These changing power structures and evolving views of higher education’s role have affected the type of individuals hired as institutional leaders. With the mid-20th century’s rapid expansion of higher education, particularly the community college sector, leadership ranks attracted a broader spectrum of professionals. Community colleges looked to leaders in local school systems, while four-year colleges and universities drew from a range of administrative roles within their institutions, ranging from student affairs to development to business operations. Recently, some colleges have begun to draw leaders from a variety of other industries as well.

Competencies and Processes

During the past half century, competitors of traditional degree-granting institutions have introduced options such as online learning, competency-based credentials, nanodegrees, and badging that appear to produce similar, if not the same, outcomes faster, more easily, and less expensively. Distance education, which had its origins in correspondence programs in the 19th century, has grown as technology quickly expands capability and reach. In 1976, John Sperling started the University of Phoenix, and in 1989, launched its online program to address the needs of working adults who had been attending the institution’s on-site classes. Since then, online education has gone from novel to norm and affected nearly all colleges and universities.

By 2012, nearly 70 percent of chief academic officers stated that online educationis critical to their institutions’ long-termstrategy. Nearly 7 million—or 32 percent— of all students were taking at least one online course at that time.

Several of these competitive learning models are raising questions about accreditation, which currently serves as the gatekeeper of federal financial aid. Begun in the 1880s as membership organizations intended to identify legitimate higher education institutions, the regional accreditors have maintained their focus on self-assessment accompanied by peer review of entire institutions. The introduction of competency-based credentials and badging that afford individuals access to disaggregated knowledge components, with outcomes assessed by specified metrics, further challenges the status quo. And, as pressure mounts to recognize the value of these innovative models, the gatekeeping function of accreditation will need to adapt to allow student access to financial aid.

Research revamp. The research function is also evolving, with opportunities to commercialize research placing increased importance on patentable products. Offices of technology transfer have become common, as universities attempt to manage the implementation and value of faculty research.

At the same time that the size and complexity of projects have grown, funding has tightened. Such reductions have had serious implications, and institutions find themselves further underwriting their research mission with resources garnered from other activities. Meanwhile, faculty researchers must put more time into securing grant funds.

Changing role of faculty. Along with online classes, hybrid courses and the flipped classroom have altered faculty’s role, often increasing the workload and leading institutions to separate the responsibilities for content from delivery and assessment. This unbundling of the faculty role has increased the number of people in supporting roles and created many new positions.

At the same time, technology has not reduced, but rather increased, faculty workload by adding tasks ranging from converting to online tools and environments to staying current with evolving knowledge bases to responding to student expectations for 24/7 communication. Because most institutions lack activity-based costing systems, the actual costs of these new frameworks often remain unknown.

The increasing use of contingent faculty has also changed the delivery medium. Research attests to both the quality of adjunct teaching as well as the deficiencies of relying on individuals with tenuous relationships to the institution for this primary function. A 2013 report to the Association of Governing Boards (An Examination of the Changing Faculty: Ensuring Institutional Quality and Achieving Desired Student Learning Outcomes), outlined the negative impact of this change in the higher education workforce on student outcomes, including reduced student completion levels.

Mission and Value Proposition

As an English transplant, the American university upheld the tradition of a prescribed liberal arts curriculum based upon a primarily classical preparatory course; it was deeply concerned with the forming of moral character and the conserving of existing knowledge rather than the search for new knowledge; it placed great value on a residential pattern of life for students; and its major role was the training of a special elite for community leadership in all fields of endeavor.

This mission remained intact for more than 200 years, until the enactment of the Morrill Act in 1862. The act began the movement toward more meritocratic access to higher education in the United States, through purposeful establishment of state colleges and universities focused on economic development. These new institutions were required to include instruction in agriculture and mechanic arts—to promote the liberal and practical education of the industrial classes in various professions.

Beyond the liberal arts. With the founding in 1876 of Johns Hopkins University, America’s first research university, the higher education model began to separate graduate and professional education from liberal education provided by colleges that served as preparatory institutions. Before long, the model evolved into an amalgam of the two, with institutional missions incorporating both the traditional liberal arts and technical and professional programs.

Despite the growth of investment in basic research to be conducted by university faculty, the mission of educating the individual for a fulfilling life served as a key value proposition for students: “In the early 1970s, nearly three-quarters of freshmen said that a college education was essential for them to develop a meaningful philosophy of life.”

Morphing missions. For the past 40 years, as public funding for higher education has decreased and costs have increased, market forces have played bigger roles in institutional missions. Broader participation as well as change in payee have brought corresponding changes in the value proposition of higher education. Many students now seek utilitarian outcomes in credentials rather than intellectual growth. Governments, accrediting bodies, and the public reiterate those values by focusing on outcome measures, such as degrees awarded and jobs obtained.

The impact of changing expectations has been widely observed in reduced enrollments in the liberal arts. At the beginning of the 20th century, approximately two-thirds of college students enrolled in liberal arts colleges, with the percentage dwindling to 25 percent in the 1950s. In 1970, the United States had 721 liberal arts colleges; the number dropped to 228 by 2000. While some liberal arts colleges closed or merged, many others revised their missions to include professional programs, such as business and health care, and established new identities as comprehensive colleges and universities.

Declining public funding for research, mentioned earlier, has driven the development of research/innovation parks, business incubators, and technology transfer offices, while workforce development and corporate partnerships have grown in importance at community colleges.

Despite the pressure to achieve measurable outcomes—and the move away from the belief that higher education is a public good—many still believe in the original mission of colleges and universities. Janet Napolitano, president of the University of California system, expresses that argument well: “We are not degree factories. Our business … is to transform individual lives and to transport new knowledge into the world. As university leaders, we must strive to convince the general public that higher education is a common good worthy of public investment. This is our grand challenge.”

CAROLE SCHWEITZER is editor in chief of Business Officer.

This article is based on the white paper What Is the Current State of Economic Sustainability of Higher Education in the United States, and How Did We Get Here? (NACUBO, 2016), by Jacalyn A. Askin and Bob Shea, project directors, Economic Models Project. Along with two additional white papers, this introductory paper will be available at the NACUBO 2016 Annual meeting, July 16–19, in Montréal.

As the availability of grants and loans boosted resources available to potential students, tuition doubled between 1980 and 2000, according to Economics of Higher Education (Department of Treasury, 2012).

The decentralized nature of the higher education industry, combined with increasing regulation and competition for resources, accentuates the power of external agents.

By 2012, nearly 70 percent of chief academic officers stated that online education is critical to their institutions’ long-term strategy. Nearly 7 million—or 32 percent—of all students were taking at least one online course at that time.