The $100 Billion Higher Ed Arms Race No One Can Afford

The $100 Billion Higher Ed Arms Race No One Can Afford
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With a few exceptions, higher education policy didn’t get a ton of attention during the 2016 campaign for President which is kind of remarkable for two reasons.

First, having a college or career education is a bright line in employment – those with post-high school credentials are two and three times more likely to be employed than those without. For a campaign that was supposedly about an economic populist revolt, it’s surprising that the key to actual economic ascent was glossed over.

Second, the lack of focus on college and career training is noteworthy because the sector remains under increasing pressure driven by student loans, overall costs, demographic-driven declines in enrollment and a historic collapse and re-alignment among for-profit colleges in the past four years. And there’s no mistaking that the tectonic movements in for-profit schools – itself under-reported and under-appreciated – was driven heavily by policy originating at the White House.

The lack of attention during the campaign and outsized distractions to other, more trivial, issues has left the future of higher education murky. But it’s also hidden a very real fiscal time bomb in higher education that awaited the future President – the exponential arms race of college marketing spending.

It’s no small matter. Left unchecked, one expert says American colleges and schools are on pace to spend $100 billion a year on marketing and recruiting costs. That sum eclipses the total annual economic activity of New Mexico.

“For decades, nonprofit colleges and universities spent around 2 percent of their tuition revenue on recruitment -- on things such as direct marketing. There was no reason to spend more since schools had a set number of seats in a fixed number of classrooms,” said John Katzman, founder of the Noodle Partners which works with colleges to design, manage and market their online programs.

“But then, for-profit colleges emerged in shopping centers and others places that were less costly and easily expandable,” Katzman said. “These schools grew their enrollments by more than 220 percent between 1998 and 2008 – largely because of expensive, aggressive marketing and few space constraints. Where the nonprofit, traditional schools spent 2 percent, these new for-profit ones were spending 20 percent or more of their tuition on marketing.”

At the same time, new online learning options have liberated all schools – for-profit and otherwise – from physical constraints such as classroom space and teaching hours, thereby removing any reason to limit marketing. In this new online education world, the only limits on how many students a school can enroll are their admission standards and how much they’re willing to invest in marketing and recruiting.

Left unchecked, Katzman says, all colleges will have to match the marketing investments of their peers just to keep their doors open. Or they’ll be forced spend more on marketing so they don’t lose out on online students which can still generate substantial income for colleges with good and well-marketed programs. Either way, as traditional non-profit and public schools push their advertising and recruiting commitments closer to the 20% that for-profits had already been spending, “Total spending on college marketing will balloon from today’s $10 billion to more than $100 billion,” he warned.

It’s easy to explain the likely rise in college marketing as healthy – freedom in the marketplace, schools selling themselves to potential students, forcing innovations, punishing bad outcomes and the like.

But the problem with that reasoning is that market pressures are supposed to also drive efficiencies and, eventually, cost savings. So far, the increased competition and escalating marketing hasn’t reduced costs. College costs more than ever and online options, which were supposed to be cheaper and more accessible, aren’t. In 2013, the average per credit, in-state cost for an online bachelor's program was $277, compared with $243 per credit at in-state brick-and-mortar schools.

And marketing costs don’t come from some special pot of money – students pay those as part of what it costs to go to school. Which means students are financing growing marketing costs thought student loans.

Another problem with leaving a higher education marketing arms race to its own outcomes is that the combatants aren’t in similar postures. For-profit colleges answer, ultimately, to shareholders and investors. They are free, even incentivized, to push marking costs skyward so long as they work. For-profits can spend 99% of tuition on marketing if they admit enough students and tuition is high enough to pay for the other costs and make a profit.

Non-profit and public colleges cannot do this. They answer to trustees and politicians and, further down the line, taxpayers. If state schools fully engaged a marketing war, their costs would go up accordingly. It’s not too difficult to image a legislature or other governing body refusing to approve repeated tuition increases simply to fund expanded marketing costs.

It’s an escalation that smaller non-profit and many public schools simply cannot afford to fight and absolutely cannot win.

The higher education marketing arms race calls out for policy and regulation intervention. Capping marketing spending as fixed percentage of tuition – 10% for example – for all colleges seems easy enough. So does barring marketing expenses from federal grants and government-backed loans. Either policy would force colleges to limit their spending.

That may be wishful thinking, though. While it’s difficult to read the policy tea leaves of Donald Trump, early indications and a career in marketing-driven businesses don’t suggest his team would look to intervene in the coming $100 billion education arms race. If anything, according to statements from his transition team, he’s likely to be even more generous to the for-profit colleges and online learning options that are driving the problem.

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