How to Cut Costs on Campus

Many university expenses are difficult to trim. But not impossible.

In my last article for the Martin Center, I outlined how increasing tuition discounts are indicative of a looming financial crisis for many colleges and universities. Tuition discounting and a slower rise in sticker price are lowering college revenues. Demographic changes (4.3 million births in 2007, 3.7 million in 2021) are shrinking the pool of potential students, and the declining value proposition of a college education makes even fewer students in that shrinking pool want to enroll. Combined with high cost structures that are not easy to fix, these factors mean that many colleges are in trouble. Institutions are getting squeezed from both sides, experiencing higher costs and lower revenues. Incremental changes are not going to solve the problem; rather, wholesale business-model changes are going to be needed.

Based on their public pronouncements, many institutions are whistling past the graveyard on this issue, but the crisis is real. In 2020, the Hechinger Report conducted a “financial stress test” on more than 2,600 institutions and reported that 500 of them exhibited financial warning signs. The Covid pandemic only made that stress worse. Mergers and failures are up significantly in the past few years. Between the 2017-18 and 2020-21 academic years, 579 institutions closed or merged, representing 8.7 percent of the total. These trends and warning signs might quickly turn into a crisis throughout higher education.

Most higher-ed institutions’ costs remain high and are not easily fixed.The normal response to flat or declining revenues is to cut costs. But most higher-ed institutions’ costs remain high and are not easily fixed. In fact, many institutions’ costs are escalating because they have hired too many administrators, house many faculty in low-enrollment courses and programs, and face competition to build new and better facilities. A big problem for colleges is that a lot of their costs are fixed, like physical-plant maintenance and the salaries of tenured faculty. A course for one student costs as much as the same course for 100 students, and a new building has maintenance and operating costs that are mostly independent of the number of students on campus. Thus, lower enrollments don’t lead to lower costs.

In addition, colleges have not seen the productivity increases that private-sector businesses have over the past several decades. Higher-ed institutions don’t like to talk about productivity, but the number of full-time equivalent (FTE) students per faculty member has been flat or has declined since at least 2009 (15.9 to 1 in 2009 versus 13.3 to 1 in 2021 for degree-granting postsecondary institutions). Colleges tout their student-to-faculty ratios (they’re mentioned in both the U.S. News ratings and the College Board’s synopsis for each school) despite scant pedagogical evidence that low ratios are beneficial.

It has been said by apologists for the lack of productivity improvements that higher ed suffers from “Baumol’s cost disease,” a condition whereby workers like artists and musicians get paid increasing wages despite the fact that they have no real opportunity to improve their productivity. Admittedly, measuring productivity for higher education is difficult because of the variety of outputs (student credentials, research publications, community service, etc.) and the varying quality of the outputs (is an “A” grade for a credit hour at an elite university the same as a “D” grade at a community college for the same subject?). But, at a gross level, as the data above indicate, there has been little movement that would affect costs.

Elsewhere, the governance structure of higher-education institutions does not suit decisionmaking for cost-reduction or radical change. Universities are governed by boards of trustees, who generally focus on agendas provided by senior administrators, and their meetings concern academics, fundraising, reputational and marketing issues, and enrollment. Cutting costs is hard work and often means layoffs or removing programs. Most trustees don’t sign up to be board members in order to take on such tasks. As such, budgets provided by administrators are often rubber-stamped for approval. Cost issues are rarely addressed unless the institution is already in crisis.

Cutting costs runs squarely against faculty priorities and is never undertaken by the faint of heart.Another powerful force in the governance structure of higher-ed institutions is the faculty. Faculty, like labor unions, lobby for more pay and benefits and more faculty positions. Unlike labor unions, however, faculty usually have a formal role in the institution’s governance, including seats on the board and even approval authority and confidence/no-confidence votes. Cutting costs runs squarely against faculty priorities and is never undertaken by the faint of heart.

So, what can be done? Despite the institutional inertia that makes cost-cutting difficult, colleges must address their largest expense: labor. Institutions need to give up on the idea that small class-sizes are universally beneficial. One benefit of the reaction to the Covid pandemic was to illustrate the usefulness of remote or online learning. Most institutions went fully or partially online, in some cases for two full years. Online learning allows instructional resources to be spread more widely and improves faculty productivity. Even before the pandemic, online programs like Georgia Tech’s highly successful M.S. in computer science were proof of concept for large-scale online education.

Faculty and others insist that there are important pedagogical reasons for retaining low-enrollment courses and programs. Yet many such courses simply have low student demand, and some, like gender studies and climate studies, exist only for ideological reasons. Whatever the intention, these courses and programs absorb costly institutional resources, and many institutions just can’t afford them anymore.

Institutions must also reverse the trend of increasing the number of administrative positions. The huge growth in administrative ranks in student services, sustainability, and DEI adds almost no value to the educational products that institutions are offering. At Yale, for example, “the number of managerial and professional staff … has risen three times faster than the undergraduate student body” over the last two decades. According to Richard Vedder, “the number of (college) administrators has soared relative to the number of students and to the number of faculty, and there’s a corresponding increase in the cost of doing business.” During the 1980-81 academic year, instructional expenses were about double instructional support expenses nationally, whereas now they are about equal. Institutions need to ask whether a particular service or administrator adds value to the core educational mission. If not, the position should be cut.

Cost-cutting is both a skill and a culture.In addition, many institutions now view themselves as a home for scholars, not teachers, and allow faculty to spend a significant amount of time on research. Unfortunately, universities’ customers (students and parents) still think of them as places of learning and instruction. Except at the top-tier “R1” universities, most faculty research is institutionally funded, and faculty are excused from some or all teaching duties to perform their research. Focusing more on teaching and less on research would improve outcomes for students and strengthen the institution’s bottom line.

Finally, besides labor-cost reductions, institutions should explore ideas like outsourcing facilities via partnerships with private entities and using technology to automate administrative tasks. I have been at universities where aggressively bidding out existing contracts significantly lowered costs and improved services. Cost-cutting is both a skill and a culture. Administrators need to meticulously and ruthlessly track and control costs, run their institutions like a business, and use metrics to track performance.

The modern student wants an avenue to a higher-paying job. Academic institutions recoil at the idea of offering “training” instead of “education,” but, in general, that is what students desire. Thus, institutions should focus on skills rather than “learning outcomes.” Universities need to focus on what their customers (students) want and then provide it. Stubbornly sticking to outdated educational models is a recipe for going out of business. As this Wall Street Journal article points out, “While colleges like to stuff the bachelor’s degree with course requirements, sometimes just one skill delivers big value.”

The coming financial crisis for many institutions can be a catalyst for change. Colleges and universities have not had many reasons to change their business models in the past. Subsidized by the federal student loan program and decades of growing enrollments, colleges have become hidebound and resistant to change. Because of that, there are tremendous opportunities to rethink higher education and add value to its students. I hope many universities seize the opportunity.

Chris Corrigan was Chief Financial Officer at Andrew College (1998-2005), Emory College (2005-2008), and Armstrong State University (2015-2017).