The Long Decline of American Higher Education Has Begun

The paradox of American higher education is that going to college used to be aspirational, but now the sales pitch is that it’s scary not to get a degree. Long ago, universities were a place where students could explore new academic frontiers and challenge themselves with new ideas. And now, school is safe: four more years of deferring big decisions and optimizing for easy A’s.

In the last few weeks, everything has changed. Now, it’s the schools that are scared. And they should be.

The American higher education system faces four immense challenges: COVID-19, China, competition, and demographics. Think of them as two hammers and two anvils: COVID-19 is hitting enrollment and attendance, as students can’t gather on campus and are forced to reconsider whether school is the best option right now.

China has provided a steady flow of students, with strings attached; those strings are getting burdensome, and Chinese students now have better options. Competition is rising everywhere, from better trade schools to a better version of the Ivy League.

Demographics make things even more challenging: U.S. birthrates were steady throughout the 90s, but after a peak of 2.12 in 2007, birthrates steadily declined, and now average 1.77. Fewer births in 2008 translates to fewer 18-year-olds starting in 2026, with the decline slated to continue for a decade.

This means that each year, colleges around the country will face the same problem: how to pay for tenured professors, administrators, and fancy facilities while suffering from declining enrollment and an end to the rising-tuition gravy train?

Room and Board: Basically Zero. Zoom Lectures: $40,000?

There are three good explanations for why people go to college:

1) To learn something, whether it’s cultivating one’s inner life or developing a practical skill.

2) To meet and befriend bright people.

3) To show employers that you were smart enough to get in and diligent enough to finish.

Conveniently for colleges, it’s hard to separate these. So they can sell the entire bundle, knowing that what students and parents brag about is not what they pay for. Untangling these benefits is tricky, though the economist Bryan Caplan has assembled extensive evidence that the “signaling model,” argument No. 3, is college’s biggest contribution to student outcomes.

Caplan’s most compelling evidence is the “sheepskin effect”: if college’s value is from teaching skills, you’d expect one year of college to add about a quarter of the wage premium of a degree, two years to add half, and so on. That’s not what the data show: some studies have found that more than half of the wage premium comes from the final semester; three and a half years of college are worth less than the credential itself.

When the nature of schools changes—and when they switch to a pass/fail system instead of grades, it weakens this signal.

Meanwhile, schools face a competitive threat: digital-first education options like Coursera, Khan Academy, and Lambda School used to offer video as a substitute for a lecture hall. Now, the lecture halls are closed, so every school is competing head-to-head with these alternatives.

 Three-quarters of students say they’re unhappy with the quality of video lectures. Some universities will find that their professors are more informed, prepared, and charismatic than the competition—others will discover that their brand name was compensating for an inferior product. It’s the Pepsi challenge, but for a $584 billion industry.

The other pitches colleges offer are also suffering. Statistics are mixed on how beneficial college-age socializing really is. Fraternity members are vastly overrepresented among politicians and senior executives, but one study found that joining a fraternity was worse for grades and had no effect on income. (A cynic might point out another way to read this study: join a fraternity, and you don’t hurt your earning prospects—but you get to go to a lot more parties for the next four years.)

In economics, forcible unbundling tends to hurt incumbents. In the ’90s, the music industry’s model was to sell one or two hits and a dozen filler tracks on every CD. When music went digital, and listeners could pay for just the tracks they wanted (or not pay at all), the industry went into a tailspin from which it has only recently started to recover.

Cable is going through a similar unbundling process as more consumers decide to watch what they want instead of paying for channels they’ll never see. In education, schools will find that it’s much harder to sell education independently from socialization, and that the value of the credential they offer is diminished—for some of them, this will mean they can’t sell enough of anything to pay their bills.

Demographic Challenges, at Home and Abroad

College attendance is a default in the United States. Ninety-two percent of parents expect their kids to have some form of post-high school education, and 70 percent of high school graduates immediately enroll in college after graduation. This rate has steadily risen over time, to the point that the most important variable for colleges is not what percentage of young people intend to enroll but how many young people there will be.

And therein lies a problem: birthrates have declined since the financial crisis, especially in the Northeast, with a disproportionate share of U.S. colleges. Starting in 2026, those smaller birth cohorts will reach college age—and colleges will scramble to find enough students.

Of course, there’s another source of enrollment: 1.1 million U.S. college students are from other countries, with 370,000 from China alone. Their $45 billion in annual tuition makes college an important U.S. export (to put this in context, it’s only slightly smaller than U.S. aerospace exports, which totaled $54 bn in 2017).

But we don’t just export education; we import influence.

China has made significant efforts to influence U.S. universities, through institutions like Confucius Institutes and the Thousand Talents Program. Chinese policy casts these projects as innocuous, and many of their activities are perfectly innocent, like promoting the study of Mandarin and holding performances of traditional Chinese plays. But the Thousand Talents Plan was the vehicle through which China paid the chairman of Harvard’s chemistry department  $50,000 per month, plus living expenses, from 2012 through at least 2017. (What they got in exchange has, thus far, not been mentioned.)

Harvard’s longstanding China ties have had complex tradeoffs over time: they’ve been a tool of soft power, influencing Chinese policymakers—but they’ve also given the Chinese Communist Party the soft power necessary to cancel speeches from dissidents.

It’s unclear how extensive this behavior is, or even how top-down it is—but in an atmosphere of mutual suspicion, it’s hard to see overseas students from China choosing to enroll in U.S. universities. That’s especially important when China itself has built up an impressive higher education system, and now produces more scientific articles each year than the United States. (Adjusted for citations, China is still behind America—but catching up fast.)

Foreign students are about 5 percent of total U.S. undergraduate and graduate enrollment, and Chinese students are about 2 percent of the total. Would losing a substantial share of those students be fatal to colleges? Not on its own (although foreign students tend to pay much higher tuition, so the impact on revenue is roughly triple the impact on enrollment).

The decline isn’t terrible on its own, but the timing for colleges is brutal. Students are questioning the value proposition of college, there will be fewer of them from the United States, and students outside the United States are having second thoughts about attending American schools.

What Happens This Fall?

American higher education is in limbo. Schools are cutting budgets, and planning to begin the fall semester online rather than in classrooms. For students, it’s unclear that traditional schools will be a compelling option, compared to the alternatives of online-first schools or simply taking a gap year. And if a gap year becomes a conventional choice, more students may choose to drop out entirely.

As one law professor recently put it: “If you were planning to enroll in college next fall—don’t.”

Meanwhile, every school will face pressure on enrollments and more pressure on tuition. This fall alone, the American Council on Education predicts a 15 percent decline in enrollment costing $23 billion in revenue. Regional colleges will discover that local appeal doesn’t matter when everyone is attending class from their bedroom anyway. Less prestigious schools will find it harder and harder to justify their price, and at lower prices they won’t be able to pay their expenses.

Elite schools will mostly be spared. They’re in a different business, and their huge endowments will insulate them (the stock market, at least, is priced as if the “just-the-flu” story is quite true).

So it’s wrong to say that higher education will be unrecognizable in 10 years. Rather, it will be recognizable to people who were alive in the middle of the 20th century. There will be colleges, just not that many; there will be a handful of elite schools, with great name recognition and prestigious faculty.

And for most 18-year-olds, college just won’t look like the best way to spend the next four years.

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About Byrne Hobart

Byrne Hobart is a consultant, writer, and investor. He works with financial and technology companies, and writes The Diff, a daily newsletter.

Photo: Filo/Getty Images

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