Industry Insights

Rising Per-Student Costs Are Dragging Down Canadian Postsecondary

10/22/20   |  
Graeme Owens, EVP & Country Manager at Keypath Education Canada

I’ve already written about the financial sustainability crisis facing the postsecondary sector. But I intentionally left out a very big issue that is contributing to that crisis: the rising per-student cost of higher education driven (somewhat paradoxically) by governments’ emphasis on performance and outcomes.

While a lack of growth in sector funding from provincial governments has left a hole in the budgets of many institutions, the cost to graduate a student continues to rise. There are two reasons for this.

Performance-based Outcomes

The first is the increasing focus on the postsecondary-to-job-market pipeline that has expanded health and STEM programs and led to a drop in low-cost humanities and social sciences programs. This shift began in the early 2000s as politicians focused on the knowledge economy, and hit its peak following the recession.

At that time, the new buzzword was ‘skills gap’. Even before businesses began to dig themselves out of the recession, employee training had become a casualty of internal budget cuts and changing priorities. The ripple effect this had on the hiring process was that so-called “entry-level jobs” started to come with requirements of one, two, even five years of experience before an applicant would be considered.

Students graduating into the recession and post-recession period with degrees that did not provide in-class, years-long training for a specific career struggled to find employment. Meanwhile, employers in fields like health, engineering, and life sciences struggled to find and hire employees with the skills required to work in those fields.

Government decision-makers, who believed high enrolment was the key to leading in the knowledge economy, began to revise their approach. Instead, they introduced the idea of performance-based outcomes for postsecondary institutions that would financially reward schools based on graduation rates as well as six-month and two-year graduate employment rates.

So, programs that teach students broader skills – like the arts – began to lose favour to those that developed workplace-specific skills. Alex Usher and his team at HESA estimate that the shift has led to a 15-25% increase in health and STEM courses and a 20% drop in humanities and social sciences.

It would stand to reason that institutions that aggressively pursue more health and STEM programming would improve their financial sustainability, because they should be able to access funds allocated on a performance-basis. However, the $23 million in funding allocated for these performance-based outcomes (at least for the last year there is program-level enrolment data for) falls wildly short of the new costs incurred by institutions. Using HESA’s estimates again, they suggest that the shift in program-mix has effectively raised per-student costs to institutions by about 7% or around $700 million. Programs with more in-class support material requirements will necessarily be more expensive to offer than those that only require an auditorium and a lecturer. And when the shift to more expensive program offerings leads to a related drop in programs that are less expensive to offer, the financial offsets of those less expensive programs disappear with them.

Increasing Labour Costs

But we can’t talk about rising per-student costs without acknowledging the cost of labour. For example, according to a study by the Higher Education Quality Council of Ontario (HEQCO), the single biggest cost facing universities in the Ontario is labour, which accounts for 73% of total spending. When mandatory retirement was eliminated in 2006, it led to a sizeable shift in the make-up of postsecondary educators. Between 2006 and 2018, the number of professors still working after the age of 65 rose to almost 9 per cent while professors under the age of 35 fell to just 5%.

If mandatory retirement had remained in place, 1,239 professors would have retired by 2018, replaced by new faculty members with less expensive salaries. In Ontario, University faculty salaries are already some of the highest in the world and continue to grow at an average increase of 4% per year, which is higher than increases in annual operating revenues. But until this older cohort of instructors retires, very little will change as their salaries remain uncapped and are protected by collective bargaining agreements. That’s not a judgment on the value of senior faculty — who contribute immensely to the life of a postsecondary institution — but it is an economic reality.

With government funding largely frozen, salary costs have to be made up some other way. And the quickest way is to pass on the cost to students. In 2017-18 alone, tuition fees for undergraduate programs in Canada jumped 3.1% over the previous year while graduate programs saw a 1.8% increase. But it’s not just domestic students that have seen price hikes. Over the same period, undergraduate tuition fees for international students jumped by 6.3% in just one year while tuition fees for international graduate students rose by 5.4%. Unsurprisingly, as of the 2016-2017 academic year, tuition fees accounted for almost 27% of total postsecondary institution revenue.

Institutions have been able to push the cost onto students because of the demand for their product – postsecondary education is increasingly seen as essential for the long-term financial comfort of workers. According to researchers, each year of postsecondary study may result in a 7-15% increase in earnings. However, the perceived value of a postsecondary education is not always recession-proof. After the Great Recession, many recent graduates began to speak out about how difficult it was to break into a job market and a poll conducted by Modus Research revealed that 31% of business leaders thought universities were doing a poor job of preparing students for the workforce. It remains to be seen how much value prospective students will place on an increasingly expensive and out-of-reach post-secondary education during a long and difficult economic recovery.

If postsecondary institutions can’t find a sustainable way to reduce per-student costs, they will be in for a rude awakening in this new decade. Austerity-focused governments will make for unlikely funding partners and financially struggling families will make for unlikely consumers. And while the challenge may seem insurmountable without outside help, there are ways institutions can leverage their existing expenditures to generate more revenue from them. But they will first need to abandon the belief that another government-led funding boom is just around the corner.

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This article originally appeared on LinkedIn