The Wednesday Letter #223 - 6/5/2024
The Wednesday Letter #223 - 6/5/2024
This Week: College Closures and Mergers; Canada Goes its Own Way; Valuing Elon Musk; Grandpa's Cool Apparel Brands.
ICYMI, we published yesterday the third post of InvestAI etc. We discuss why ChatGPT and Perplexity respond correctly to this prompt:
> write a short poem where the last line is the same as the first.
But not to this prompt:
> write an equation where the last number is double the first number.
COLLEGE CLOSURES AND MERGERS
Every year, a few schools and colleges shutter their doors. The reasons are always the same: lack of funding and disappointing enrollment numbers. Most of those closing are small and lesser-known schools. But there may be something else happening today. The number of colleges shutting down or seeking mergers is accelerating.
Here is a list of colleges that closed down or merged in each year from 2020 through early June 2024. You can examine the fine print or just focus on the totals. In 2020, there were six college closures and mergers impacting a total enrollment of 2,770 students. Closures and mergers climbed to 10, 11 and 21 in 2021, 2022 and 2023, impacting enrollment of 20,456, 7,131 and 27,380. This year, there have already been announcements for 22 closures and mergers (24 if you count those calendared for 2025) impacting enrollment of 46,382.
The figures are lumpy in 2021, 2022 and 2023 due to the larger enrollments at Independence University (an online college), the University of Wisconsin - Platteville Richland and Indiana University - Purdue University Indianapolis. Excluding the University of Wisconsin and the Indiana schools, the 2024 total of 21 colleges with enrollment of 18,692 represents a big like-for-like increase from 2023.
Nearly all of the closing schools mentioned financial difficulties and weak enrollment as the primary reasons for their decision. Several mentioned the impact of the pandemic. Some mentioned accreditation issues. Those merging with others saw mutual benefits for both parties.
Counting by state, New York had straight closures (not including mergers) impacting enrollment of 12,911, the most of any state but not a very large figure as a percentage of the state’s total undergraduate enrollment of 860,000.
Kevin J. Ruth, an advisor to K-12 independent schools, makes an important point about the recently announced closure of the White Mountain boarding school in New Hampshire. Although White Mountain is a secondary school and not a college, Ruth’s concerns also apply to colleges. He writes on LinkedIn (our emphasis):
[The White Mountain School] had a high reliance on international boarders, who tend to be full-pay students, whose tuition payments supply meaningful revenue to the school. A decline in international students can easily decimate such a business model. What is not mentioned [in the school’s release], but would be interesting to learn, is what their average tuition discount rate is/was. We often hear of discount rate averages around 17-20%, but there are schools that are north of 30% and 40%. When there is that level of discounting, plus the loss of international students, plus facing demographic slumps, etc., a school is deep in a full risk-on scenario. Higher education has been showing us the disastrous results of high/unsustainable discount rates.
So, the combination of 1) too much discounting, 2) high reliance on international students and 3) a demographic slump gets a school “deep in a full risk-on scenario.” The part about international students is interesting because many schools have for a long time viewed international enrollment as a way to reduce their fragility. Here we need to speak about different school tiers. Demographic slumps, international students and tuition discounting are not nearly as damaging to top-tier or mid-tier schools where the pool of applicants will remain stable in the face of such pressures. But they could be terminal risks for lower-tier schools.
Speaking of demographic slumps, here below is a chart that we first published in TWL #197 showing the number of US-born Americans aged 18 to 21. The size of this age cohort will peak at 17 million in 2027 and then start a long decline. We wrote at the time:
By 2040, there will only be 14.7 million US-born Americans aged 18-21. We could bump these figures by 10 to 20% to account for immigration but the profile will remain the same, give or take a shift of a couple of years.
All in, a net decline of say 1 million applicants will certainly be felt by some colleges. Expect the weaker ones to shut down, or expect that there will be many more foreign-born students to make up the shortfall.
There are an estimated 4,000 degree-granting colleges and 15 million enrolled undergraduates (including foreign students) in the United States. Given all of the above, it is fair to predict that the wave of closures and mergers is only starting.
CANADA GOES ITS OWN WAY
Although we think of Canada’s economy and politics as generally correlated with those of the United States, there has been a bifurcation between the two in recent years.
Here is one item for example. Real per capita GDP has continued to grow in the US, but it is falling in Canada (chart). The divergence started around 2015. Critics of Justin Trudeau explain the weaker GDP growth by reminding that he became prime minister in 2015.