Costs of college

Why universities are money pits

December 5, 2013: 11:55 AM ET

Tuition rates are rising, but colleges and universities are still not bringing in enough revenue to make ends meet. What gives?

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FORTUNE -- If you listen closely enough, you can almost hear the collective sigh of resignation among the throngs of parents and college-bound students who face higher tuition bills and, with it, more debt.

The U.S. Department of Education reported on Tuesday that the average price of attending a four-year public university increased by $1,700 between 2008 and 2012 and by $3,900 for a four-year private school. That includes everything from tuition, fees, books, housing, food, transportation, and personal expenses.

For a full-time undergraduate at a public university, that means the average price was $23,200 in 2011-2012 and $43,500 at a private non-profit. Apply scholarships and other aid, the average net price was $14,300 for a public schools and $23,000 for a private schools.

The news doesn't come as much of a surprise. A college education has long been considered one of life's major investments, and even though countless studies have shown that college is worth the cost, the returns have increasingly come under attack as graduates fall deeper into debt amid a weak job market.

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That aspect has been widely reported, but less attention has been paid to universities, which aren't raking in enough from tuition even as costs rise -- albeit, at a slower pace during the past two years compared with previous years.

After more than a decade of robust growth, tuition revenue is expected to decline at 28% at public universities and 19% at private universities in 2014, according to a report released last month by credit rating agency Moody's Investors Service. In a survey of about 300 U.S. schools, nearly 30% of public university respondents said that they expect tuition revenue to decline in fiscal years 2013 and 2014. What's more, 44% of public universities do not expect the growth of tuition revenue to keep up with inflation, or 2%, in fiscal year 2014.

Various reasons are behind the decline: For one, enrollment is expected to fall as the economy improves -- a trend that hit mostly for-profit and community colleges in 2012-2013. While more people opting to join the workforce as opposed to returning to campus is good news, tuition revenue is also declining in tandem with family incomes. Parents were less sensitive to tuition hikes before the financial crisis, but that attitude has changed. One sign: Leaving your home state for college was once considered a rite of passage, but that hasn't grown any more appealing in recent years since it's considerably more expensive than staying in state. Median out-of-state enrollment as a share of total enrollment has remained flat -- in fall 2013, it was 17%, compared with 15.5% five years ago, according to Moody's.

Admittedly, it's hard to feel sorry for colleges. Tuition hikes were routine before the financial crisis; colleges and universities grew increasingly dependent on tuition money to pay for everything from employee salaries to new buildings and expansion plans. In fiscal year 2012, tuition and fees made up a median 44% of revenue at public universities, up from less than one-third only a decade ago, according to Moody's.

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U.S. campuses have reached a crossroads. They will either need to cut costs or look for revenue sources beyond their students, at least their American students. As Moody's notes, regional public universities and smaller private colleges may be most at risk, while larger universities are likely to be better off as they've been relatively successful at recruiting students from abroad, who do not qualify for the same aid packages and tuition discounts that domestic students receive, but it's hard to view foreign student recruitment as a long-term solution. After all, tuition costs could reach a point that would put off even affluent international students.

To stay alive, U.S. campuses will need to dramatically change the way they do business.

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