Impact Sector: Higher Education

The Higher Education Team

Picking up from last week, we continue to explore education impact investing with a focus on higher education. The Higher Education team includes first year Investment Associates Bianca, Juliet, Jitin, Ambreen, Shaistah, and Alexandre and undergrad Investment Analyst Chuhan. 

Industry Overview

The postsecondary education industry is a $400 billion industry supported by public and private funding. Investment in the space is also growing. Looking at ed-tech companies only, there was a 503% growth in VC-investment between 2010 and 2014 (including K-12) with $1.4 billion invested in 2014. The post-secondary education industry breaks down into three large sub-sectors: Undergraduate Degrees, Graduate Degrees and Non-Traditional Programs.

Access to and graduation from postsecondary institutions has multiple benefits to individuals and society including higher wages and upward socioeconomic mobility. Both within the US and internationally, however, the postsecondary industry continues to face the challenges of rising costs, unclear educational outcomes and unequal access. These inefficiencies in the sector have given rise to several enterprises that are looking to solve these challenges and improve the access, affordability and quality of the postsecondary education.

Key Impact Goals

Within the Post-Secondary education sector, we want our investments to achieve three primary goals:

  1. Improved Accessibility: Does the offered solution help more students, especially those from underserved communities gain access to a quality post-secondary education?
  2. Improved Affordability: Does the offered solution either bring down the cost of attendance for students, offer lower-cost financing or change the cost structure of the education provider to make education more affordable?
  3. Improved Quality: Does the offered solution increase the number of people who achieve their desired outcome including successful career placement, admission into advanced degree programs or graduation rates within 5 years?

By evaluating the sector with these goals in mind, we can better gauge the level of impact of the investments sourced. The impact matrix below shows how new innovations are helping achieve key impact goals across different higher education sub-sectors.

Sub-sector Deep Dives

Based on our initial sector research we see the greatest need and opportunity for impact in the Undergraduate and Vocational Degree sectors of the market and will spend less time covering the Graduate Degree sector.

Traditional Institutions: Undergraduate Degrees

In fall 2014, there were 17.3 million undergraduate students in the United States. Skill gap and rising cost to the student, in tandem, create two of our three addressable needs in the undergraduate education space: increased affordability and increased quality. The third addressable need is increased accessibility as certain groups (e.g. Hispanics and women) are underrepresented at universities.

Given this, we see three main addressable needs and opportunities in the traditional undergraduate program space. First, there is a growing mismatch between the skills of newly graduated students and the skills necessary in the economy today. Unemployment is two to three times higher among low-skilled professionals than it is among medium- and high-skilled professionals, showing the even greater difficulties facing graduates with only basic skills (BCG Five Trends to Watch in Higher Education).

Second, the cost of the undergraduate education is rising dramatically as sources of funding are being cut. There is currently $1.3 trillion of student loan debt in 2016 and student debt loads have increased 8% annually since the financial crisis (BCG Five Trends to Watch in Higher Education). These two trends - skill gap and rising cost to the student - in tandem, create two of our three addressable needs in the undergraduate education space: increased affordability and increased quality.

The third addressable need is increased accessibility as certain groups are underrepresented at universities. This issue stems from the lack of resources to get these underrepresented groups into college and also the higher than proportionate share of failed completion of an undergraduate degree by these groups. Increasing support in getting these groups in undergraduate programs and ensuring their graduation and success is a large need and we have identified key investment opportunities through these trends.

Notable trends within this sector include:

  • Funding: There is a need for more funding resources to help students manage the cost. Specifically, many students from low-income backgrounds are unaware of the resources available to them. Thus, many organizations have been started to help students and parents navigate the funding challenge in order to enable initial access and to increase retention.
  • Enrollment: Postsecondary attendance rates are generally lower for youth from lower socioeconomic backgrounds and those from various racial/ethnic groups when compared to Whites and Asians. In addition to racial/ethnic enrollment differences, there are gaps in postsecondary attainment for males and females.
  • Graduation: Graduation rates are falling and enrollment growth is weak; causing lower-tier institutions to suffer. As a result, these institutions will face increased competition for students & their longevity is threatened if they face reduced enrollment and a shutdown decision in the medium- to long-term.
  • Outcomes: There has been a significant focus on measuring and improving students’ education outcomes. Rising concern about America’s ability to maintain its competitive position in the global economy has also renewed interests in STEM education.

Limitations within this sector include:

  • Public funding: policy heavy and government focused. Impact on affordability through addressing institutions funding source of government funds will be outside the scope of WIIP-type investments
  • Managing costs at institutions: likely to be outside the scope of WIIP-type investments

Traditional Institutions: Graduate Degrees

As of the fall of 2014 there were ~3.7 million Graduate students enrolled in the US and ~900,000, degrees conferred. The number of degrees has remained relatively flat over the last 10 years and the forecast going forward is similar. The biggest shifts in the Graduate student populations are around the mix of international vs. domestic students and the way students are accessing education options. These mix shifts are giving rise to two addressable needs in the space.

Firstly, there is a strong need to improve affordability and access to funding in the sub-sector. When looking at the mix shift of international students specifically, there is limited access to federal and US-based private funding for international students. New financial funding models may help alleviate this issue. In addition to improving access to funding, there is a growing affordability issue. Although Graduate students only make up 16% of the student populations they account for 40% of the ~$1 trillion dollars of student debt in the US in 2016. This large debt amount is driven by significantly less state support at the Graduate level (e.g., no Pell grants).

The second addressable need in the market is improving accessibility through additional non-traditional structures. Graduate students are more likely to go to school while working and need additional flexibility. Although there are online or weekend/night classes there is a lack of specific and quality accreditation for several online universities which may make degrees less valuable.

Notable trends within this sector include:

  • Funding models: There is a growth in innovative funding options for Graduate students that fill the gap of State and Federal funding. These models, that can also be available to international students, are pursuing strategies like connecting individual lenders and students directly, bypassing traditional financial institutions.
  • Growing use of academic technology: 36% of all Graduate students take at least some online classes while 20% of all Graduate students exclusively take online classes. Additionally, Graduate degree seekers are more likely to take classes on nights or weekends: 34% take some night classes and 12% take some weekend classes.
  • Enrollment of underrepresented students: Black and Hispanic students in Graduate programs have seen the highest growth rate over the last ten years - 6% CAGR in number of degrees for Black Students and 7% CAGR for Hispanic students. Despite the growth, Hispanic students are still seeing the most underrepresentation in the Graduate field (17% of the population vs. 7% of the degrees).  (See Exhibit 3)

Limitations within this sector include:

  • Limited overall growth in number of degrees: The number of Graduate degrees conferred in the US has been relatively flat over the last 3-5 years and there may be a natural saturation point in the market
  • Lack of Specific Accreditations: Though students are responsible to verify a provider’s status but some institutions may mask their lack of specific accreditation(s) in order to attract unsuspecting students.

Non-Traditional Programs

Vocational and community colleges provide alternative options to one-half of post-high school students, consisting of organized education programs offering a sequence of courses to directly prepare individuals for employment without the requirement of an advanced baccalaureate degree. As of 2008, there were 1,045 community colleges in the United States, enrolling 6.2 million students (35% of all postsecondary students enrolled). As of October 2015, 3.5 million students are enrolled in vocational courses. In addition, adult life-long learning platforms, including online skill certifications and knowledge portfolios, are on the rise.

The key need in this space is to make sure schools are offering a more career-oriented approach to higher education, particularly given sluggish economic recovery, accelerated stimulus spending and a more practical student mindset. Students in vocational and community schools, and even those enrolled in lifelong learning online platforms, are looking for affordable quality education that develops both career specific skills and well-rounded citizens, leading students to short and long-term success.

 Notable trends within this sector include:

  • Workplace Needs Dictate Learning Needs: The workplace requires three sets of skills of most workers: 1) Strong technical achievement, especially in English language arts, mathematics, and science, as well as computer skills; 2) Career specific skills for a chosen career clusters; 3) Virtues such as honesty, responsibility, and integrity. The goal is to prepare students with high-level, broad-based transferable skills and technical skills required for participation in the "new economy," where adaptability is key.
  • New Teaching Models: New teaching systems are gaining traction, including accelerated three-year degrees, industry accreditations, and certifications programs relevant to vocations.
  • Accessible Loans: In 2015, the Department of Education passed a new gainful employment rule that requires vocational programs at for-profit higher education institutions and non-degree programs at community colleges to meet minimum debt-to-income thresholds of their graduates (annual loan payments must be less than 12 percent of total earnings.)
  • Highest Demand Vocational Skills: Due to an aging population, demand for workers in the healthcare-related fields is increasing and projected to be the area of highest growth in the next five years, specifically for medical technicians, nurse’s aides and dental hygienists.

Limitations within this sector include:

  • Enrollment Fluctuations: Enrollment in vocational schools is dependent on the economy: in year 2011, industry revenue jumped by 11.2% due to high unemployment and a slow economy, however, growth is estimated to slow down to be about 0.3% annually due to improvements in the labor market.
  • Lack of Diversity: More than 75% of non-baccalaureate postsecondary students over the last several decades have been white (NCES)
  • Misaligned Focus: While employers rank mathematics, science, and English language as top-rated skill needs, many of the lowest-rated topics remain a central focus of instruction in non-baccalaureate programs.
  • Decreasing Affordability: Changes in the funding landscape within the Education sector in general - notably the 2010 expiration of the stimulus spending through the doubling of Pell Grants alongside other cuts in taxes being earmarked to pay tuition at for-profit colleges are making even vocational/community college programs less affordable.