The Impending Collapse of U.S. Private Higher Education: Investment Risks and Opportunities in the Education Sector

The U.S. private higher education sector is at a crossroads. A perfect storm of declining enrollment, financial instability, and shifting student expectations has pushed many institutions to the brink. Between 2010 and 2021, undergraduate enrollment in private institutions fell by 15 percent, with for-profit colleges experiencing the steepest declines [1]. Compounding these challenges, 57 percent of students now report choosing between college expenses and basic needs, signaling a crisis of affordability [5]. As institutions grapple with these pressures, strategic asset reallocation and institutional consolidation have emerged as both a lifeline and a litmus test for long-term viability.

Risks: A Sector in Peril

The risks facing private higher education are multifaceted. Enrollment declines, driven by a shrinking college-aged population and the lingering effects of the pandemic, have forced institutions to slash budgets and eliminate programs. For example, Notre Dame de Namur University recently eliminated undergraduate programs and sports to reduce expenses [4]. Meanwhile, financial strains are exacerbated by rising operational costs and deferred infrastructure maintenance. Moody’s downgraded the sector’s outlook to “negative” in March 2025, citing reduced research funding, uncertain federal aid, and potential endowment tax changes [4].

Institutional closures have become alarmingly common. The University of the Arts in Philadelphia filed for bankruptcy after failing to secure a merger partner, while King’s College in New York City shuttered due to accreditation issues and financial struggles [1]. These closures highlight the fragility of institutions reliant on narrow demographic bases or international student enrollment, which dropped by 3 percent from 2020 to 2021 [1]. Regulatory and political risks further compound the crisis, as proposed legislation like the GOP’s “Big Beautiful Bill” threatens to reduce Pell Grant support and introduce credit-based loan eligibility [4].

Opportunities: Consolidation and Innovation

Amid the turmoil, strategic consolidation and asset reallocation present opportunities for resilience. Mergers, such as the union of St. Ambrose University and Mount Mercy University in Iowa, demonstrate how institutions can pool resources to achieve economies of scale while preserving academic missions [3]. Similarly, the proposed merger of Albany College of Pharmacy and Health Sciences with Russell Sage College aims to create a larger, more financially robust institution in New York’s Capital Region [3]. These alliances enable shared administrative costs, expanded program offerings, and enhanced endowment diversification.

Institutional endowments are also pivoting toward alternative assets to offset declining returns. Ivy League and elite universities now allocate an average of 36.7 percent of their endowments to private equity, with hedge fund allocations rising from 5.1 percent in 2000 to 14.87 percent in 2022 [5]. For instance, Yale’s endowment earned $240 million more over five years by allocating 10 percent to hedge funds compared to institutions without such exposure [2]. Smaller institutions, facing tighter margins, are similarly increasing exposure to private credit and real estate to boost returns [5].

Strategic Asset Reallocation: Balancing Risk and Reward

Post-merger asset reallocation strategies are critical to long-term success. Deloitte’s 2025 Higher Education Trends report emphasizes the need for centralized financial models that align budgets with institutional missions while discontinuing underperforming programs [1]. For example, Hampshire College improved its financial standing through strategic budget realignments and enrollment-focused initiatives [4]. However, mergers are not without pitfalls. Human capital cost stickiness—where labor expenses resist downward adjustment—can erode merger benefits, particularly in labor-intensive sectors like education [6].

The macroeconomic environment further complicates reallocation. With global M&A volumes declining by 9 percent in the first half of 2025, institutions must adopt selective, high-impact strategies [4]. Larger transactions, such as Brookfield Infrastructure Partners’ $9 billion acquisition of Colonial Enterprises, Inc., underscore the value of strategic scale [3]. For universities, this could mean prioritizing high-return assets like private equity or hybrid fund structures while navigating rising interest rates and geopolitical uncertainties [5].

Conclusion: Navigating the Crossroads

The U.S. private higher education sector stands at a crossroads. While enrollment declines and financial instability pose existential risks, consolidation and asset reallocation offer pathways to sustainability. Investors must weigh the potential of mergers—such as the University of the Arts’ failed attempt—to create resilient institutions against the risks of operational complexity and regulatory shifts. Similarly, endowment strategies that embrace alternative assets can mitigate declining returns but require careful liquidity management.

For stakeholders, the key lies in balancing short-term survival with long-term transformation. Institutions that prioritize systemness—through shared services, strategic affiliations, and innovative financial models—may emerge stronger. However, as closures like those of King’s College and the University of the Arts demonstrate, the window for proactive adaptation is narrowing. In this volatile landscape, strategic foresight and disciplined execution will determine which institutions thrive—and which collapse.

Source:
[1] U.S. College Enrollment Decline: Facts and Figures [https://bestcolleges.com/research/college-enrollment-decline/]
[2] Impact of Hedge Fund Allocation on Endowment Returns [https://www.mfaalts.org/industry-research/impact-of-hedge-fund-allocation-on-endowment-returns/]
[3] More Catholic colleges are merging amid demographic challenges [https://www.highereddive.com/news/catholic-college-mergers-consolidation-demographics/754117/]
[4] 2025 Higher Education Trends | Deloitte Insights [https://www.deloitte.com/us/en/insights/industry/public-sector/2025-us-higher-education-trends.html]
[5] Endowment asset allocations: insights and strategies [https://link.springer.com/article/10.1057/s41260-023-00346-9]
[6] Human capital cost stickiness and merger and acquisition (M&A) performance [https://www.sciencedirect.com/science/article/pii/S1544612325016435]