CryptocurrencyInvestingBanksReal Estate

‘25% of colleges could go out of business’: Chegg CEO says the pandemic is speeding up higher education’s reckoning

March 9, 2021, 1:30 AM UTC

There is something deeply wrong with U.S. higher education: Tuition seemingly never stops rising, while outcomes like graduation rates and job prospects are stagnating or worsening. Eventually a reckoning is coming to higher education. Or at least that’s the message Chegg CEO Dan Rosensweig has been preaching since he took the helm of the education technology company in 2010.

The COVID-19 pandemic, Rosensweig says, has hastened that moment. Schools with the biggest endowments, like Princeton or Stanford, can weather the storm, while smaller colleges and universities might not be able to hang on.

Just how bad is it? Rosensweig, who leads a company that provides services ranging from digital and physical textbook rentals to online tutoring, recently told Fortune, “We estimate 25% of colleges could go out of business in the next few years.”

Many institutions that went remote or hybrid as a result of the pandemic have seen precipitous declines in their student bodies: Fall 2020 enrollment at U.S. colleges was down about 400,000, with the sharpest drop occurring at community colleges, where freshman enrollment dropped 13%. That’s exactly the opposite of what usually occurs during recessions, with the unemployed enrolling in an attempt to improve their job prospects. In fact, during the Great Recession, enrollment at community colleges jumped 2.5 million. Schools are so desperate to entice students that many schools are turning to tuition breaks. That’s why last year the consumer price index for college tuition saw its biggest price decline since 1978.

But the financial crunch caused by the pandemic isn’t even the biggest long-term issue for colleges, Rosensweig says. Instead he points to the fact they aren’t adapting to students’ modern needs. Around three in four college students have at least one nontraditional trait, for example: working full-time or having children. These nontraditional students, in particular, need schools to offer flexible classes and online options, Rosensweig says. But Gen Zers want that too, he adds. After all, they grew up at a time when an Uber ride was just a click away.

“Is the student benefiting from a system where they run up debt and has an almost 1 in 2 chance they’re not going to graduate? That even if they do, they end up in a job that’s not paying them what they need to make to pay back their loan. And they [schools] have curriculums that have nothing to do with the careers [students] are likely to enter. The whole system wasn’t designed to work at scale with a diverse student base: diversity in terms of gender, age, socioeconomic, and in many ways race…and prices keep going up,” Rosensweig said.

The numbers show Rosensweig has a point. Between 2001 to 2021, tuition rose over 140%, which far outpaced inflation. At the same time, only 62% of students graduated within six years of enrolling—a figure that has barely moved.

Where should colleges start? Rosensweig says they need to go back to the drawing board and build programs that are affordable, utilize technology, support students at scale, and provide curriculums that better prepare students for the modern workforce. He added, “If you want [higher education] to empower students to be employable and earn enough to be middle class, then the whole system needs to be designed to do that for the majority of people.”

Rosensweig says Chegg’s internal surveys of its student users show that 75% of college students favor a hybrid model (that is, a mix of in-person and online learning). That’s why the adoption of online and hybrid learning that the pandemic spurred won’t go away, he says. Similar to other areas in our lives, including e-commerce and video streaming, the pandemic has only sped up the digital transformation of higher education. That accelerated digital transformation has immensely benefited Chegg, which provides digital resources to students. Its subscription service, which includes access to textbooks and homework help, saw its subscription base hit a record of 6.6 million in 2020. That was a 67% year-over-year uptick. At the same time, net revenue increased by 57% to $205.7 million in 2020. That has made Chegg shareholders happy: Since January 2020, its share price has climbed 128% to $87.55.

Other tech/education players are seeing similar gains. SV Ventures is an early-stage education technology firm that just raised $180 million in its second fund, according to Dan Primack’s Axios newsletter. Primack, a former Fortune editor, added, “The past year has permanently changed education, regardless of when all students return to the classroom. Some form of ‘hybrid’ learning could become the norm in certain places (e.g., rural areas of emerging countries) and among certain cohorts (e.g., adult learning), meaning there could be billions of potential customers for startups that improve on makeshift Zoom classrooms.”