Headlines abound regarding the difficulties facing the higher education sector in the U.S., but the real story is much more nuanced. L.E.K. Consulting collaborated with Houlihan Lokey to analyze the evolution of the sector and profile potential opportunities for investors in three key areas: higher education technology-enabled services, alternative adult learning programs and for-profit higher education institutions.

Declining enrollment trends

One of the most significant issues facing higher education is a consistent decline in enrollment over the past decade. Undergraduate enrollment in degree-granting postsecondary institutions has decreased 1.1% per annum from 2013 to 2023. This downward trend, exacerbated by the COVID-19 pandemic, has been attributed to several factors, including rising education costs and questions over the return on investment (ROI) of higher education relative to alternative pathways. Going forward, a shrinking population may further compress the pool of candidates that higher education institutions have to draw from.

However, the decline is not uniform across all types of institutions. While public and private four-year colleges have maintained relatively stable enrollment levels, two-year colleges and for-profit institutions have seen steeper declines.

Cost of attendance and ROI

Although the list price of higher education has increased significantly in recent decades, far outpacing inflation, the net cost to students — factoring in grants and scholarships — has been more stable. In fact, since the onset of the COVID-19 pandemic, many institutions have successfully reduced their operating expenses and passed these savings on to students. Public four-year institutions saw their net cost of attendance decrease by 3.3% between 2020 and 2023, reflecting efforts to reignite student interest in higher education by alleviating financial burdens.

Despite historical cost increases, higher education remains a strong driver of economic opportunity. Our analysis highlights that attaining a bachelor’s degree or higher significantly increases lifetime earnings. Individuals with a bachelor’s degree have 75% higher median gross lifetime earnings than do those with only a high school diploma; however, the ROI varies considerably by field of study and type of degree. Approximately 77% of undergraduate programs offer a positive ROI, with master’s degrees and associate degrees having more variable outcomes.

Financial challenges in higher education

While many of the headlines about higher education may be overly simplistic, financial instability persists across many institutions. Based on the latest financial data, 27% of U.S. colleges were classified as “unprofitable,” with smaller private colleges experiencing the brunt of these challenges. Within this context a robust ecosystem of service and software providers has emerged to help higher education institutions attract more students and operate more efficiently and effectively.

Investment opportunities

In response to these challenges, we identified three primary areas where investors can focus to capitalize on the transformation occurring in higher education:

  1. Higher education technology-enabled services and software providers: As educational institutions grapple with declining enrollment and financial difficulties, there has been increasing reliance on third-party providers to manage and optimize key processes. The U.S. higher education technology-enabled solutions market, estimated at $25 billion to $30 billion in 2024, presents robust opportunities. Notably, student information systems and learning management systems are critical tools used by institutions to manage enrollment, deliver content and support academic success. The remaining market share is dominated by outsourced services such as online program management and student life cycle support.

    Additionally, services such as marketing and international recruitment are mission-critical for higher education institutions as they seek to offset enrollment declines from domestic students. International students, who often pay full tuition, represent a key growth segment for institutions aiming to diversify their revenue streams.

  2. Alternative adult learning programs: Nondegree credentials, including certificates, apprenticeships and professional licenses, have grown substantially in recent years, driven by increased job mobility, technological disruption and skepticism about traditional higher education pathways. The U.S. alternative adult learning market is valued at $6 billion to $8 billion, with professional licenses and certifications making up 25%-30% of the market and nondegree certificates and online courses representing another 20%-25%. Apprenticeships and unskilled adult education have less direct spend from learners, but there are interesting models emerging in these spaces.

    Broadly, these programs offer flexibility for adult learners and cater to industries with high-demand job opportunities, such as healthcare and the skilled trades. The rising acceptance of alternative credentials by employers makes this sector a dynamic space for investors seeking to tap into the growing demand for workforce-ready education models.

  3. For-profit higher education institutions: Although for-profit degree-granting institutions have faced significant enrollment declines since their peak in 2010, the remaining institutions are generally more outcomes-oriented and positioned to serve specific consumer segments and careers. Healthcare and IT programs, which align with labor market demand for “good jobs,” represent particularly strong opportunities. While regulatory scrutiny for Title IV schools can add complexity to the investment process, for-profit education can be a potentially lucrative investment option in fields where labor supply cannot meet demand.

Conclusion

The higher education sector is undergoing significant transformation, driven by demographic shifts, financial pressures and evolving workforce demands. While enrollment trends and financial health challenges are concerns, there are substantial opportunities for investment; specifically, technology-enabled services, alternative adult learning providers and select for-profit higher education institutions offer compelling prospects for growth. Investors positioned to support innovation in these areas will likely benefit from the evolving landscape of U.S. higher education.

For more information, please download our analysis.

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