The Great Realignment
Why Higher Education’s Financial Crisis Signals More Than Economic Trouble
In one of my previous essays, I argued that AI has exposed a fundamental incompatibility between meaningful education and the industrial model that has shaped our higher education institutions for over a century. The emergence of generative AI broke the chain connecting outputs to processes, revealing that what we had optimized was not learning but credentialing. That argument focused on a pedagogical crisis precipitated by technological change.
What I failed to emphasize sufficiently, I believe, is that AI arrived at a moment when the financial architecture of American higher education was already fracturing. The technological disruption compounds an economic crisis that has been building for years. We are facing a convergence of problems with multiple causes: financial stress, demographic decline, as well as AI disruption. And this leads us to an inflection point where several independent structural failures reinforce each other to produce a systemic collapse.
In my opinion, the question is no longer whether the current model will survive. It won’t. The question is whether we can build something better from what will remain.
The Illusion of Recovery
The enrollment statistics from fall 2024 and 2025 appear encouraging at first glance. Undergraduate enrollment continues to increase, with first-year student numbers spiking 5.5% in fall 2024. Trade publications celebrated the “rebound,” and administrators pointed to the figures as evidence of resilience.
But this reading mistakes a sectoral realignment for institutional recovery. The growth is not occurring where the traditional model operates. Four-year residential institutions, particularly small private colleges and regional universities, continue hemorrhaging students. The enrollment gains are concentrated in vocational programs, short-term credentials, community colleges, and the massive public systems that can leverage economies of scale. At the same time, the “middle class” of higher education, consisting of tuition-dependent private colleges that built their model on residential liberal arts education, continues to collapse.
The Forbes College Financial Grades assessment for fiscal year 2025 shows this bifurcation: fifty-one elite institutions earned an ‘A+’ rating, while 148 colleges received a ‘D’—the lowest possible grade. These D-rated institutions rely on tuition for 80% or more of their revenue and are now trapped in a death spiral: enrollment declines create revenue shortfalls, forcing increased discount rates (scholarships) to attract students, which erodes net revenue further. This requires deferred maintenance and staff cuts that degrade the educational experience, damaging reputation and further accelerating enrollment decline.
Degree-granting institutions now close at a rate approaching one per week during peak announcement periods. This is not a temporary correction. It is a market reckoning with a bloated asset class that expanded beyond what the demographic and economic fundamentals could sustain.
The Revenue Subsidy Evaporates
For two decades, American higher education relied on international students as a financial subsidy to shore up deteriorating economics. These students typically paid full tuition without financial aid, cross-subsidizing domestic students and supporting institutional budgets. In the 2023-2024 academic year, international students contributed an estimated $50 billion to the U.S. economy.
That subsidy is disappearing. The United States, along with the other major Anglophone destinations (UK, Canada, Australia), has implemented increasingly restrictive visa policies that are driving a historic pivot in global student mobility. Canada imposed student enrollment caps that caused greater declines than the pandemic shutdown. Australia raised enrollment limits for 2025-26 but made them functionally unreachable through visa restrictions. And UK foreign enrollments also declined again in fall 2025.
The consequences are severe for graduate programs, which depend heavily on international enrollment. Many U.S. graduate programs, especially in STEM fields, enrolled international students at rates exceeding 50-60%. As these students redirect to Europe and Asia, programs face a sudden revenue collapse. The shift is structural. Once students establish pathways to alternative destinations, rebuilding market share requires years of effort and substantial marketing investment that struggling institutions cannot afford.
Meanwhile, Germany now hosts over 400,000 international students. France enrolled nearly 445,000 international students in 2024-2025, a historic high. These countries are not just capturing displaced demand; they are building permanent market positions by offering low-cost or free tuition, English-language programs, and clear pathways to post-graduation employment.
We have to come to terms with the fact that the business model of the U.S. higher education sector is built on a geopolitical monopoly that no longer exists. Institutions that cannot replace this revenue source face immediate financial distress, and those with the weakest balance sheets will close.
When the Public Loses Faith
Even more concerning, while financial metrics capture institutional health, they miss the erosion of social legitimacy that undermines the entire sector’s value proposition. Public trust in higher education has declined precipitously. While Gallup reported a modest uptick from recent lows, 70% of Americans now say higher education is “headed in the wrong direction.” And this is not partisan noise; it reflects a fundamental reassessment of value.
The college wage premium—the primary economic justification for degree completion—is eroding faster than institutions acknowledge. This erosion stems partially from credential inflation (when everyone has a degree, no one does) and partially from technological displacement. Generative AI automates precisely the entry-level knowledge work that previously justified the investment in a four-year degree. College graduates now face unemployment rates that surprise both students and institutions. A 2025 survey found that 60% of students believe AI tools in college diminish the value of their degree.
The public is responding rationally to this reassessment by seeking alternatives. Vocational and technical training programs have seen double-digit growth for two consecutive years, driven by students who recognize that many trade skills cannot be automated and command competitive wages without requiring six figures of debt. And community colleges are absorbing enrollment that once flowed to four-year institutions.
These students are making cost-benefit calculations that increasingly favor cheaper, faster paths to employment over the traditional residential college experience. This is not a temporary preference shift. It represents a structural revaluation of what higher education provides and what it costs. But once public perception shifts from “college is essential” to “college is optional for many paths,” the entire demand curve moves permanently.
The Credit Agencies Sound the Alarm
The three major credit rating agencies—Moody’s, Fitch, and S&P—have all issued negative or deteriorating outlooks for higher education in 2025-2026. Moody’s projects that sector-wide expenses will grow at 4.4% while revenue grows at only 3.5%, creating a structural deficit that cannot be closed through efficiency measures alone. Fitch labeled the outlook “deteriorating,” citing an “uncertain legislative landscape” and flattened public funding. And S&P describes the sector as “bifurcated,” noting that while strong institutions excel, regional and less-selective schools face acute liquidity crises.
This collective assessment means borrowing costs will rise for distressed institutions, creating a further credit crunch that has the potential to speed up closure timelines. The Federal Reserve Bank of Philadelphia estimated that up to 80 colleges could close following a worst-case enrollment scenario—a scenario that increasingly resembles the base case for the bottom quartile of institutions.
The Department of Education’s Heightened Cash Monitoring (HCM) list provides a leading indicator of institutional collapse. Institutions placed on HCM2 status must disburse all federal student aid from their own cash reserves before seeking reimbursement. This creates a liquidity constraint that often proves fatal for cash-poor colleges. Being placed on this list signals that the federal government views the institution as an imminent credit risk, precipitating loss of vendor confidence and banking relationships.
It is important to point out that these are not purely abstract financial metrics. They represent real institutions serving real students in real communities. When a college closes, it creates higher education deserts in rural areas where these institutions were often the largest employers. Students lose credits that may not transfer. Faculty lose careers. And communities lose economic anchors.
The Convergence
Each of these factors—declining enrollment in traditional programs, loss of international student revenue, erosion of public trust, deteriorating credit conditions, and technological displacement—would stress the system independently. Together, they create a perfect storm that the current model cannot withstand.
The industrial model that shaped higher education for the past century was predicated on several assumptions: that the college degree was the primary gateway to middle-class employment, that scale could be achieved through standardization while maintaining quality, that international students would continue choosing American institutions despite cost, that public funding would remain stable, and that the credential itself would keep value regardless of how it was obtained.
Each assumption is now invalid. The degree is no longer the sole pathway to prosperity. Standardization has been exposed as a proxy that machines can replicate. International students have alternatives. Public funding has stagnated or declined. And the credential’s value depends increasingly on the process by which it was earned rather than its mere possession.
AI did not create this crisis. AI arrived at the moment when these failures converged to make the existing model untenable. The technology only accelerated a collapse that was already underway.
The Fork in the Road
We face a choice about what comes next. The path of least resistance leads to further stratification. Elite institutions with large endowments, strong brands, and low student-faculty ratios will thrive by offering value through intensive human mentorship, formation rather than credentialing, and networks that provide genuine social capital. These institutions already operate closer to the relational model that I have been consistently covering on this Substack and that research identifies as actually effective.
The rest of the sector will fragment. Some institutions will automate aggressively, deploying AI for grading, tutoring, and content delivery as a replacement rather than an enhancement. This will produce education at an even lower cost, but of such diminished quality that the credential risks becoming worthless. These institutions will enter a race to the bottom, competing on price while delivering a product that provides little genuine educational value.
Other institutions will close outright.
But this stratification is not inevitable. It is the default outcome if we allow market logic to dictate the transition. But markets optimize for efficiency, not equity, and they reward short-term survival over long-term social benefit. If we want a different outcome, we must intervene deliberately.
What Realignment Requires
The institutions that will thrive in the coming decade are those that will abandon the industrial model intentionally rather than allowing it to collapse around them. This requires several fundamental changes in how institutions operate.
First, they must restructure around sustained, individualized human interaction. This means reducing class sizes, investing in faculty development focused on mentorship capacity, designing curricula around dialogue and relationships rather than content delivery, and measuring success by transformation rather than throughput.
This restructuring costs money in the short term. It requires institutions to make investments when they can least afford them. But the alternative—continuing to deliver a commodified product that machines replicate at near-zero cost—leads to obsolescence.Second, institutions must rebuild public trust by delivering demonstrable value. This requires transparency about outcomes, honesty about what degrees can and cannot provide, and a willingness to innovate beyond the traditional four-year residential model where it no longer serves students well. Some students benefit from shorter credentials, structured apprenticeships, or modular programs that allow them to earn while learning. The goal is education that transforms, not a system that protects its own interests.
Third, policymakers must recognize that higher education is infrastructure. When institutions close, communities lose more than a school. They lose economic engines, cultural centers, and pathways to opportunity. Some institutions deserve to close because they have failed their mission. But others close because the financial model cannot support the density of institutions that communities need. Public investment in sustainable models serves social benefits beyond what markets provide.
Fourth, we must redesign the economics of education itself. The credit hour, the seat-time model, the assumption that learning happens in semester-long blocks—these artifacts of industrial efficiency no longer serve us. We need funding mechanisms that support intensive mentorship, assessment systems that measure actual competence rather than proxy outputs, and accreditation standards that evaluate transformation rather than inputs and processes.
This is not a call for incremental improvement. Incremental improvements to a broken system merely delay its collapse. We need a radical redesign of how education is delivered, funded, and evaluated.
The Opportunity in Crisis
But moments of structural collapse also create opportunities for reinvention that stable periods foreclose. The current crisis forces questions that were easy to avoid when the system appeared functional: What is education actually for? What do we owe students beyond a credential? How do we build institutions that serve democratic rather than merely economic ends?
The research on effective education has been consistent for decades. Meaningful interaction between students and faculty predicts success, retention, and intellectual development. Relationships mediate learning. High-impact practices, such as collaborative assignments, undergraduate research, or capstone projects, work because they require sustained human interaction that cannot be scripted, standardized, or automated.
We have always known what works. We simply built a system that could not afford to do it at scale. AI has now broken the compromise that allowed us to pretend otherwise. The question is whether we use this moment to build something better or allow the collapse to proceed through market logic alone.
If we choose intentional redesign, the next generation of higher education institutions will look different from what we have now. They will be smaller, more focused, more expensive per student but cheaper overall because they will be shorter and more directly connected to employment. They will prioritize mentorship over content delivery, transformation over certification. and they will serve diverse student populations through multiple models rather than forcing everyone through a single standardized process.
These institutions will not serve everyone, at least not initially. But they will serve their students genuinely, providing education rather than merely processing credentials. Over time, as they prove their value and rebuild public trust, they will expand to serve more students through sustainable models rather than the extractive models that are currently failing.
The Choice Is Ours
The American higher education system is at an inflection point. The industrial model that enabled mass access to education is collapsing under the weight of its own contradictions, accelerated by technological change but driven primarily by economic and demographic realities it can no longer escape.
We can allow this collapse to proceed through market forces, resulting in radical stratification where quality education becomes the exclusive privilege of the wealthy, while everyone else receives automated credentialing of dubious value. Or we can intervene to ensure that the transition serves democratic ends, preserving access while rebuilding quality, supporting communities through institutional change, and creating new models that provide genuine educational value rather than merely efficient processing.
This requires courage from institutional leaders willing to restructure before the crisis forces their hand. It requires investment from policymakers who recognize that education is infrastructure deserving public support. And it requires honesty from all of us about what education can provide and what it costs to do well.
The current model is ending. That ending is not a failure to be lamented but a transition to be navigated. What we build next will determine whether higher education remains a public good accessible to all who can benefit or becomes a luxury good available only to those who can afford it.
The choice is ours. The moment is now.
The images in this article were generated with Nano Banana Pro.
P.S. I believe transparency builds the trust that AI detection systems fail to enforce. That’s why I’ve published an ethics and AI disclosure statement, which outlines how I integrate AI tools into my intellectual work.