Higher Education: Finding Investment Opportunities In Disruption

The U.S. higher education sector is in the midst of unprecedented transformation. Once defined by expansion and access, the industry now finds itself at a crossroads, shaped by sweeping federal policy changes, heightened demand for workforce-aligned credentials, and rapid advances in artificial intelligence (AI).

Nicholas Kent, the recently installed Under Secretary of Education, stated upon assuming office that "President Trump has entrusted me with a weighty task: to restore the greatness of American higher education and ensure that our taxpayer-supported colleges, universities, vocational schools, and other postsecondary programs are genuinely helping young Americans launch and grow their careers." He added, "The 'higher education industrial complex' must be shaken up by competition, accountability, and a future-focused mindset."

These changes bring existential risks for traditional colleges and universities—particularly those dependent on tuition revenue, graduate enrollment, and expensive programs that lack student return on investment (ROI). For investors and innovators, however, the disruption is a unique opportunity to create value in institutions and companies by reshaping learning and job and career preparation.

"One Big Beautiful Bill": A New Era of Reduced Funding and Accountability

The transformation of higher education accelerated on July 4, 2025, when President Trump signed into lawH.R. 1, the "One Big Beautiful Bill".

This sweeping legislation, which includes several hundred billion dollars in cuts to higher education funding over the next decade, ushers in a new era of performance-based funding, accountability, and market-driven reform.

The Act eliminates Graduate PLUS loans for new borrowers, imposes new annual and lifetime borrowing caps on unsubsidized graduate and professional loans, and provides annual and lifetime caps on loans to parents of undergraduates (Parent PLUS). These changes will present challenges to institutions that enroll significant numbers of students from low- and middle-income backgrounds, working adults, and graduate students.

One of the Act's more consequential changes is the introduction of a new "earnings premium" accountability framework, which applies equally to degree programs at all institutions of higher education— public, private nonprofit, and private for-profit. If a program's graduates consistently earn too little compared to a baseline group, the program could lose access to federal student loans. For undergraduate programs, the rule compares graduates' earnings four years after finishing to the earnings of working adults with only a high school diploma or GED. For graduate programs, it compares earnings four years after enrollment to those of working adults with only a bachelor's degree. This metric is intended to hold all colleges and universities accountable for the economic value that they deliver to students.

If a program's graduates consistently earn too little compared to a baseline group, the program could lose access to federal student loans.

Finally, the Act imposes much steeper excise taxes on the investment income of private colleges and universities with large endowments, raising the rate from the previous flat 1.4% rate to a range that tops out at 8%.

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This increased tax will not only affect elite institutions but also many smaller institutions, potentially reducing the funds available for scholarships, research, and student support services.

The message from Washington is not just a matter of budget tightening. Institutions must prove their value or risk losing funding. Providers that can align closely with labor market needs and demonstrate measurable employment outcomes are poised to capture a larger share of students and federal support. Expect investments to target high-demand fields requiring either a college degree or trade school education, including roles in healthcare, technology, engineering, and advanced manufacturing and skilled trades like medical technology, aviation maintenance, HVAC, and welding. In addition, education models that rely on employer funding and other nonfederal funding sources—bypassing federal bureaucracy altogether—will continue to be in high demand.

"Workforce Pell": The Rise of Nontraditional Providers

The Act advances the skillsfirst agenda, introducing a new "Workforce Pell Grant" for accredited short-term credential programs— those lasting just eight to 15 weeks and offering between 150 and 600 clock hours of instruction.

These programs are not only more affordable and flexible, but also faster to market, appealing to working adults and those seeking to upskill quickly. Accredited providers that can quickly align with labor market needs and demonstrate measurable employment outcomes are poised to capture a growing share of students and funding with workforce relevance. Under Secretary Kent recently stated that he looks forward "to embracing alternatives to the traditional four-year degree— promoting vocational training, apprenticeships, and innovative credentials that align education with the in-demand needs of today's workforce."

Accreditation Reform: Lowering Barriers for New Entrants

In tandem with legislative changes, President Trump's April 23, 2025, executive order onreforming accreditation is set to disrupt the status quo further.

The order directs the Secretary of Education to resume recognizing new accreditors to increase competition and accountability in promoting highquality, high-value academic programs focused on student outcomes and to prioritize outcome-based measures—such as graduation rates and post-graduation earnings—over traditional input metrics. This reform lowers barriers for new and innovative educational institutions that have previously struggled to gain recognition under the current accreditation system. For investors, it signals a more open regulatory environment where high-performing newcomers can compete on equal footing.

Outcome-based measures—such as graduation rates and postgraduation earnings—will be prioritized over traditional input metrics.

AI: The New GenEd Requirement

At the 2025 ASU+GSV Summit in April, attended by more than 7,000 education leaders, edtech entrepreneurs, investors, and policymakers, AI emerged as a dominant theme.

There was broad consensus that AI literacy has become a foundational skill, similar to reading or math. Colleges and edtech companies are hyper-focused on integrating AI into curricula, support services, and administrative operations. Institutions that can offer AI-enhanced learning experiences, predictive student support, and automated administrative functions can vastly improve outcomes and reduce costs. Companies providing AI-based tools—from virtual tutors to enrollment bots to predictive analytics dashboards—are strategically placed for increased demand from institutions seeking to modernize.

President Trump's April 23, 2025, executive order on AI education and workforce development reinforces this trend, directing federal agencies to use existing funding mechanisms, such as Workforce Innovation and Opportunity Act (WIOA) grants, to promote AI skillbuilding for high school students, including through dual enrollment to earn postsecondary credentials, and to expand registered apprenticeships in AI-related occupations. Public-private partnerships and B2B platforms that can deliver scalable AI training solutions are especially well-positioned for growth.

Companies providing AIbased tools are strategically placed for increased demand from institutions seeking to modernize.

The current environment is fertile ground for companies offering:

• Operational efficiencies.
• Improved student outcomes.
• Technology enablement.
• Workforce-aligned programs.
• Revenue-sharing or performancebased contracts.

Partnership and Private Capital: The Search for Efficiency, Competitiveness, and Solvency

As financial pressures mount from the need to adapt to new accountability measures, tighter federal aid, and political scrutiny, institutions will be actively seeking partnerships to offset costs and mitigate risks.

The current environment is fertile ground for companies offering operational efficiencies, improved student outcomes, technology enablement, and workforcealigned programs, such as shared-service platforms, online program managers (OPMs), public-private partnerships (P3s) in infrastructure and student services, and revenue-sharing or performance-based contracts. However, as institutions face tighter budgets and higher taxes, spending on less mission-critical third-party services and partnerships will likely decline.

The Act's new federal borrowing requirements and caps and elimination of Grad PLUS loans are expected to significantly expand the private student loan market, as students and families seek financing from private lenders to cover shortfalls in their ability to fund their education. However, these changes will leave behind many low-income and high-risk borrowers, who may be unable to qualify for or afford private loans, impacting enrollments at institutions that serve these students.

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Disclaimer: This Alert has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice. For more information, please see the firm's full disclaimer.