Summary: Yesterday’s post discussed the broken business models of the mainstream print media. Other institutions suffer from similar problems, as American undergoes massive financial, social, and technological shocks. Such as colleges. Institutions providing undergraduate education — specifically, 4 year non-technical degrees — have priced themselves out of their market, except for those few elites institutions with massive endowments (and rich alumni). The consequences for America might be large — both in terms of lost global competitiveness and decreased social mobility. This is the first post in a series about education; at the end are links to the other posts.
For a generation or two college costs have risen faster than both US household incomes AND government tuition support. This year is no exception:
With families facing one of the worst economic crises in the nation’s history, private, nonprofit colleges and universities have responded with the smallest average increase in tuition and fees in 37 years, according to the final results of a membership survey conducted by the National Association of Independent Colleges and Universities (NAICU). The 4.3% increase for 2009-10 is the smallest since 1972-73 … Over the past 10 years, the average annual increase in tuition and fees at private colleges has been 6%. (source: NAICU)
The effect of rising costs was muted by increased borrowing by parents and students. This is classic rent-seeking by colleges, described by Wikipedia:
{R}ent seeking occurs when an individual, organization or firm seeks to earn income by capturing economic rent through manipulation or exploitation of the economic environment, rather than by earning profits through economic transactions and the production of added wealth.
A college diploma has value unconnected to anything actually learned by the student, as it became the key component of American’s social allocation system — by which a new generation was steered into the job market. Colleges extracted. Colleges charged excess tuition to skim off as much of this as possible, expanded their costs to the maximum extent the market would bear.
Now that structure has crashed. People are less willing to borrow for college; lenders are less willing to lend to parents and students. Students and parents know a liberal arts education is seldom worth the cost either financially or intellectually. Now they increasinly wonder if the diplomma is worth the cost.
Colleges are left with broken business models: large inflexible cost structures, and disenchanted clients. Much like newspapers and airlines. And like them, those working in colleges only slowly realize the grim outlook. Their first response is to hope the good times return. The adjustment process probably will be long and painful.
- “Measuring Up 2008“, National Center for Public Policy and Higher Education
- “Will Higher Education Be the Next Bubble to Burst?“, Joseph Marr Cronin and Howard E. Horton, The Chronicle of Higher Education, 22 May 2009
Also, but with no excerpt: “Transformation 101“, Kevin Carey, Washington Monthly, Nov/Dec 2008 — “Technology is driving down the cost of teaching undergraduates. So why are tuition bills going up?”
Excerpts
(1) “Measuring Up 2008“, National Center for Public Policy and Higher Education — Excerpt from page 8:
The deterioration of college affordability throughout the United States has contributed to the disparities in higher education opportunity and attainment. There are several dimensions to this national and state problem.
First, college tuition continues to outpace family income and the price of other necessities, such as medical care, food, and housing (see Figure 5). Whatever the causes of these tuition increases, the continuation of trends of the last quarter century would place higher education beyond the reach of most Americans and would greatly exacerbate the debt burdens of those who do enroll.
Second, the erosion of college affordability has been exacerbated not only by increased tuition, but also by relatively flat or declining family incomes. As a result of these trends, the financial burden of paying for college costs has increased substantially, particularly for low- and middle-income families, even when scholarships and grants are taken into account (see Table 1).
Third, students who do enroll in college are taking on more debt to maintain their college access. More students are borrowing (see Figure 6), and they are borrowing more. Over the last decade, student borrowing has more than doubled (see Figure 7).
Another dimension of the problem of college affordability involves the financial aid priorities of colleges and universities, which are not in synch with public policy priorities. Currently, students from middle- and upper-income families receive larger grants from colleges and universities than students from low-income families receive (see Table 2).
(2) “Will Higher Education Be the Next Bubble to Burst?“, Joseph Marr Cronin and Howard E. Horton, The Chronicle of Higher Education, 22 May 2009 — Excerpt:
Is it possible that higher education might be the next bubble to burst? Some early warnings suggest that it could be.
With tuitions, fees, and room and board at dozens of colleges now reaching $50,000 a year, the ability to sustain private higher education for all but the very well-heeled is questionable. According to the National Center for Public Policy and Higher Education, over the past 25 years, average college tuition and fees have risen by 440 percent — more than four times the rate of inflation and almost twice the rate of medical care. Patrick M. Callan, the center’s president, has warned that low-income students will find college unaffordable.
Meanwhile, the middle class, which has paid for higher education in the past mainly by taking out loans, may now be precluded from doing so as the private student-loan market has all but dried up. In addition, endowment cushions that allowed colleges to engage in steep tuition discounting are gone. Declines in housing valuations are making it difficult for families to rely on home-equity loans for college financing. Even when the equity is there, parents are reluctant to further leverage themselves into a future where job security is uncertain.
Consumers who have questioned whether it is worth spending $1,000 a square foot for a home are now asking whether it is worth spending $1,000 a week to send their kids to college. There is a growing sense among the public that higher education might be overpriced and under-delivering.
In such a climate, it is not surprising that applications to some community colleges and other public institutions have risen by as much as 40 percent. Those institutions, particularly community colleges, will become a more-attractive option for a larger swath of the collegebound. Taking the first two years of college while living at home has been an attractive option since the 1920s, but it is now poised to grow significantly.
With a drift toward higher enrollments in public institutions, all but the most competitive highly endowed private colleges are beginning to wonder if their enrollments may start to evaporate. In an effort to secure students, some institutions, like Merrimack College near Boston, are freezing their tuition for the first time in decades.
Could it get worse for colleges in the coming years? The numbers of college-aged students in the “baby-boom echo,” which crested with this year’s high-school senior class, will decline over the next decade. Certain Great Plains and Northeastern states may lose 10 percent of the 12th-graders eligible for college. Vermont is expected to lose 20 percent by 2020.
In the meantime, online, nontraditional institutions are becoming increasingly successful at challenging high-priced private colleges and those public universities that charge $25,000 or more per year. The best known is the for-profit University of Phoenix, which now teaches courses to more than 300,000 students a year — including traditional-age college students — half of them online. But other competitors are emerging.
.. Moreover, increases in federal financial aid and state scholarships have been unable to keep up with the incessant annual increases in tuition at traditional four-year colleges. For example, Congress has raised the Pell Grant limits from $4,731 to $5,350 a year by scrubbing the federal loan programs of bank subsidies thought to be excessive. But $5,350 pays for only about four to six weeks at a high-priced private college.
… What can they do to keep the bubble from bursting? They can look for more efficiency and other sources of tuition. … Colleges can also make productivity gains by using technology and re-engineering courses.
… The economist Richard Vedder of Ohio University, a member of the federal Spellings Commission, offers more radical solutions. He urges that university presidents’ salaries include incentives to contain and reduce costs, to make “affordability” a goal. In addition, he proposes that state policy makers conduct cost-benefit studies to see what the universities that receive state support are actually accomplishing.
Joseph Marr Cronin is the former Massachusetts secretary of educational affairs, and Howard E. Horton is the president of New England College of Business and Finance.
Afterword
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To read other articles about these things, see the FM reference page on the right side menu bar. Of esp relevance to this topic:
Posts about America’s education system:
- College education in America, another broken business model, 3 July 2009
- The secret about our universities (seldom even whispered among Professors), 5 July 2009
- Women dominating the ranks of college graduates – What’s the effect on America?, 7 July 2009
- A better answer to “why women outperform men in college?”, 8 July 2009
- Is a college education worth a million dollars?, 10 July 2009
- What should a student learn from college? Why go to college?, 1 November 2009