Pricing College Out of the Market
For the past five or six years, tuition charges at private colleges and universities have been rising at twice or three times the rate of inflation. While most of the rest of the economy has prospered with a relatively low rate of inflation, private education seems to have remained stuck in the era of high inflation rates. Each spring parents of college students can expect to receive a letter from a dean or president informing them of yet another increase in tuition of 6%, 8% or even 12%.
The most common excuse for escalating tuitions is that faculty salaries have lost much of the buying power that they had in the mid-1960s and early ‘70s. There may be some truth to this argument, but it does not really explain the rise in tuitions. If you look at how colleges and universities are spending the additional money they generate by raising tuitions, you will see that only a small part of it goes to increase faculty paychecks. Much of the additional money is being spent on improving a wide range of facilities, services and programs: career counseling, study abroad, internships, special seminars, lectureships, publications and, most important, financial aid.
The reason for this is that private colleges and universities no longer compete with each other on the basis of stated price, as do most other commodities and services. They compete primarily on the basis of general academic reputation, enhanced services and programs and discounted prices (financial aid).
The number of traditional college-age students has been declining since 1980. If the usual laws of economics applied to higher education as they do to widgets, you would expect the price of a college education to drop. That is what should happen when an abundant commodity seeks fewer purchasers. But the opposite has occurred. The market for independent colleges and universities seems to be relatively insensitive to price. What this means is that the consumers of higher education--parents and students--do not appear to be choosing institutions on the basis of cost.
There is a good reason for this. First, approximately 80% of today’s students go to public universities. The cost of operating a public university is not less than the cost of operating a private university of the same size, but the price to the consumers is considerably less because of state tax support. There is no way that independent colleges and universities can compete with public universities on the basis of stated price or tuition charges.
Second, as many as two-thirds of the students who attend the better-known independent colleges receive some form of financial aid. Most institutions will award aid in the form of scholarships on the basis of need, to make up the difference between what the college charges and what a qualified applicant’s family can afford to pay. A family that can pay $5,000 per year will be charged $5,000, whether the tuition is $8,000 or $12,000. Given a choice between Pontiac College, with a tuition of $8,000 per year, and Cadillac College, which charges $12,000, which would you prefer, knowing that, in either case, the cost to you will be the same: $5,000?
Being a rational consumer, you will compare what each college offers in the way of prestigious faculty, up-to-date facilities, career counseling, food and housing. You probably will choose Cadillac College: It has a better reputation for academic achievement, its campus is picturesque and its course catalogue is full of small seminars and tutorials.
Now look at the situation from the point of view of the president at Pontiac College. Pontiac cannot compete with the public institutions on the basis of price. Neither can Pontiac compete with Cadillac College on the basis of price, because the financial aid policy at both institutions equalizes price for the majority of students. Pontiac College will enjoy little competitive advantage by charging less than Cadillac College. Why, then, should the president at Pontiac cut corners, why economize, why defer renovating that aging dormitory? Nobody will appreciate those cost-cutting efforts. Why not just raise Pontiac’s tuition to $12,000 and be done with it? Pontiac will pick up students who cannot get into Cadillac, many of whom won’t need or qualify for aid, and it can spend part of its additional revenues on beefing up financial aid.
What is wrong with this thinking? For the consumer, and for higher education in general, plenty. In the long run, tuition escalation is going to drive more and more students to the public universities. The Pontiac Colleges of this country will not be able to offer enough services to offset the great price advantage of the public university. The more affluent and prestigious independent colleges will prosper, but the independent sector is likely to become smaller as less prestigious colleges are unable to attract qualified students. At some point, independent colleges and universities will become elitist preserves with dwindling influence on the intellectual and cultural life of the nation.
Escalating tuitions may appear to be an easy short-run solution to a college’s financial problems, but they have disastrous long-term consequences for all of higher education.
