Pricing College Tuition

Let’s assume for the purposes of this analysis that getting a college degree is good for most Americans. This assumption does not mean that every American needs a college degree to lead a productive life. But in most areas and in many industries a college degree will open the same doors for students that a high school degree opened for their parents in the 20th Century.

Let’s also assume that proponents of a college education will need to come to terms with the debate over the value of college degrees versus professional credentials within the marketplace. It is likely that in the end there will still be a robust market both for college graduates and credentialing programs.  There is sufficient demand for both approaches.

If these assumptions are correct, then the most important question on college and university campuses will be: “How do we price a college degree?”

Let’s look at the facts. American higher education institutions have a number of ways to produce income. Their efforts start with the comprehensive fee – tuition, fees, and room and board – to provide most of the revenue available to them. In all but the largest research universities, most additional revenue is drawn from interest taken from endowment earnings and donations received from supportive alumni and friends.

Offsetting revenue are expenses – often largely fixed – including land, labor, depreciation, capital investment, and financial aid. Colleges show financial aid as a discount against tuition received.

These facts state some hard truths. Colleges are labor-intensive operations, often showing up to 60 percent of their expenses as labor. In addition, they maintain an extensive physical plant operating much like a small town with expensive residential facilities, student services, protection, consumer-and alumni–driven wellness and athletic components, and recurring technology investments.  There are also significant outlays for areas like alumni cultivation, development, and federal and state reporting mandates. Added into the mix is the financial discount, now approaching 50 percent of every tuition dollar at many independent colleges and universities.

To offset aging physical plant and compete in a hypersensitive consumer market, many colleges and universities took on extensive debt  – much of it variable rate as the great recession hit – in an effort to compete successfully for students and alumni support.

On the public side, federal and state support, including direct institutional support, has declined dramatically. Worse yet is the uncertainty annually that makes budget projections extremely difficult given the national political climate.

And finally, media sadly translate fundamental problems simplistically into hype about high tuition sticker prices.

The effect is to erode confidence in the value and quality of America’s colleges and universities.

Where does this leave American higher education?

To begin, there must be agreement that the pricing model does not work. While wealthy parents can pay sticker prices exceeding $60,000 annually, the financial aid discount, comprehensive campaign strategies, and tweaks at the margin then applied as solutions by most colleges and universities are wholly insufficient. The gap between what students can and are willing to pay and the sticker price advertised is now too great for many Americans as recent polls suggest. Colleges and universities must moderate escalating sticker prices. Average annual increases that before the recession might approach 4 percent  – 6 percent and are now often in the 3 percent range.  They must continue to decline, even if inflation reappears.

Next, American higher education institutions must look inward. Since college and university budgets are largely an aggregate of fixed costs, incremental budgeting is an almost uniform strategy. American higher education must have an institutional infrastructure to support its evolution and growth. Like a good hockey player, higher education leaders must worry less about where the puck is and more about where it will be if they are to move the game forward.

Setting aside the political debates, what lines can be drawn on debt-financed consumer spending?  The rating agencies have downgraded the entire sector.  How can collaborative efforts with other institutions create economies and efficiencies of scale not otherwise possible? What administrative changes can decrease costs before a single program review occurs?  How can CEOs continue critical investments when the practical internal politics make postponing, deferring or delaying action the easy political decision? In short, are there new ways to think about how colleges are administered?

Third, American higher education needs to think about what goes into comprehensive campaign requests in a post-great recession world. Few athletic programs, even at the Division I level, for example, make money. If athletics support a broader admissions and wellness strategy, the college should fund these components but rely heavily on donor support to maintain expensive athletic staff and facilities that cannot support themselves otherwise. While athletics offers only one example, the broader question is how to establish the right priorities to deal with market forces?

Fourth, state and federal governments must recognize the role they play in running up college costs. A respected president once told me that his institution had undertaken a legal review of federal regulations, finding at the time that they were expected to respond to nearly 10,000 of them. Add in state regulations and there is a huge cost incurred annually by American colleges and universities. Sometime soon the federal government must undertake a review of cumbersome, archaic regulatory reporting requirements to provide budget relief.

Obviously, there are other steps that can be taken. The point of this exercise is to make the case for reform of college budgeting practices. Sometimes figuring out what to do is just as important as understanding what not to do.

At those institutions where the debate is still frozen on the amount of an annual tuition increase, trustees, presidents, and faculty must change the orientation of the discussion – and quickly. The financing model no longer works. The first step is to appreciate that time is running out.

One response

  1. This essay makes many good points, and I agree that current pricing strategies don’t work. But I don’t accept why the solution must be to limit sticker price hikes (which primarily translates to a reduction in the costs of the wealthiest students) rather than an increase in financial aid grants and a rejection of the dishonest way many in the media report about tuition (by giving the false impression that $60,000 is a common college tuition, when in reality the very highest charge for tuition and fees is $47,426 at Columbia, and the average student in America pays $5,189).

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