Two days ago USA Today had an article on colleges that are cutting tuition to lure more students in. This is mostly among private colleges that have struggled in recent years to lure students in, as their tuition prices have climbed and the public has become skeptical of the career value of a more liberal arts based education. The next few years will be particularly tough because of a dip in high school graduates (there were half a million fewer students enrolled in college last year, and many colleges are seeing a significant decrease in their frosh classes this fall). And it appears that just about every year now some private college shuts down (if you were counting, that’s at least two in 2013).
Forbes recently analyzed the financial health of all private not-for-profit colleges in the U.S., grading colleges’ financial health on a A-D scale (just like college grades). The news is a bit gloomy, as seen by their grade distribution.
There are qualms about the quality of the data Forbes used, but Moody’s paints an equally gloomy picture. The ones at most risk, according to Moody’s, are “very small, private colleges with a high reliance on student charges, indistinct market positions, and limited donor support.” I’ve been thinking about this issue for about five years now, and that sounds exactly right to me.
So does it make sense to actually cut tuition? Sure, if students weren’t paying it anyway. I don’t mean just students who chose not to attend because of the high list price, but the financial aid schools have to give to students, most of whom actually get a significant discount off the sticker price. This aid from the school itself may come partly in a loan, but most of it comes in the form of grants and scholarships (which commonly are given based more on financial need than actual scholarly ability). If the list price is $25,000, and the school averages $5,000 in grants per student, then if we drop the list price to $20,000 it all comes out even.
Of course the idea of that lower price is to draw in more students, so if $20,000 isn’t really covering the actual per-student cost to the college, then it may help enrollment while not helping revenue. USA Today cites Concordia University (St. Paul, MN) officials as saying they expect their plan to cost them some money initially. But, according to their COO, “If we kept going at that rate (of declining enrollment) we were going to have fewer and fewer students coming to us.” And that’s an even bigger problem, because the loss of revenue from each non-enrolling student is greater than the loss of revenue from an extra student paying less tuition. Fortunately the marginal cost of any given student is not actually the full tuition price, given fixed costs that have to be covered (my classroom’s utilities and my salary don’t differ between a class of 5 and a class of 25). So getting more students in at lower list, but same real, price is potentially better than getting fewer students in at higher list, but same real, price. Still, there’s the potential for a replay of the old joke, “If you’re losing money on each unit, how do you make it up? Volume!”
Ultimately, the college has to find that extra money to cover its costs from somewhere, and this got me to wondering what it would take for my college to offer actual free tuition. Our list price tuition and fees are right about $30,000 per year (not counting room and board). And we have about 1750 students. That adds up to tution (list price) of $52.5 million per year. If that was drawn from the earnings from an endowment, and we use the general assumption of 5% per year, it would require an endowment of $1.05 billion.* Our room and board is just under $10,000 per year–imagine the sales pitch if we could say our tution and fees are just $10,000 per year, and we offer free room and board (that way we also get some revenue from commuters, eh?). (To cover tuition, fees, room, and board totally would require an endowment of about $1.4 billion.)
Now obviously it’s not easy to raise that kind of endowment, especially for those colleges that currently need it most. But of course not that much is needed just to cut down the tution price significantly, without costing the college money. It’s still not easy to raise, though, because donors aren’t big on giving their money to a general endowment. They like things they can put their names on. Endowed scholarships are good, but they tend to be small. Endowed chairs in faculty departments are also good, but they’re rare at these kinds of schools. Buildings are what donors really seem to like, because everyone can see their name on it. And that’s ok, if you have an existing building that can be renamed, and the money actually put to covering tuition costs, but most existing buildings are already named, and people tend to get a bit pissed if you take their family name off it–and you never want to piss off a family that has given generously over the years. And anyway, a really big donation is normally in the $5-$10 million dollar range–you can do the math to figure out how many of those it will take to get to a billion.
Raising big bucks can be done. Hillsdale College, after it decided to forgo accepting federal financial aid for students, had to find other sources for its funding, and it’s raised an endowment of almost $300 million (I think their goal is $400 million). But by virtue of its ideological position, it was able to tap into wealthy conservative and libertarian minded donors. Remember, the real problem is for “very small, private colleges with a high reliance on student charges, indistinct market positions, and limited donor support.” They had the first, and probably, at first, the second, but they’ve worked their very distinct market position for all its worth to reverse the third.
So the most straightforward solution remains out of reach for most of the colleges most in need of it. But if some multi-billionaires were to decide this is the route they want to go, say giving $400-500 million each to several schools, they could go a long way toward ensuring continuing affordability of private college education in this country.
That is, if anyone out there still believes in it.
* Only $1.01 billion to go!