$1 Billion for Free Tuition?

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.
0723_distribution-of-grades-chart_3002 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!

About J@m3z Aitch

J@m3z Aitch is a two-bit college professor who'd rather be canoeing.
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4 Responses to $1 Billion for Free Tuition?

  1. Troublesome Frog says:

    Tuition is something I can’t figure out. There’s something very wrong when rapidly increasing pricess are tied to suppliers going out of business, especially when the “production” process should be roughly the same as it always was. I’m pretty sure that you won’t admit to taking home all that extra cash as salary, so where’s it going?

    It’s like nursing. In any given week, I read news articles about shortages of nurses / nurses working crazy hours and articles about nurses graduating from school unable to find stable jobs / nurses working temp work with no benefits. Talking to my friends in the industry, as far as I can tell, both of these things are simultaneously true. That screams “broken market” to me.

    At least the medical industry can blame our ridiculous regulatory environment and hopelessly broken insurance system. What’s up with higher education?

  2. J@m3z Aitch says:

    so where’s it going?

    There’s the question, all right. One argument is that education suffers from a “cost disease.” (But others, like Tyler Cowen, think the cost disease idea is, in general, bunk.)

    My opinion is that the cost drivers are students. Colleges have to attract the little buggers, and it turns out that while they all complain about the cost of tuition, most of them don’t want a no-frills campus. So they’re driving cost increases in technology and amenities. When I first went to college, I shared a dorm room with a friend. During homecoming a middle-aged guy stopped by and said it used to be his room, but back then it was 3 students to a room. I shuddered at the thought. Today most students want single rooms. And they want nicer rooms, ideally with private baths, or at least just a shared bathroom instead of the old down-the-hall public shower. And internet access sufficient to play MMOGs with brilliant graphics streaming at high speed without a hitch. They want onsite laundry facilities, etc. etc. etc. Colleges don’t have much choice but to compete by the rules the students have collectively created, and the students go along not realizing how much they’re the cause of the problem, and willing to pay because much of the price is either subsidized or deferred.

  3. Troublesome Frog says:

    I think that cost disease is quite real, but not a huge factor. It’s hard to get around the notion that anything produced with pure labor will go up in cost faster than inflation as our labor becomes more valuable in terms of “other stuff / everything else.” It seems unavoidable by definition. But it also seems to me that we buy those things with our labor as well, so it shouldn’t get that much harder to purchase them.

    Amenities are certainly a driver, but how big? I did my higher education from 1999-2004 at a private university and single rooms were vanishingly rare. Private bathrooms were nonexistent. But even if we draw a big box around “tuition + room + board” and call it one product, has the cost of comparable room and board skyrocketed outside of the university environment the same way it has when a university sends you the bill? I mean, laundry facilities in the basement of a housing unit are not unusual both on and off campus, so why the compounding of cost?

    IT is an interesting possibility, but again it’s not something that’s unique to university environments. We’re very good at building large IT infrastructures in businesses at reasonable costs. And of course, the cost per unit of IT goodness should be dropping every year. We should have seen IT cost growth rate start to decline 5-10 years ago. But not at universities.

    Even stranger, it sounds like the universities who are having trouble aren’t the big research schools that spend huge money on computers and labs and other fancy infrastructure but the small schools whose IT infrastructure tends to be… well… hilarious.

    My primary suspicion is that we’re arming both sides in a bidding war for a limited set of seats. I’m all for government subsidizing eduction, but when demand is outstripping capacity, subsidizing the demand side doesn’t help us. “Both of you are bidding for that one chair? Well here’s $10K each to defray the costs of the bidding war,” is a really dumb policy. But that only explains high prices, not why schools are having trouble staying afloat with what look like historically unprecedented revenue streams.

  4. lancifer666 says:

    In the fifteen years I have been teaching at IUPUI my salary has increased by 38% while tuition has increased by 175%.

    I am clearly not the cause of the increase.

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