Volume 16
 

The Economics of Higher Education: Increasing Tuition and Endowments

By Brian Bingham

The golden dome (2)

Image Credit: Know1one1, Wikimedia Commons

On Tuesday, February 10th, the University of Notre Dame announced that tuition and fees for the upcoming school year would increase by 3.7 percent to $47,929, raising the estimated total cost of attendance at Our Lady's University to $61,775 (NDSMC Observer). President John Jenkins C.S.C lauded the act a monumental achievement on the administration's part - the percentage increase was the lowest since 1960, when the University last kept the same price for two consecutive years (Felsenstein). Students nevertheless took to social media sites like Twitter and Yik Yak to voice displeasure at the controversial yet unquestionably standard practice of raising tuition at American colleges and universities.

As any college student is acutely aware, tuition costs rise every year at nearly every major institution of higher learning. While inflation chronically devalues currencies, the rates at which tuition has been increasing over the past quarter-century vastly outpaces even the most inflation-heavy years (Ehrenberg, ix). I hope to find out why colleges continue to raise costs, when at first glance cutting the sticker price would perhaps attract more applicants. Afterwords, I hope to come to a conclusion as to whether or not a bubble, similar to the one that destroyed the housing market in late 2007, is developing in higher education. It seems unfeasible that top-tier schools like Harvard or Yale would go defunct, but what about schools that lack the abundant resources to save themselves? Will they soon all but disappear?

After discerning why colleges feel the need to annually raise tuition, when presumably a cheaper sticker price would attract more applicants, I will test my hypothesis that, unless changes are made to the current system, mid-tier and lower-tier private institutions will simply not be able to outlast their public peers while attempting to compete with top-tier private institutions in terms of price. I will explore the exponential growth of non-traditional educational alternatives like online colleges, which are expected to cause an enrollment decrease in the near future. Finally, I will conclude with what I believe are likely pathways that all colleges - not simply lower-tier ones - can take to combat exorbitant tuition increases that only help to further America's divide between the rich and poor.

Tuition and Endowment

In 1976, it cost a family on average just over $2,500 to send a student to a private institution of higher learning. After accounting for inflation, that sum would be worth slightly under $10,000 in 2007, yet average tuition costs at private schools had skyrocketed to over $20,000 in this 30-year period (Gillen 8). Jonathan Robe of the Center for College Affordability and Productivity recently released a chart which depicted the causes behind a phenomenon that will leave "an entire generation at a loss as to how they will pay off their loans" (Hilsinger). He outlined three contributing factors: increases in student demand, marketing, and administrative spending. The first category is buoyed by simple supply-side economics - if demand increases yet supply (number of seats available in a given class) remains the same, price will increase. In 2005, Harvard received an astounding 22,753 applications vying for one of just under 1,700 seats for its class of 2010. Five years later, just under 35,000 students applied to the very same university (IvyCoach). In order to attract more potential enrollees and drive down their precious acceptance rate, schools increase spending on everything from athletic facilities to new dorms to free laundry services. Such extra expenditures, while seemingly justifying higher tuition prices, allow a school to appeal to precocious and impressionable high school students. This budget crisis is worsened by a rampant increase in administrative spending over the past eight years: according to Robe, schools have increased such spending by 61 percent while only ratcheting up funds dedicated to students by 39 percent over the same time period (Hilsinger). Former Duke admissions officer Rachel Toor told Time Magazine, "[Every school] wants to keep their admit rate low because that makes you more selective, which gives you a higher place on the college rankings" (Webley). Based on these factors, schools may seem justified in raising tuition: every school has a very real incentive to offer the newest facilities, fanciest dormitories, and of course, lowest acceptance rates.

What infuriated students at Notre Dame perhaps even more than the extra $2,000 they would be paying for the upcoming academic year was the fact that the University was so incredibly rich yet chronically fails to pass such savings on to its students. The school's endowment grew by 17.3 percent between 2013 and 2014, elevating the sum to $8.039 billion, larger than all but 11 other schools in America (Onink). The explanations offered by Robe present legitimate reasons for schools to raise their total cost of attendance to well over $60,000 per year, yet fail to account for a critical demand-side economic question: why, in an attempt to attract more applicants, would a school not drastically reduce costs and thereby undercut their peers? Schools like Notre Dame clearly have the resources, but apparently not enough incentives to actually do so. In order to answer this question, we must acknowledge that a college education is not, in economic terms, a 'normal good' - one that follows the rules dictated by traditional supply and demand (Gillen 13). While many commodities become more expensive as demand increases, the same is not true for college education. Price remains virtually the same regardless of the demand by prospective students.

A key takeaway from the Gillen article is that colleges, and the administrators they hire, are not looking to maximize profits. In theory, a school for which demand is extraordinarily high - Harvard, for example - could drastically increase its net profits by taking one of two courses of action: raising tuition to astronomical levels and only accepting those who can pay, or drastically raising enrollment by a factor of 500 percent or even more. Of course, Harvard has a very real reason to not engage in either practice - doing so would decrease the quality of its students, and, by extension, the school itself. For non-profit schools, additional funds "are sought for the purpose of building a better institution," not simply lining the pockets of administrators or shareholders (Gillen 13-14). Gillen argues that the end-goal for a college is achieving maximum prestige, not profit. The collegiate economic landscape is further muddled by the lack of a clear way to discern the quality - the economic worth - of an education. Some services attempt to quantify this value by estimating the career earnings of a school's graduates. This method, while largely arbitrary, and often dependent on alumni to report data, has no universal standard that can be applied to both research universities and smaller liberal arts schools. Gillen writes that in many cases (excluding public schools and military academies), cost serves as a proxy for quality (Gillen 15). A higher cost perversely leads prospective students to view a school as more desirable. As such, he notes, a decrease in tuition could in fact scare off some applicants who would associate this price cut with the school lowering its quality. A college education is an incredibly unique economic good, bounded by pressure from alumni, administrators, and of course, one of the most influential factors in the collegiate environment: ranking agencies like Forbes or USA Today.

Alternative Resources

In the one generation that separates today's college students from their parents, countless elements regarding the collegiate landscape have changed, but none more so than the role of the Internet in today's classrooms. Computers took up entire rooms thirty years ago, and inter-device connections were virtually unheard of. Today, it would be an incredibly rare sight to walk into a lecture hall at any campus and see less than ten laptop screens - many of them browsing the web rather than taking diligent notes. With this incredible rise of the Internet over the last quarter century, however, has came a challenging and legitimate threat to the current university model: online educational alternatives. What do Harvard University, Massachusetts Institute of Technology, and the University of California at Berkeley have in common with a rural high school in Mongolia? All four offer massive open online courses, known colloquially as MOOCs (Pappano). A Stanford professor first conceived the idea of ubiquitous and free top-notch educational offerings in late 2011. Shortly after, administrators at Harvard and M.I.T. decided to collaborate on a project known as edX, which now offers 68 courses to more than 1.25 million students around the world (Pappano.) Although many initial MOOCs focused on math and computer science, heavy competition in the field is leading companies to diversify their offerings making it possible to study virtually any discipline - from the history of rock and roll to marine biology (Pappano). According to the Economist Magazine, the astounding rise of MOOCs and other non-traditional, technology-based educational offerings is the greatest change to the university system since the 12th century (Economist Magazine) As such, it would be foolish to assume such services could not compete with current four year colleges for prospective students. In order to understand this relationship, we must again look at the economics behind this phenomenon.

Unlike a traditional university which is a non-normal good, MOOCs follow laws of supply and demand, and are created (largely) by companies looking to maximize profits (Economist Magazine). Of course, operating a massive open online course has many expenses that a traditional class does not present: the need to film classes, the necessity of creating special software to prevent cheating and impropriety, and of course, the challenge of handing out grades to thousands of students. According to Alex Tabarook of George Mason University, "teaching additional students is virtually free" despite the fact that "the fixed cost of creating an online course is relatively high" (Economist Magazine). Every student that registers for an online course operated by edX pays a fixed rate. Although it costs the company a tiny amount of money to grade each student (and for many computer science and math courses grading is automated), each new matriculant represents pure profit for the company. When combined with the fact that many MOOC offers are private companies looking to maximize profit, a tremor may run down the spine of traditional college administrators.

When the Bubble Bursts

It should come as no surprise that the combination of ever-higher costs and cheap (if not free) alternatives to the traditional university system is placing collegiate administrators between a proverbial 'rock and a hard place.' They cannot cut tuition lest applicants perceive this price break as a signal of inferior services, yet at the same time such men and women are left speechless when responding to students who wonder why a school like Notre Dame needs an additional $2,000 per head when its endowment has surpassed $8 billion. Fortunately for men like John Jenkins C.S.C., however, top-tier and extraordinarily wealthy schools have distinguished themselves from certain peers in one distinct manner: their operating budgets are not contingent on a certain level of income generated by tuition. This allows schools like Notre Dame to offer grants and scholarships to students who deserve a seat, yet cannot afford to pay the sticker price. According to Jessica Thompson of the University of Washington, the astronomical 'average' tuition costs are not reflective of what a school typically receives. Based on analysis performed by the College Board, the average student pays less than half of the sticker price (Thompson, 3). Although a college receives some money from other sources - local, state, or federal grants and scholarships, for example - schools rarely take in the advertised cost of tuition. Schools like Notre Dame and Harvard can afford to partake in this meritocracy, thereby increasing both the quality of their student body as well as economic diversity among the student body. Stanford just last month announced a monumental initiative whereby the school requests no tuition payments from students whose family income is under $125,000 (Fox). Top tier schools can further separate themselves from their peers by recruiting brilliant yet economically disadvantaged students. At the opposite end of the spectrum, however, are private schools that rely upon tuition payments for annual - or sometimes even daily - cost burdens.

High Point University is a private four-year institution located in the heart of North Carolina. Since Nino Qubein became president in 2005, more than $700 million has been spent on academic and structural improvements to the campus, all part of a $2.1 fifteen-year plan that aims to transform a once-mediocre school into a southern powerhouse that can compete with hegemonies such as Duke and Vanderbilt (Matlack). In keeping with Robe's assertion that colleges are increasingly obsessed with affording countless luxuries to attract prospective students, High Point has installed a movie theater and hot tubs on campus, along with an ice cream truck commissioned to roam the campus (Matlack). In spite of such extravagances, however, High Point is less-than-desirable in certain other capacities. According to John Nelson of Moody's Investors Service, High Point accumulated a debt of $165 million (in contrast to the billion-dollar endowments touted by other schools) and its debt rating was downgraded to junk status in 2009 (Matlack). It should come as no surprise that this university is one of many emerging private schools that is dependent on annual tuition payments. Students pay $37,000 for room and board, a figure that is comparable with many other private schools (including Notre Dame). High Point distinguishes itself, however, in its decision to discriminate based on ability to pay. Aid only accounts for 15.1 percent of its total tuition payments, according to BusinessWeek, a figure that is less than half the national average. Perhaps more egregiously, is the incredible decrease in minority enrollment that can be attributed both to price discrimination and an attempt to raise the school's average SAT score. African-Americans comprised one quarter of students in 2005 before Qubein's term began; that figure currently sits at a paltry 5.8 percent (Matlack). In an attempt to compete with other schools in terms of academics and luxuries, High Point has sacrificed its financial integrity and commitment to the disadvantaged poor of America. Its dependence on tuition serves as a microcosm for the destructive force of long-term economic instability sweeping the higher education market.

A trendy comparison was often made, particularly at the end of the last decade, between college education and the housing 'bubble' that played a foundational role in the recession of 2008. Forbes recently published an article criticizing the lending policies that have allowed for an astounding $1.2 trillion in student loan debt to amalgamate over the past two decades (Denhart). In her paper for the University of Washington, however, Thompson refutes this analogy by succinctly declaring that a bubble cannot exist because there is no resale market for a college degree (Thompson 2). As a result, one cannot foreclose on his/her degree; once earned, a college degree is permanent. Additionally, there is no way for outsiders to speculate on future prices or earnings as there was in the housing market. While Thompson summarily refutes this comparison, I contest that another 'bubble' already exists in the American university system: those private institutions which, in many cases by no fault of their own, cannot compete with MOOCs and online alternatives. Forbes magazine defines a bubble as "a run-up in the price of an asset that is not justified by the fundamental supply and demand factors for the asset" (Conerly). Based on aforementioned statistics, I argue the combination of rising tuition and increased supply via online alternatives have combined to create an artificial bubble in college education. Though the economically-destructive potential of this bubble bursting, or a number of schools shutting their doors in a relatively small period of time, is remarkably small when compared to the housing market, it could have massive ramifications in particular communities. As more and more alternatives arise, schools like High Point will be faced with a dilemma: either continue to raise tuition and only enroll the select few applicants who can afford to pay (and thereby decrease the schools quality), or keep tuition constant and be perceived as decreasing the quality of education. Both factors would presumably reflect negatively in the minds of prospective students, leading to less applicants and even fewer who can afford the tuition demanded by the school. Although this thought experiment is somewhat far-fetched and ignores many realities of the present day (such as the growing influx of international students), I assert that many American institutions are operating on a simply unsustainable foundation.

Conclusion

Even as the college environment becomes more and more competitive and cutthroat, and as alternative learning opportunities arise with increasing frequency, administrators must adhere to the core values that originally allowed for their institution to flourish. Spend money on attracting the best professors, not providing free laundry services or ice cream to students. Increase the endowment but only insofar as the cost of doing so does not prohibit the school from enrolling low-income and minority students who may not be able to pay $60,000 per year. Embrace alternative forms of education, for they are undoubtedly going to play a role in the future of American education. Posters placed in dormitory hallways at Notre Dame, for example, advertise three-credit summer classes that students can take exclusively online. As in any industry, it is a fact of the matter that some schools will eventually go belly-up and have to shut their doors. I contest that the unique 'bubble' created by both tuition and alternative sources has been decades in the coming. A colloquial and overwhelmingly common slogan used to describe Wall Street banks during the economic recession of 2008 was 'too big to fail.' Those schools with the economic reserves to stave off the inevitable downturn created by this bubble will survive - in the case of a $9 billion endowment, Notre Dame simply appears too wealthy to possibly go under. Universities without such reserves, however, are certainly in for an uphill climb over the next decade.