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Tuition Turmoil: A roundtable discussion

Higher education leaders talk about the struggle with skyrocketing tuition costs and changes to federal aid programs.
University Business, May 2005

Pick up any newspaper and you'll see headlines that scream about skyrocketing tuition costs and cuts to aid programs. University Business Editor Tim Goral recently spoke with a panel of tuition experts to find out what these changes hold in store for for higher education.

Kurz: Regardless of the sticker price of an institution, whether public or private, the fact is that no one pays the true full cost of education. When you look at what it costs to provide the services and the level of the faculty at any institution, it is higher than what students are paying, even if they are paying the full sticker price.

Wright: The real cost of education is much higher than the sticker price at almost all institutions because there are so many additional costs--everything from technology changes to heating and lighting--besides just the instructional costs.

Breneman: And tuition, as high as it may appear, is only a fraction of the total resources that are brought to bear on a student's education.

Schapiro: At Williams, we spend $80,000 per student, and if you're part of the half or so of our students who the pay sticker price, that's about $40,000. So one way to think of it is that it's not the worst deal in the world if you are paying $40,000 for something that costs twice as much.

What happens when you
drastically reduce the
price? We happen to be in
an industry where people
confuse price with quality.
-Morton Schapiro

Scannell: We spend a lot of time with almost every client talking about creating proof statements on the return on investment. The problem is, this is an industry that has real difficulty differentiating itself, and if you pick up 10 random view books, you'll see phrases like "great hands-on experience," "safe campus," "close relationships with faculty." You see what should be differentiating themes, but everyone is using them so they don't differentiate anything. Institutions need to go to the next step and have data that demonstrates and supports what they are saying.

Breneman: Yes, the private rate of return financially to a college degree remains quite high--in the 10 or 11 percent range--calculated even with the higher cost, so as an investment this still remains a good payoff.

Scannell: There is very good data available on the lifetime earnings of someone with a four-year degree, versus someone with an associate degree, versus a high school education. That's a foundational argument, but it is incumbent on each institution to take it a step further and talk about why their particular brand of higher education is worth the price they are charging. I think this business of making the case that you're worth the price you're charging is one that higher education in general doesn't do a very good job with.

Schapiro: One of the things that has been fueling the increased demand for higher education institutions is the increased return on those degrees. It's such a good investment now. The rates of return are far in excess of those in basically any capital market.

Nemerowicz: It is a great deal when you look at the statistics of income for college educated versus non-college educated people. But that's a distant deal. It doesn't matter how good the deal is if you can't afford to take it. Our concern is the accessibility to the deal.

Nemerowicz: It's awful, and it will hurt our students. Large portions of our students are on Pell, but any cut in outside support for their attending especially a private liberal arts college will mean many can't come. We can't make up that in tuition, because many of the students who qualify for Pell now don't have other resources, and couldn't pay higher tuition even if we raised it. We try to give more financial aid. That's the alternative to Pell grants, the individual institutional support.

Kurz: Several years ago, colleges and universities were being accused of raising their tuition because it made students eligible for more Pell grant money or more loan money. But that wasn't true then, and it isn't true now. The things that drive tuition costs up are not related to suddenly being eligible for more financial aid, and I don't think that most IHEs are in the position of lowering tuition costs because there might be less funding available. What it may well mean is that students are going to have to make different choices than they otherwise might have been able to make.

Wright: It will certainly make it harder for families at some colleges--it all depends on how the college is going to handle what is basically a shortfall for them. They'll have to compensate somehow. Wealthy colleges will give more grants to make up for that change, and less wealthy colleges will give more loans. I think it's harder for colleges to raise tuition very high right now because of the scrutiny from the federal government, the media, and from families. That's why I think loans have been growing at a much higher rate than in previous decades.

Schapiro: The other thing that people forget to ask is, what does it do to the availability of institutional aid? Are federal aid and institutional aid complementary or are they substitutes? We found strong empirical evidence that they are not substitutes, they are complements. A lot of private institutions want to increase the socio-economic diversity of their student bodies, but they realize it is very expensive, so when the feds increase their financial aid that means that it gets people into the door and then the private institutions are more likely to supplement that aid with additional price discounts. If the government cuts back on aid, some people will think, 'well, that's OK because the private institutions are going to replace that aid.' In fact, it takes people out of even thinking about going to privates. It makes it so expensive for privates to package these kids that they become even more need aware.

Breneman: The core issue is a very real one: We are in danger as a country of pricing a number of young people out of college. Even though there may be student aid out there, we've made such a complicated process of finding it and working your way down to a net price that, for a lot of kids who don't have sophisticated parents or go to schools with poor counseling systems, I think many of these kids get discouraged and never bother to apply. I don't think we've got a good socially responsive answer to that question.

Wright: That has been suggested a number of times and it is one solution, but I feel it would never work in the kind of market that we're in right now. There would be questions about who would set the price, and whom that would advantage.

Breneman: If you're familiar with the economics of price discrimination--which is what this is--the simple fact is that if we lower the price to a bottom line that everyone can afford to pay, you give up revenue. A price discriminator works his way down the demand curve to get those people who are willing to pay a relatively high price, and then selectively discounts his way down the demand curve. If you go to a bottom line, you give up the revenue that you get from full pay students. So from an institution's point of view that would be a money-losing proposition. People often point to Muskingum College [Ohio] as an example of a school that lowered its price, but they had reached a point where they had almost no one paying anything close to the full price--they didn't have anybody in the upper reaches of the demand curve--so it made sense for them to lower their price. But the bulk of institutions still have 20 or 25 percent full-pays, so it is a revenue maximizing strategy to be a price discriminator.

Nemerowicz: How low does the playing field have to go? I support this kind of across the board kind of leveling, but you can't lower it to the extent that people need it. There has to be some other way of dealing with the problem. When students come to us with no resources, we've got to create other financial models and other opportunities to give something back to the institution to educate these young people.

Wright: We're in a positional arms race--no one can really agree what the price should be, and therefore the costs just keep going up. I don't see the possibility of lowering the price for everyone in the current situation. If it gets so extreme that the feds step in, then it might happen, but I don't think anyone really wants that scenario, including the federal government.

The things that drive
tuition costs up are not
related to suddenly
being eligible for more
financial aid.
-Kathy Kurz

Schapiro: Think about it in relation to other product markets--what happens when you drastically reduce the price? What kind of signal does that send to the market? We happen to be in an industry where many people confuse price with quality. For some schools it might be better to keep the sticker price high--even if no one is paying it--and do significant price discounts to enroll the students you want, and still maintain the high sticker price so you are associated with other high-priced schools that are generally perceived as high quality. Price is a very inefficient way to indicate quality, but I think public perception plays a large part in it.

Scannell: There is a model out there that's been going on for hundreds of years and that's the public sector where everyone does receive a discount up front. But the evidence about who goes to state-supported institutions and who goes to private institutions isn't what you might expect it to be. That is to say, all rich people don't go to private institutions and all poor people don't go to public institutions--it's quite the reverse. There are many affluent people who take advantage of that lower public price, such that at many of the better public institutions, the seats are full. So, families from middle and lower incomes end up going to community colleges or to private institutions, but with a lot of institutional grants. The idea of lowering the price for everyone doesn't always have the outcome that one would intend, which is to keep a school accessible and affordable for people of lower means.

Wright: I do think it's a trend and it will increase because competition is so fierce. I regard it largely as marketing, but it's also nice to be able to tell families what they are likely to pay over a number of years so they can do some planning. Rice had tuition indexing for a number of years, where the tuition went up only in relation to the Consumer Price Index, but we found that it was essentially just cost shifting. We had to raise tuition enough to cover increases in cost, but basically what it comes down to is that someone has to pay. So some colleges move to merit aid in order to deal with price increases and others do some kind of evaluation to attract more high-income students so they can shift that income to low-income students. Is it good for higher education? Probably not, but I don't see what can be done about it.

Breneman: Those plans are appealing because college is a four-year purchase, but it is doled out in four lumps. I'm on the board of Goucher College [Md.], and we used to do exactly what Lebanon Valley is doing--we announced that if students were in the top percentage they'd get a half-price discount. I don't like that. I understand why they do it and it's not going to stop just because I don't like it. We stopped the policy at Goucher when the new president came on board, because he concluded we didn't need it any longer. The upturn in demography was helping the college, and we were giving away half our tuition to students who could afford to pay it. In fact, he concluded that it even made the school look less attractive in some ways.

Schapiro: While I admire all these institutions that are innovative with their tuition models, I think the broader question is, does it bring people into higher education? Does it affect enrollment rates, or is it just a zero sum gain that one person goes up and one person goes down? I worry more about the overall educational enterprise and how we increase the socio-economic diversity of our institutions. I don't think that the little things that particular institutions do really amount to anything in the overall picture. But more power to them--they should be innovative.

Scannell: One of the things families need is predictability. They need to be able to plan and they need to be able to plan beyond one year. They need to look out over the course of a college education so they can have some idea of how they are going to cover those costs in a four- or five-year period. What many of these plans are--whether it is a guaranteed tuition or a predictable increase from year to year--is an attempt to put some predictability in the family planning process.

Kurz: We're going to see more and more ways of helping families understand what their long-term commitment is going to be. We'll also see schools looking for more innovative ways to market their tuition using guarantees.

Scannell: These kinds of plans are terrific for the people who are in a position to use them but that doesn't speak to the majority of the people.

Kurz: To some extent, without these plans there is really not a strong incentive for saving. That's something the financial aid profession has been struggling with for years because families have the perception that if they save, they are knocking themselves out of eligibility for financial aid, so what's the point? But only a small portion of your savings is going to be counted in the formula. If you don't save, you're really hurting yourself, because you'll have difficulty coming up with your family contribution out of your monthly salary.

Nemerowicz: I support anything that will provide funds for students that need them when they are about to go to college. However, for people who don't have the resources, the idea of saving 10, 15, or 20 years in advance for a college education is unrealistic, and it remains to be seen how effective the 529s will be for individuals--whether they can do it, or whether they feel it works in their best interest.

The core issue is a very
real one: We are in
danger as a country of
pricing young pople out
of college. - David Breneman

Breneman: I'm funding one for my granddaughter, but like any other investment, they can perform poorly for you. For people who have the capacity to do it--the upper-income families who can tuck money away and get tax preferred privileges for doing that--it's a reasonable policy. But don't kid yourself that it will help the low-income folks. The 529s won't help the access problem.

David Breneman, dean of the Curry School of Education, University of Virginia. An economist and well-known policy analyst, Breneman has authored numerous books and articles on the economics of education and public policy toward education.

Kathy Kurz and Jim Scannell are partners in the enrollment management consulting firm Scannell & Kurz, Inc ( Regular contributors to University Business, they specialize in developing customized financial aid/net tuition revenue and enrollment management strategies for their higher education clients.

Gloria Nemerowicz, president, Pine Manor College (Mass.). Pine Manor lowered its tuition in 1998, and has since successfully kept costs low to allow all interested students to achieve an education. Students at the liberal arts college leave school with approximately 70 percent less debt than most college students.

How low does the
playing field have to
go? You can't lower
it to the extent that
people need it.
-Gloria Nemerowicz

Morton Schapiro, president, Williams College (Mass.). With co-author Michael McPherson, Schapiro has written extensively on the issue of pricing and financial aid in higher education. Williams held tuition constant several years ago in response to the changes in aid policy of other Ivy League schools.

Ann Wright, vice president for Enrollment, Rice University (Texas). Although Rice is a member of the Consortium of Financing Higher Education, a group of highly prestigious institutions, they have deliberately priced themselves substantially below those institutions, in part because of their commitment to serving Texans.

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