Why Do Colleges Cost So Little?

Parents Forum
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As Boys Town found out some years ago, a non-profit that accumulates too much wealth for the amount of public good it does will be scrutinized by the IRS.

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<p>That's not really a problem for mini's plan. The college can easily spend the additional revenue generated from the students whose families are at the top of the income distribution by admitting more students at the bottom of the distribution.</p>

<p>Or...they could spend the money in other ways....I'm sure the librarians have a wish list of books and journals they'd like to buy, the science faculty have a wish list of lab equipment they'd like, the language faculty would like to lead more school-funded trips abroad, class sizes could be smaller, faculty could get lighter teaching loads, etc., etc.</p>

<p>OR...they could spend the extra money on the snazzy marketing materials they need to continue to attract applicants!</p>

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<p>If you bring in too many poor students--there goes the "prestige" factor. That's the problem with being exclusive--when everyone goes there nobody goes there anymore.</p>

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<p>I don't think poor students would take away the prestige factor. Only stupid students would do that.</p>

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<p>I'll answer your question, mini--because that's what they think they can get in the marketplace. It's certainly not altruism. There may not have been specific economic modeling going on (or there may have been), but colleges, like any other business, have an idea of a tipping point beyond which the increased price is not justified by the purportedly increased value. It's one thing to tell yourself that the total cost of an LAC is justified at twice the level of a state university Honors College--it's another thing to justify something which is 3 or 4 tines as expensive. Yes, the experience has been that tuition increases have not slowed down application numbers, but kids are applying to more schools than ever before, and everybody is raising tuition substantially. If the "elites" make a quantum leap and no one else does, well, that scenerio has only been played out in the minds of the colleges involved. They've reached their conclusion.</p>

<p>I do want to know one thing--if it costs so much to educate kids that small privates are losing money on each student, why are they wasting money sending out all sorts of advertising and solicitations to apply?</p>

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<p>This very question arose during a meeting at the private school where my kids go. The subject was fundraising, and the cost per student, which like colleges, was much higher than the tuition. The answer given by the school headmaster and president, was that the tuition amounts are set after careful analysis of what the market will bear without compromising the quality of the school. This is an economic balancing act, as you do not want to increase the number of kids on aid so that it offsets the increase in tuition, and lose qualified kids as well. Although this school is very selective, it does lose kids who do not qualify for scholarships because of the need requirement to get any money, yet the price is just too high for the family's comfort. The numbers for like schools are very close in costs, so the same conclusions either are made, or they are just copying each other.</p>

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<p>Right now the housing market is changing from asking "Why do houses cost so little?" to "Why do houses cost so much?" but I agree with Mini that the price of elite higher education probably hasn't even risen to its "natural" level yet. The top of the natural level of price would be set by the market's estimate of the value of such education, and that estimate is still quite high, on some reasonable grounds.</p>

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<p>dadx3:</p>

<p>I think you're missing some of the point. It costs substantially ALL colleges more money "to educate kids" (really to operate the institution) than they charge in tuition (except for a few trade schools). Operating costs are funded by tuition, government grants and contracts, endowment, sales and licenses, explicit government funding (in the case of state institutions and the military academies), and annual giving.</p>

<p>It seems unquestionable that the superelite colleges could, if they wished, collect a substantially higher base tuition. After all, one of the commonplaces of CC is that some people out there are spending multiple tens of thousands of dollars on "packaging" and test preparation just to improve their kids' chances of getting into one of them. Presumably, they would be willing to pay more for the privilege of actually attending (and, of course, rumor has it that this can be arranged, at really substantial figures). Let's say they charged $100,000/year in tuition, but set EFC at 15% of family income (or some asset equivalent). They would probably pull in more net revenue. Would a family with $1 million annual income balk at $100,000 for Harvard?</p>

<p>Nevertheless, I think you're right. Their other revenue streams are just as (if not more) important than tuition, and setting nominal tuition far above state institutions might affect government funding and charitable giving. (Remember, charitable giving is subsidized by the government, too. The million-dollar family would far prefer to pay $30,000 in tuition and contribute $70,000 than to pay $100,000 in tuition -- it costs them about 30% less.) In the long run, barrons is right: Eventually donors and politicians would ask why Harvard needs an $XX billion endowment if not to make up for the gap between tuition and operating costs?</p>

<p>Also, they would really be opening the door to price competition from peer and next-tier institutions for the most desirable students from wealthy families. That exists today, of course, but there would be much more of it if a few of the superelites tripled their base tuition. They would lose a few people, and then maybe more. </p>

<p>My guess is, if you look at the really wealthy families from whom such a tuition increase would be collected, the college's expected revenue over time from contributions far exceeds tuition (and would exceed the increased tuition). You don't want that family to go elsewhere because they think you're gouging on the tuition.</p>

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<p>A nitpicky point: The actual "scholarship" given to each student is about $30,000/year, as housing costs and board are calculated separately and pay for themselves. </p>

<p>First of all, if college tuition cost $70,000/year when I went, my family would not be able to afford it. I would have taken a scholarship somewhere else. For many upper-middle class kids, tuition that is "too high" will drive them away. </p>

<p>Second, "list price" scares a LOT of people. I don't think that you can directly correlate price and selectivity - i.e. increasing the former increases the latter - because you'll lose a fair chunk of people. NYU could have, along with increasing its price, only taken people with high SAT scores (a good indicator of wealth!!), not "interesting" kids without the stats. Ergo, you see both rise. Or, as price rises, only the wealthy (i.e. high-stat) kids go there. In general, wealthy kids make better college applicants, but that doesn't mean that all colleges want wealthy kids.</p>

<p>So a college, such as Harvard, could think that it has quite enough upper-middle class and upper-class kids, thank you very much, so it doesn't want to raise the prices and scare away lower-income students (fewer would even apply). </p>

<p>Consider that a family earning in the top 1% of the population earns about $300,000/year. If they have two kids in college, paying "full freight," that's $140,000/year - i.e. "sticker price" is out of reach of over 99% of the population. </p>

<p>I think that you might also see a HUGE alum backlash - many donate so that costs can be kept down, and they don't want to give money to the first college in the country that charges seventy grand a year. </p>

<p>Further on down the road, you would KILL your chances for wealthy scions to give money. I've seen the effects - colleges that are very expensive and soak their students for everything end up with students who, as much as they loved their experience, will not donate - their thought is that the school has taken enough of their money already. Contrast my law school, which is very generous with merit money, and you see students who are happy to donate. They see something worth donating for when they go there.</p>

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I think they recognize that the price is too low, because every time they raise it above the rate of inflation, they see an increase in applicants.

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Correlation does not equal causation! Mini, could this not be because, oh, I don't know, there's more high school students than ever who are going to college? Students are applying to 8-10 colleges where they once applied to three or four?</p>

<p>To a certain extent, a lot of colleges are increasing their incoming class sizes. Beyond a certain point, they then have to construct more dorms (there's $25 million that someone has to pay for), classrooms, etc. Furthermore, at many colleges, a lot of construction was being done in the 1960s and 1970s as the baby boomers hit college. Now, those buildings need remodeling and repair - at quite a substantial cost - and the colleges have to raise prices to accomodate that. Ergo, rising prices does correlate to rising applicants, but one doesn't CAUSE the other!</p>

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<p>"Ergo, rising prices does correlate to rising applicants, but one doesn't CAUSE the other!"</p>

<p>Oh, certainly not. But consider: almost none of the prestige colleges have increased their total number of undergrads in more than a decade. And since 1993, the number and percentage of low-income students, (i.e. Pell Grant recipients) has (with some exceptions) actually gone down. Some schools, like my alma mater, are signficantly less economically diverse than they were 25-30 years ago, even though more students receive (ah-hem) "need-based aid".</p>

<p>It is true that tuition/rb have risen. But they have not risen as quickly as the income/assets of their full-pay customers. So I would have said it is like the frog in the pot of warm water, except that, for the full-pay customers, the water is getting cooler, not hotter. It is cheaper (relatively) for full-pay customers to send their kids to these places than it was a decade ago.</p>

<p>I think the colleges recognize this, which is why they are still raising prices faster than inflation. And, at some level, at least in theory there would at least be an "inflection point" whereby applications of full-pay customers (those are the only ones that count when setting list prices) would level off. But current prices are so low, we aren't even close to the point, as evidenced by increasing applications.</p>

<p>There is no economic modelling that I know of by which this really makes any sense. By raising prices and then increasing scholarships (as Princeton has done), everyone feels like they are getting a better deal, but especially those students in the $100k-$160k range whom schools like Princeton don't want to lose to the Vanderbilts of the world. </p>

<p>"There may not have been specific economic modeling going on (or there may have been), but colleges, like any other business, have an idea of a tipping point beyond which the increased price is not justified by the purportedly increased value."</p>

<p>I would like to believe it, but I don't see any evidence for it. (Consider what is happening to applications at schools like NYU, Georgetown, and George Washington, and I think you'd come to the opposite conclusion.) There is a tipping point, I'm sure, but I think just to get college prices up to where they were relative to income/assets (for a full-pay applicant) a decade ago would require at least a $8-10k higher list price; and I expect the tipping point is well higher than that.</p>

<p>I think JHS really is closest to the truth - the reason prices are so low is basically inertia. So get the bargain price while you can!</p>

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<p>Elite college and university teach all their students that it is a privilege for them to be there. It is a privilege that money cannot buy, and their education is financed in part or wholly through the generosity of others. What they ask in return is for their students to realize that such privilege can be repaid by other venues and to be generous themselves in turn. It is a great lesson.</p>

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I'll answer your question, mini--because that's what they think they can get in the marketplace. It's certainly not altruism. There may not have been specific economic modeling going on (or there may have been), but colleges, like any other business, have an idea of a tipping point beyond which the increased price is not justified by the purportedly increased value.

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<p>Yep. </p>

<p>The Swarthmore Board of Managers has explicitly considered a much more radically progressive pricing scheme. They've rejected the idea at this time for competitive marketplace reasons. But, I find it hard to believe this idea is not being similarly discussed at a number of elite colleges and universities.</p>

<p>Here's a blurb from a March Daily Gazette article:</p>

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Two members of the Board of Managers also came to speak to Alumni Council, namely Jed Rakoff '64 and Secretary Cynthia Graae '62. Rakoff was "very pleased to report that Board meetings have been boring beyond belief... it means that the college is in very good shape and there are no immediate issues dividing us," but warned that "the ever-rising cost of a Swarthmore education... may lead to a very serious crisis ten or twenty years from now." As Graae humorously noted, the price of a college education is in some senses "becoming a giant Ponzi scheme." If the cost of tuition continues to rise faster than the rate of inflation, the college may have to make radical decisions.</p>

<p>The alumni asked Rakoff and Graae difficult questions about what was driving the rising costs and what the college was going to do about it. This latter question sparked a fascinating discussion; two ideas that have been rejected by the Board so far include progressive tuition for the super-rich and eliminating tenure. These ideas are both considered "too dangerous to experiment with." If Swarthmore took either of these steps alone, it would risk losing prospective students and faculty to peer schools.</p>

<p>Graae believes that one factor in the rising costs is that "we're talking about a very different generation of students... they have grown up with activities their entire lives and want to continue these activities at a very high level in college." Other reasons for rising costs include a growing number of departments; Rakoff revealed that "the Board ultimately decided that we could afford both Arabic and Japanese."

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<p>Notwitstanding the reluctance to move to an even more progressive pricing structure, it is my belief that colleges are doing exactly that. Tuition is rising faster than inflation. Financial aid is rising faster than tuition. What other conclusion can we draw? The schools are moving, incrementally, to a more progressive pricing structure -- year after year after year.</p>

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<p>I find it hilarious that some people think eliminating tenure would lower costs.</p>

<p>Without tenure, schools would have to vastly increase the amounts they paid to good professors or else lose them to other schools.</p>

<p>Which would you rather go to: School A at $X per year with tenure or School S with $Y and no tenure? My guess is you would need Y>2X or 3X to get away with this in today's market for profs in highly demanded fields.</p>

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<p>Suppose the less known schools are pushing for the top level schools to raise costs inorder for them to justified raising their costs.</p>

<p>The Demand, Supply, COA real or list are meaningless to the schools that have excess qualified applicants and who can pay. The slots are limited and the excess students must go somewhere be it to "match" or other. The 15000+ students that do not get into the "ivys" will go to the second ivy's and pay Ivy price and even get a better education. The effect cascades to the community college level. </p>

<p>At some point $cost will equal to Value$ and all will be equalibrum. IOW-You will ultimately be happy with what you pay.</p>

<h1>33: Agreed. My old man got tired that no one was willing to pay him for his 50years of accumulated family medical knowledge. Tenure has a lot of intangible value. Has your doctor ever seem TB, measles, smallpox, scurvy, rickets? Cancer and broken bones are too common to mention.</h1>

<p>Especially to your life.</p>

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<p>System-wide, tenure is obviously expensive. Otherwise, schools wouldn't be shifting increasing amounts of the teaching load to non-tenure track and adjunct faculty.</p>

<p>At schools already at the top of the pay scale, the problem is that they seldom lose tenured faculty. Thus, over time, the mix of assistant, associate, and full professors tilts increasingly towards older, higher paid faculty members. </p>

<p>For example, Swarthmore had 189 full-time faculty members last year. 165 of these were tenure or tenure-track positions. 12 were full-time sabbatical-replacement positions (all professors get a full-pay one or two semester sabbatical after every three years of teaching). 12 were full-time non-tenure track positions. Their faculty/staff compensation costs alone ($56 million) exceeded their net student tuition and fees revenues ($39 million).</p>

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<p>I'm ambivalent about tenure. I like the idea of protecting academic freedom and giving professors a long-term stake in the institution. But "stars" don't need tenure -- they are going to go to the institution that makes them the best offer in terms of money, prestige, working conditions, and money. Not that they ever have to choose, but I doubt it would take anything like 2X tenured salary to get them to accept a non-tenured (though tenure-equivalent in prestige) position. They would feel secure that if they lost one position, they would get a better one on the open market. (See, e.g., Cornell West, Henry Kissinger.) So tenure winds up being the refuge of the unproductive. </p>

<p>And, especially when faculties are not expanding, tenure becomes an absolute barrier to healthy generational development in a field. Tenure does not increase the net welfare of scholars; one person's security is another's denied opportunity. America's law firms are stuffed full of ex-grad students and assistant professors of my generation, for whom there was simply never going to be a place in the academy, ever. It was the slaughter of the innocents. Tenure did nothing good for them.</p>

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<p>*I find it hilarious that some people think eliminating tenure would lower costs.</p>

<p>Without tenure, schools would have to vastly increase the amounts they paid to good professors or else lose them to other schools.*</p>

<p>It probably depends
In the private K-12 sector, at least at the schools my kids have attended, the private school teachers are paid less, are not unionized ( tenured), but I don't see them going to public schools.
IN private schools- they can have more autonomy, have - dare I say it- kids that come to school more or less ready to learn, and know they have the support of the parents and the administration.</p>

<p>Evergreen College, doesnt have tenure, neither does Hampshire. I expect mini can expound on just why Evergreen doesn't use tenure, while I think some profs at Evrgreen are pretty good, it wasn't my impression that lack of tenure improved the overall pool, but it probably did save on employee costs</p>

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<p>I am only speaking of the top 50-100 universities. In fields such as economics, there is a lot of movement of top people and large premia are paid even when tenure is granted.</p>

<p>Tenure is most valuable for the young hotshot who is not quite a star but might be. On more than one occasion a hot assistant at a top 10 school with a less than 50-50 chance of tenure (which is almost all of them except for the Steve Levitt's and Larry Summers) has been lured away to another school by an early offer combining high salary and early tenure (say at year 4).</p>

<p>After the fact, there is deadwood. But that is a feature of the system. The cost of supporting older faculty who don't publish in later years is factored into the lower salaries they pay up front. There's no way the salaries wouldn't rise if tenure were abolished.</p>

<p>A more efficient system would allow schools to offer a choice of tenure with a lower salary or a higher salary (for say 5 years) and no tenure. That would be an economically efficient contracting scheme, but it is not allowed by university and AAUP rules.</p>

<p>In practice, schools "punish" senior faculty who are unproductive by allowing their salaries to be held down and making them teach more and do more admin duty.</p>

<p>Consider that the salaries for hot new assistants in econ is about $85K or a little more. But average salaries for full professors at most (non top ten) schools is around $100k -- less at smaller, non-doctorate places. The young guns will teach only 2-3 classes a year and have many perks. Star full profs who are newly hired will easily earn $200K. The few superstars can command $300K or more.</p>

<p>Since the likelihood of winning this lottery is low, even bright tenurables will want tenure as a hedge against not ending up "touched by the Gods."</p>

<p>Where tenure is much trickier is in the humanities, because there isn't a "thick" market for professors and only a very few get to move around. As opposed to econ, where people denied tenure at a strong school almost always get another tenure-track job elsewhere.</p>

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<p>Which would you rather go to: School A at $X per year with tenure or School S with $Y and no tenure? My guess is you would need Y>2X or 3X to get away with this in today's market for profs in highly demanded fields.</p>

<p>As a tenured faculty myself, wholeheartedly agree. :)</p>

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<p>The discussion of the economics of these prestige schools is interesting, but misses the point, I think. Let's agree that there are increasing costs everywhere. Let's also agree that the tuitions charged to full-pay customers don't cover these costs.</p>

<p>But the idea that the costs per student at, say, Swarthmore, and at Yale will vary by only 2% is ridiculous. There are entirely different economics involved, with Swarthmore's extremely high cost per student driven in part by a low student census coupled with high maintenance, and Yale's at least partially offset by the use of graduate students, and support of graduate faculty. Clearly it is something besides costs, even at a gross level (even things like tenure), that drives pricing. Add another 50 schools to the mix, virtually all charging within 5% or so of each other, and one quickly sees that discussion of the relationship between costs and prices quickly goes out the window.</p>

<p>Take advantage of the bargain while you can!</p>