Unpublished Research W Mark Tew The Perfect ‘Tuition’ Storm September, 2010 The Perfect ‘Tuition’ Storm By: W Mark Tew In late October of 1991, the warm air of the north Atlantic collided with a massive arctic cold front moving down and out to sea from Canada The “nor’easter” created by these converging forces was then fueled by hurricane Grace, a dying, but northern bound tropical disturbance The confluence of these forces resulted in what the National Weather Service labeled “the perfect storm.” Taken in isolation, these three meteorological events would have passed completely unnoticed It was their proximity in time and space that made them catastrophic Unfortunately, such “storms” are not limited to meteorological events Three seemingly unrelated pieces of higher education news in as many months could spell significant distress for institutions that are already battling difficult financial circumstances or troubling times The first news to break was Steve Eisman’s “shorting” of publically traded for-profit colleges Stating that this sector was conducting business with the same misinformed strategy that led to the subprime mortgage collapse, Eisman argued that many in the for-profit education sector are “selling” education to students who cannot afford the price tag and are relying on government Title IV funding to so (See MotherJones, Thursday May 27, 2010.) The next flash appeared in The Chronicle of Higher Education, July 11, 2010, that gave insight into default rates on federal student loans In this article, Kelly Field and Jeffrey Brainard revealed that the current required system of reporting loan defaults drastically understates the true default rate because the official rate is taken within two to three years of repayment, not over the lifetime of the loan Furthermore, the authors reported that while in 2007 the for-profit sector educated only ten percent of all college students, their graduates (or stopouts/drop-outs) compose forty-four percent of all federal loan defaults Unpublished Research W Mark Tew The Perfect ‘Tuition’ Storm September, 2010 Lest this start to sound like a diatribe enumerating the “evils” of the for-profit educational industry, the third news event was the article, “Tuition Shake-up” by Santiago Merea printed in the June 2010 edition of Business Officer that presented an executive summary of the 2009 Tuition Discounting Study produced by the National Association of College and University Business Officers (NACUBO) Weaving results of the national study with a coherent rationale intended to explain the circumstances driving the discounting, Merea revealed that while private sector tuition has risen steadily, the amount of institutional aid, in the form of funded and unfunded scholarships, has risen at a higher rate (The discount rate jumped to a projected 42.2% in 2009 after having hovered between 37% and 38% from 2000 to 2006) The result has been that many private sector institutions have seen a reduction in nettuition, i.e real revenue from students, positioning their operations for limited short-term success and potentially debilitating their long-term viability But back to the storm If the reports about Steve Eisman and the understated federal loan defaults had not been reported in proximity, they could have gone unnoticed Without the inflammatory story of loan defaults that also calls into question practices by the for-profit sector that were the basis of Eisman’s criticism, these two events would have passed like ships in the night After all, financial analysts daily scour the business world for the next trend or market opportunity That is why they are called analysts Furthermore, Congress seems determined to investigate and execute governmental oversight in matters of higher education Yet the two events together create a proverbial nor’easter that seems bound by the forces of free markets and fundamentals of human economic behavior to send waves of tumult and uncertainty crashing upon the shores of American higher education Unfortunately, there remains Hurricane Grace Into the confusion of educational markets that are already ripe with uncertainty is introduced the “energy” of rising tuition discounting On its own, Unpublished Research W Mark Tew The Perfect ‘Tuition’ Storm September, 2010 this would seem to be a private sector problem – a temporary adjustment driven by the economic downturn of 2008 Given time, say the leaders of private colleges and universities, all of this will resolve and settle back down to normal Unfortunately, the forces that are causing college and universities, mostly in the private sector, to raise their discount rate and lower its real spending power are occurring at the worst possible time The same forces that are driving the increase in the discount rate in higher education also are producing economic distress in other non-educational markets: durable goods, home sales and even consumables Parents of 18- to 22-year-olds are experiencing extreme difficulty in accomplishing their goals of providing advanced educational opportunities for their children The investments that they had planned to use, while rebounding, remain a fraction of what they were a few years ago Of course, there is the option of additional debt While loans are available, the advisability of borrowing money, regardless of how well we in higher education make the argument that the cost can be justified in the long run, is a growing concern Many families simply are not able while others simply are not willing to take on additional debt All of these forces combine to present higher education practitioners and the governing boards of trustees great room for pause Can higher education costs continue to rise and with it the cost of tuition? Exactly where will the tuition spiral end? How much net revenue can an institution afford to lose? At what point will consumers of higher education simply say, “Enough!”? At what point does the perfect storm crash into the shores, causing massive, if not irreparable, damage to the American system of education that has served so many so well for such a long, long time? Given these issues, there appear to be three tuition strategies available to boards of trustees These are “high price for high quality,” “high price with high aid,” and “reduce the sticker shock.” All are valid strategies with their own unique strengths and weaknesses Unpublished Research W Mark Tew The Perfect ‘Tuition’ Storm September, 2010 High Price for High Quality American higher education truly is the envy of the entire world State-of-the-art facilities combined with the opportunity to study with many of the best minds in the world on any given subject are remarkable national treasures It should come then as no shock that in both public and private sectors there are institutions that legitimately command high tuition, both now and in the foreseeable future While the averages for 2009/10 for public and private-four year institutions were respectively $7,020 and $26,273, many quality institutions carry a considerably higher annual tuition price Public university tuition leaders range from William and Mary at $10,800 annually to Penn State at $14,416 per year for an undergraduate degree Likewise, noted private institutions with above average tuition include Rice University and Southern Methodist University in the low to mid $30,000’s to Tulane University at $40,548 and George Washington University at $41,655 for annual undergraduate tuition (The following tables cite institutions whose tuition was among the highest nationally, rather than a regional sampling Source – Chronicle of Higher Education, October 20, 2009.) Public University Tuition Leaders Annual Undergraduate Tuition & Fees Percent of Applicants Admitted Pennsylvania State University $14,416 52% University of Pittsburg $14,154 59% University of Vermont $13,554 71% Saint Mary's College of Maryland $13,234 57% University of New Hampshire, Durham $12,743 72% University of Massachusetts, Amherst $11,917 67% Rutgers University $11,886 60% University of Michigan, Ann Arbor $11,848 50% Clemson University $11,478 63% Michigan State University $11,434 73% University of Minnesota, Twin Cities $11,287 50% Virginia Military Institute $11,190 56% College of William and Mary $10,800 34% Unpublished Research W Mark Tew The Perfect ‘Tuition’ Storm September, 2010 Private University Tuition Leaders Annual Undergraduate Tuition & Fees Percentage of Applicants Admitted Vassar College $41,930 25% George Washington University $41,655 37% Columbia University $41,316 10% Bucknell University $40,816 30% Tulane University $40,584 26% University of Richmond $40,010 39% University of Chicago $39,381 27% University of Southern California $39,274 24% Georgetown University $39,036 20% Amherst College $38,928 15% Brown University $38,848 11% Dartmouth College $38,789 13% Duke University $38,741 19% Vanderbilt University $38,578 20% Northwestern University $38,461 26% Emory University $38,036 30% Cornell University $37,954 19% Pepperdine University $37,850 41% Massachusetts Institute of Technology $37,782 11% Stanford University $37,380 8% Harvard University $36,828 7% Yale University $36,500 8% Boston College $35,828 30% Princeton University $35,340 10% Southern Methodist University $35,160 53% Rice University $32,058 22% While these numbers may seem to be exorbitant in comparison to their averages, one must not overlook the simple law of supply and demand The quality offered at these institutions has garnered a reputation that creates demand, a fact that is apparent in the number of students admitted as a percentage of the number of students that applied For these high quality/high tuition institutions, admission rates are as low as seven to ten percent at Harvard, Yale and Princeton to slightly over one out of two at Southern Methodist University As is seen in the tables, many of these institutions are highly selective in their admissions practices, a term used to describe institutions that admit Unpublished Research W Mark Tew The Perfect ‘Tuition’ Storm September, 2010 approximately twenty-five percent or less of their qualified applicants Because there are in many cases three students wanting to attend for every student that does attend, the institution can basically name its price This phenomenon is ameliorated only slightly in the high quality/high tuition public institutions where William and Mary admits only thirty-four percent of its applicants and Michigan State, a pioneer among the Land Grant movement, admits three out of four qualified applicants (See table above) Even among publicly supported institution, high quality with limited access increases price For the trustee considering his or her institution’s tuition strategy, demand must be considered If the quality is present and if the institution is known for the quality, relative demand should provide a guide for setting tuition rates High Price with High Aid The next acceptable tuition strategy if properly understood and properly administered is the policy that continues to push the price of tuition higher while using the new gross revenue to fund larger student aid packages This strategy acknowledges two very definite realities in the current educational marketplace The first reality is that there is a presumed correlation between cost and value: the greater the cost, the higher the value Prevalent within the private sector, this strategy promises to enable institutions to increase the products and services offered to its students and their families The theory is that the increase in the gross tuition revenue will be greater than the increase in additional aid, resulting in budget growth that will allow for incremental improvement and ultimately greater quality The second reality is that students and parents appreciate receiving scholarships There is a sense of accomplishment that comes with merit incentives This type of recruiting is very common and allows an institution to mold its class as desired Unfortunately, the promise of increased marginal income is not always realized by the High Price/High Aid strategy As was demonstrated in the recent NACUBO Tuition Discounting Study, the Unpublished Research W Mark Tew The Perfect ‘Tuition’ Storm September, 2010 practice of rebating can lead to an actual reduction of net review In fact, of the 355 colleges and universities that participated in the 2009 Tuition Discounting Study, the average annual increase in net tuition has dropped from 6.3% in 2000 to an estimated 1.9% in 2009 Furthermore, the greatest single year-decline occurred between 2007 and 2008, the year that the tuition rebate rate began its unprecedented climb from 39.1% to 41.8% The reason for this occurrence is simple economics Because of the availability of “seats” at numerous institutions that are not highly selective in their admissions standards, the recruitment process becomes a bit like post-war Germany Too many dollars chasing too few products creates an inflationary spiral where buying power is inevitably eroded Unfortunately, in this scholarship scenario, colleges and universities are the buyers and the college-going student population is the product being sought and purchased Furthermore, colleges and universities create an artificial scarcity by inflating the dollars available for student awards Because colleges and universities are using “unfunded” scholarships made possible by increased gross tuition, institutions are in essence flooding the market with currency Furthermore, because students receive personal reward by being “recruited” with ever increasing scholarship dollars, students unintentionally are encouraged to shop award packages, often playing one institution against another The warning then becomes obvious While this strategy of increasing tuition to increase aid can and does work, it also presents a slippery slope that if not carefully negotiated will lead to ruin Reduce the Sticker Shock The third strategy is one not often employed in colleges and universities Observing the seemingly uncontrolled increase in higher education costs and the offering of financial aid that lacks real dollars in support, some institutions are saying that it is time to stop the hemorrhage of funds If an Unpublished Research W Mark Tew The Perfect ‘Tuition’ Storm September, 2010 institution routinely discounts or rebates a significant portion of its published tuition, why not simply advertise the net rate as the sticker price? To test the validity of this theory, a simple survey was conducted of executive directors of state members of the National Association of Independent Colleges and Universities (NAICU) One question was asked: “To your knowledge, has any college or university in your state implemented a revenue strategy that simultaneously reduced tuition and unfunded student aid?” Six institutions were identified by the thirty-nine state executive directors Specifically, they are Lourdes College and Muskingum University in Ohio, Thiel College in Pennsylvania, Eureka College and North Park University in Illinois, and Warner Pacific College in Oregon Follow-up telephone conversations with the chief financial officers of each institution indicated that the strategy of reducing tuition and reducing aid was not an attempt to increase net tuition Rather the decisions were an effort to position each institution in their particular markets The arguments were made that by advertising the “real tuition” they not only were priced more competitively with other local institutions, but they also made the process of attending college more simple This strategy bears much scrutiny and deliberate decision-making The obvious pit fall is if the institution decreases tuition and institution aid to a point of equilibrium, but fails to maintain that balance overtime If in a subsequent recruiting effort the institution finds it necessary to inflate unfunded aid, the end result will be the worst of all positions: high aid with low gross tuition (The researcher recognizes that the sample is too narrow for statistical validity.) And what of the perfect storm? While it is true that unprecedented economic forces are assailing the shores of higher education, the end results are uncertain Will they blow over and shortly dissipate, or will they intensify and wreak cataclysmic upheaval? And what would that upheaval be? If higher education costs and the resulting tuition expense remain unchecked, will the American public boycott higher education? Will there be a federal take-over with the inevitable imposition of regulatory Unpublished Research W Mark Tew The Perfect ‘Tuition’ Storm September, 2010 and bureaucratic mandates? Or will Americans just find a way to pay the tuition and allow the system to continue as is? If so, will the pricing strategies currently prevalent in private institutions force greater numbers to consider the public sector? Trustees and educational practitioners must their best to understand these forces and set policy accordingly Amid the confusion one thing is certain Just like the weather, it will be easier to explain what happened that to predict what will take place W Mark Tew is Provost at Howard Payne University (Brownwood, Texas) and he previously served as both the chief academic officer and chief financial officer at Judson College (Marion, Alabama)