Friday, October 31, 2008

Out with the Old, In with the New

by Daniel Bennett

In the spirit of the election frenzy, it is worth discussing a shift in paradigm that is highly possible in the coming years. And no, I am not referring to a new administration in the White House. Instead, let's focus on the reality that the college pricing model is being threatened by the state of the economy, which is not necessarily a bad thing. The Chronicle discussed the issue, stating that the traditional model of college pricing is based on an unstable foundation of government support and ascending tuition.

I wrote earlier this month on the declining state support of higher education , which is the economic reality for at least the near and medium-term. The higher ed community can no long rely on steady public expenditures to support its inefficient operation. The intermediate response of hiking up tuition is crippling many families financially, and forcing many students to reconsider lower-priced options, such as community colleges and online programs. Enrollment at state public schools should also see a boost, as students who may have otherwise attended private institutions opt for less costly alternatives.

However, schools can't continue to subsidize tuition of the needy with increases in tuition for those that are able to afford full sticker price. Tuition levels have increased substantially more than the CPI over the past several decades. Higher education is a difficult market to analyze due to the scarce availability of cost and revenue data, but I would suspect that the market equilibrium price (when supply equals demand) has been overshot and is due for a recession. The evidence that supports this claim, includes:
(1) Growing public discontent over high tuition
(2) Expected increased enrollment at community and online colleges
(3) Declining government support for higher education
(4) Tightening control of spending on growth projects by universities
The first two indicators are somewhat endogenous factors, as consumers concerned over the high price seek alternatives, a signal that the tuition ceiling is near. The declining government support of higher education is attributable to the scarcity of resources, as the resources allocated to higher education compete with the need for public support of health care, infrastructure, primary education and other public needs. There has been some evidence that universities are tightening their budgets, but this may prove to only be a short-term fantasy evoked by the slow economic climate, The the market conditions ought to preclude a shift in administrative focus from institutional growth and lavish spending, to increased control over costs and efficiency. Colleges need to become more affordable to students and productive with their resources.

Dr. Vedder outlines 12 reasons for rising tuition prices in his Over-Invested and Over-Priced report. Universities can build on these, and other cost-saving measures, to begin to bring tuition back to reality. Otherwise, the tuition bubble is bound to pop at any time. The current economic situation is the ideal time to implement such a shift in paradigm towards reducing costs and maximizing the use of resources. Out with the old and in with the new!

1 comment:

capeman said...

Perhaps if the colleges get in that much trouble, they'll get a bailout the way the banks have gotten. After all, that's the American way, right?