Harvey Mudd President Emeritus Henry Riggs explains pricing tuition at liberal arts colleges in The New York Times.
He suggests that Claremont McKenna raised its tuition prices merely because it could.
Here's what he had to say, in part:
He suggests that Claremont McKenna raised its tuition prices merely because it could.
Here's what he had to say, in part:
“Prestige” and “quality” are in the eyes of the beholder. Wannabes price themselves accordingly. Ursinus College acknowledged, when it sharply raised tuition, that it did so to build the perception of quality. Claremont McKenna, neighbor to Harvey Mudd College, where I served as president, raised its tuition when it realized it was gaining nothing by being priced below its competition.
The fact that tuitions are set to five significant figures implies precise calculation. But pricing is a marketing, not a cost accounting, decision.
My lunch companions protested: these are nonprofit colleges, not for-profit enterprises.
But neither, said I, are they expense-minimizing enterprises.
Administrators strive to avoid losing money, while achieving only a small excess of revenue over expenses. Once tuition is set, costs are controlled — or permitted to grow — to match the maximum revenues each institution believes it can get. One assumption is safe: colleges spend all they can get their hands on. No administrator or faculty member I know is short of ideas on how to spend more.
Consider the cost of educating students at two liberal arts colleges with similar missions, Pomona and Earlham.
For 2009-10, Earlham reports having spent about $40,650 for each of 1,113 full-time equivalent students. Pomona spent just under $77,420 per student, with 1,540 full-time equivalencies. Though its tuition is less than 10 percent higher than Earlham’s, Pomona manages to spend almost twice as much.
Now, Earlham’s rural Indiana location is unlike Pomona’s suburban Southern California location, but geography doesn’t begin to explain the difference.
Could Earlham — current tuition and fees: $36,694 — charge a lot more? Probably not. For all its fine qualities, it is not perceived as a top-tier college, and the market likely would not bear it. Could Pomona charge more? Yes. But it could also charge less — and spend less.
Interestingly, if Pomona’s per-student spending were the same as Earlham’s, it could charge zero tuition and not even have to draw 5 percent from its endowment (a typical annual payout rate).
But why should Pomona spend less as long as the market continues to bear the current rate?
Well-endowed institutions lament that even their high tuitions cover only half the cost of educating undergraduates.
Here’s a question for another luncheon engagement: Institutions may be able to spend twice the amount of tuition, but do they need to spend so much? If Ponoma spent the same as Earlham, faculty members might have to teach more than two courses a semester, and dorms and recreational centers would be less luxurious. Of course, not all of this spending is trivial. Spending less means financial aid policies would be less generous and the student body therefore less diverse and stellar.
As sticker prices have increased, so has scholarship aid offered. In effect, prices are discounted just sufficiently to “clear the market” — match supply and demand — for the students the college wishes to enroll. Many of these scholarships are financed through tuitions paid by wealthier students. To date, parents don’t seem to be rebelling against these Robin Hood activities.
But those responsible for setting tuitions at prestigious universities have for years worried that they might soon hit the wall — that is, price themselves out of the market. Perhaps there isn’t an upper limit, or wall, or perhaps that worry has less to do with what a family can afford than with perceptions of price gouging and frivolous spending.
With the demand for top-end colleges and universities only growing, and a finite supply of slots, my bet is that tuitions will continue for some time to rise at a pace well above inflation.I suspect that Peter Thiel is correct when he tells Tech Crunch that higher education is a bubble.
Rich institutions will get richer, dishing out more financial aid, hiring the best teachers, receiving more gifts, amassing bigger endowments and building more fancy rec centers.
The rate of increase in the number of applications in recent years has been more than double that of tuition increases. Obviously, the “buyers” believe that the extra investment in tuition has a positive return on investment.
“A true bubble is when something is overvalued and intensely believed,” he says. “Education may be the only thing people still believe in in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus.”
Like the housing bubble, the education bubble is about security and insurance against the future. Both whisper a seductive promise into the ears of worried Americans: Do this and you will be safe. The excesses of both were always excused by a core national belief that no matter what happens in the world, these were the best investments you could make. Housing prices would always go up, and you will always make more money if you are college educated.
Like any good bubble, this belief– while rooted in truth– gets pushed to unhealthy levels. Thiel talks about consumption masquerading as investment during the housing bubble, as people would take out speculative interest-only loans to get a bigger house with a pool and tell themselves they were being frugal and saving for retirement. Similarly, the idea that attending Harvard is all about learning? Yeah. No one pays a quarter of a million dollars just to read Chaucer. The implicit promise is that you work hard to get there, and then you are set for life. It can lead to an unhealthy sense of entitlement. “It’s what you’ve been told all your life, and it’s how schools rationalize a quarter of a million dollars in debt,” Thiel says.
