Update on Perspectives on the elephant of college pricing

A year and one half ago I wrote a post called Perspectives on the elephant of college pricing. In it, I looked at the increasing cost of higher education from three perspectives: the public's view; the student and parents view; and the college view.  In all cases, I focused on private, non-profit four year institutions. Given the changes in the economy since that post was written, it seems worthwhile to give a quick update on each of these perspectives.

THE PUBLIC'S VIEW

In this section, I looked at increases in published tuition, fees, room and board over time, compared to changes in family income.  These numbers are those most often used in discussions of the price of higher education, and so help to form the general public's view of affordability.

In the earlier post, I showed data demonstrating that real (inflation adjusted) family income had been essentially flat over the past 20 years for all but the highest quintile.Over the same period, inflation adjusted average published tuition, fees, room and board climbed 68%. In fact, this rate of increase was considerably higher than the rate of increase in family income even for the highest quintile. Thus, for almost every family, the cost of higher education as shown by the published price has increased enormously over the past two decades as a fraction (or multiple) of family income.

Most recent data simply extends and reinforces this conclusion.  The latest Census Bureau report adds data on 2009: it shows that real family income at all quintiles was essentially unchanged from the 2008 data used in the previous post.  Tuition, fees, room and board went up 4.3% for 2010-2011, according to the College Board, while CPI increase for the 12 month period ending July 2010 was 1.2%. Thus the real increase in published price was about 3.1%. Somewhat lower than the 20 year average increase of about 3.5% a year, but not super when family income stayed essentially flat.

So, for this view - more of the same - college is pricing itself out of the reach of most families.

THE STUDENT AND PARENT VIEW OF THE ELEPHANT

The data get more complex when viewed from this perspective - there is both good news, and bad news.  Obviously, the focus here is on what is called the the net price of education -published price minus aid - and the kinds of aid involved.  The College Board estimates that for 2010-2011, as in recent years, the net price actually stays pretty flat due to estimated increases in aid. However, they give no breakdown of grants vs loans in the aid numbers in 2010-2011. There was a big jump in Federal grant support in 2009-2010 that brought the grant/loan number slightly above 1/2 for the first time in several years. Of course, 2010-2011 has not been such a great year for the Federal budget, so that fraction may have decreased somewhat in the most recent year.  In any case, roughly 1/2 of all aid is in the form of loans.  Thus, the College Board characterization of "net" is actually only net if one views the loans as a gift that need not be paid back - other, stodgier folks might consider "net" to reflect the real total cost to the student, which includes paying back the loans with interest. 

In any case, if one plots the total of the net price as defined by College Board plus the loans to be repaid (as was done in the previous post), one finds a number that increases at roughly 2% a year above inflation for the past few decades. College really is costing more each year. And, according to recent reports, this increasing cost is reflected in data that shows the Class of 2011 graduates have the highest debt load ever -  up 8% from last year.

THE COLLEGE VIEW OF THE ELEPHANT

For the college, the pertinent questions are: 1) did we make our class?; and 2)how much of the published value of the tuition did we have to give back to student in order to make the answer to 1) be "yes"?.  A significant fraction of the grant aid that students get comes from their college, which creates a pool for such aid from such sources as endowments, gifts - and a fraction of the tuition it receives. This fraction of tuition that gets recycled as aid is the discount rate.  So what is happening to the discount rate in these turbulent times?

NACUBO reports in their recently released 2010 Tuition Discount Study that things are not looking good in this area:

The average discount rate (defined as institutional grant dollars as a share of gross tuition and fee revenue) for first‐time, full‐time freshmen jumped from about 39 percent in 2007 to an all‐time high of 42.4 percent in 2010; the rate for all undergraduates reached 37 percent, also the highest ever recorded in the NACUBO TDS series. In addition, the share of first‐time freshmen receiving institutional grants rose to nearly 88 percent, but the average grant award as a share of the average tuition and fee price fell from 52 percent to 49 percent, which suggests that colleges and universities were awarding smaller grants (relative to tuition and fee “sticker” prices) to a much larger number of students......

Net tuition and fee revenue fell 0.3 percent in 2008; it grew less than 2 percent in 2009 and just under 3 percent in 2010 (these rates compare with the long‐term annual average of 4.3 percent)....

The study also found that on average just 10 percent of fall 2009 institutional grants were funded by restricted and unrestricted endowment earnings, which suggests that most institutional grant aid is “unfunded” (that is, institutions do not have a dedicated revenue source to support their institutional grant expenditures and thus must use gross tuition and fees to support these expenditures).

The  increases in institutional grant aid were, of course, not the result of concerns for the financial difficulties of parents and students. Rather, they reflect what institutions felt would be necessary in order to fill their classes, thus warding off even larger financial losses. 

So from the perspective of the college, the model of rapidly rising published tuition is not working so well, either. Aid is increasing so rapidly that it is eating up the real increases in income needed to sustain the current business model of higher education. It is worth noting that the roughly 3% increase in net tuition in 2010-2011 is well above the 1.2% increase in CPI. Thus, even this real increase in income is insufficient to stave off the the very visible hiring and salary freezes, deferred building plans, etc. that have marked the past year in higher education. 

*******

The situation from all perspectives is obviously greatly exacerbated by the current unusually bad economic times. Pressures to increase discounting have been enormous for many institutions, especially those whose selectivity is lower. Economic times eventually will get better, of course, but NACUBO warns that it may be some time before institutions see the year‐to- year gains in net tuition revenue they experienced before the beginning of the economic downturn. In fact, there are increasing indications that there may not ever be a return to such gains for many institutions.  There are serious questions being raised by the general public regarding whether higher education produces a value equal to its cost. This issue will hit those institutions that are "non-elite" most strongly, and make it increasingly difficult for them to raise tuition at the historic rate.   It also may well be the case that the American public will be more cautious in taking on loans in the future, and thus will look much more carefully at the concept that a loan is really decreasing the net cost of education (as the current terminology implies). Should this happen, it could significantly raise pressure to raise grant aid, leading to higher discount rates.

All in all, the data clearly indicate that the current cost/price model of higher education is working less well with each passing year from each of the three perspectives. Is it time to start thinking of sustainable alternatives?