Rising Prices, Sinking Revenues?

I have had money on my mind all year. There are a variety of reasons for my preoccupation, including some new fiscal challenges on my own campus and the conversations I’ve had with people in my professional network.

One thing I’ve been doing a lot is looking back on my faculty career and thinking about what I wish I had known about institutional finances and the overall picture of higher education’s economic future. A recent article by Kevin Kiley at Inside Higher Ed answers a number of questions I either had or now know I should have had as I began my professional life.

Kiley, summarizing a report by Moody’s Investors Service, argues that for many small private institutions with limited prestige and “brand recognition,” the next few years are going to be marked by very slow increases, or even decreases, in net tuition revenue, which is the bottom-line financial lifeblood of a tuition-dependent college.

Kiley’s analysis reflects the situation at my own university quite well, and it’s even more salient for similar institutions that have smaller endowments or other financial challenges—such as high debt service—that we do not have.

Here’s what’s happening. The so-called sticker price of most small private colleges has more or less topped out. That those prices have increased far faster than inflation for the past 20 years or so is well known, and they have now reached levels that, on their face, look staggering and insurmountable to families of typical college-bound students.

At the same time, actual tuition revenue has not gone up nearly as quickly, or has even gone down relative to inflation at many institutions, because no one pays the full sticker price. Competition for strong students leads institutions below the very top tier into bidding wars that drive up their so-called discount rate, which is the percentage difference between the sticker price and the actual average price that students pay. (For more detail, I refer you again to an excellent recent book, Liberal Arts at the Brink, by a former president of Beloit College, Victor E. Ferrall Jr.)

It is the rare small private college that has not seen a significant acceleration in its discount rate in the past decade. So while such institutions’ sticker prices may be double what they were 10 years ago, they may actually be getting only a very small amount more in net revenue per student, an increase that in some cases has probably been offset by inflation. For example, an institution that had a sticker price of $20,000 in 2000 and a discount rate of 15 percent would have had average net revenue of $17,000 per student.

That same institution, with a current sticker price of $35,000 and a discount rate of 45 percent (which is not at all an atypical number these days), would now have average net per-student revenue of $19,250, a compounded increase of just over 1 percent per year, far below the rate of inflation.

Add to this predicament the fact that the cost of things like health insurance and utilities has increased drastically over the past dozen years, and you can see why many private institutions are struggling. Even as the apparent cost of attendance has risen precipitously, the actual cost often has not, and so each year institutions’ budgets become ever tighter.

The institutions at the very top of the pyramid don’t generally have those kinds of problems. For one thing, they usually have enormous endowments that provide substantial income each year. Quite a few of them could mount a very respectable, if somewhat less plush, program on the income from their endowment alone, without a penny of income from tuition, room and board, or other fees.

But the rich get richer: Because those institutions also have very high levels of what marketers call brand equity, and demand for spaces in their first-year classes greatly exceeds supply, they have a level of pricing power that other institutions can only dream about.

Because of that confluence of circumstances, many such places don’t give so-called merit aid (which is often institutional “discount” funds rather than endowment income) at all, awarding aid based only on students’ financial need. Their level of selectivity means that their student bodies tend to have much lower need than average, thanks to the well-known correlation between family income and academic achievement.

In turn, they can shape their incoming classes with fairly high precision because those institutions tend to be first choices for many in their applicant pools. Though they claim to be “need blind” in their admission process, in fact the demographics of their applicant pools create a favorable climate for high tuition and low discounts.

Among small private colleges, though, there are perhaps only 30 or so that can act in the way I have described. All the rest of us are scrambling all the time to find the right combination of price, discount, recruitment strategy, and messaging to prospective students.

Not every such institution is going to survive, and even among those that will, the range of financial options to support their operations is narrowing with frightening speed. The institutions that meet their challenges nimbly and imaginatively are going to have a big advantage in the market, but that kind of nimbleness is in some ways antithetical to the deliberative norms of faculty culture and our (I include myself in this concern) strong sense that there’s a right, time-tested way to do undergraduate education.

Institutional finances are fascinating and important. As I have said repeatedly here, faculty members absolutely must have a basic understanding of how finances work at their institution, and of the financial picture for higher education in general. I was an English major, and my disciplinary background delivered a clarion message that money was gauche, so I understand faculty colleagues’ tepid responses to these conversations.

We have come to the point now, though, where it’s imperative to deal squarely and in an informed way with financial matters because refusing to do so is the surest way to fail.

[Creative Commons-licensed photo by Flickr user AMagill.]

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