Skip to Content

Colleges: Grinches or Santas?

December 21st, 2012 by dfarish

In my previous post, I noted the diametrically opposed reactions of some colleges and universities to the public’s rising concerns regarding the cost of a college education, and the ballooning debt taken on by a growing number of students and their families.

The large majority of both public and private institutions are tweaking what I believe to be a broken model: they are seeking to increase financial aid while looking for ways of economizing, but, while well intentioned, these are at best temporary bandages on a severe wound. Moreover, these solutions are not sustainable, and, in their efforts to economize, these campuses risk being perceived as cutting the quality of their educational offerings.

A second group of campuses, almost all private, are seeking to control their prices by freezing or even reducing their sticker prices. In some instances, these are acts of desperation: enrollments have fallen, and the colleges are hoping to increase student numbers by offering fire sale prices. The challenge is to reduce prices without reducing quality, but how these schools will make up for the missing revenue is not generally apparent.

Within this same category, however, are another group of campuses – still quite tiny in number – that are focused on a more comprehensive goal: increasing quality, augmenting revenue, all while controlling price. I described how Roger Williams University is following precisely this approach in my blog post of 10 December.

Finally, there is a third group, comprised of extremely wealthy private colleges and universities that are not concerned about affordability, presumably because so many of their students are from very wealthy families. Rather, they are concerned about their investment returns to the point that they are actually reducing institutional aid, forcing less affluent students to borrow larger sums to finance their education.

These very different institutional responses to a shared set of problems suggest that campuses have, over time, evolved quite different sets of values – and, if that is the case, it is a worrisome development.

At various times, commentators have claimed that colleges and universities would be far better off (as would the students and their families) if they followed a true business model. I don’t have time in this short post to take on that issue in its entirety, but I will say that it seems to me that some campuses are, in fact, following a business model, and to their detriment.

Businesses are concerned about the bottom line: how can the business maximize net revenue? This is particularly true for publicly held companies, where stockholders expect a good return on their investment. Thus, to keep the stockholders happy, the managers look for ways to increase profit margins through increasing unit prices, maximizing sales and controlling costs. Their focus is on the shareholders; customers come second.

But in higher education (at least in the nonprofit sector), there are no shareholders. The focus should be entirely on the customer (in this case, the students and their families): how does the institution create an educational experience that is affordable and, particularly in recent years, has tangible value in the marketplace (meaning that graduates obtain rewarding and, ideally, high-paying jobs)? The only concern about the bottom line should be ending the year modestly in the black.

However, what appears to be happening at some very wealthy institutions is that a bottom-line mentality has taken hold. These campuses now compete with each other in ways that have little to do with educational excellence: they are all excellent. The new competition metrics are the rate of return on their investments, and the overall size of their endowments. Concern about irregular investment returns in recent years has led some of them to reduce the rate of drawdown from their endowments (even as they seek to inflate their endowments through never-ending capital campaigns), leading to less institutional aid for their students.

I believe these institutions have lost sight of their true purpose. How else can we explain why it is that the richest campuses in the history of the world continue to raise their sticker prices every year – even in years when their investment returns exceed 20 percent?

How is it that these campuses have come to focus more on their wealth than their students?

Which will be the first campus to declare that it has a large enough endowment that it has become economically self-sufficient, and no longer has to charge tuition? (I suggest that no one hold his or her breath, waiting for this announcement!)

Next time: how to turn Grinches back into Santas.