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Colleges and Universities

Strange days for colleges facing rising costs

NCR Staff

America is worried about the cost of college. Time and Newsweek have run cover stories on the subject, and Congress has created a commission to study rising costs and to make recommendations. The suggestion from both media reports and politicians is that tuition is too expensive and should be lower.

If only it were that simple. The truth is that higher education finance is far too eccentric for such easy formulations. It's a sector of the economy driven not only by dollars-and-cents business realities, but also by the shifting and sometimes contradictory decisions of state and federal legislatures, as well as the unpredictable choices of students, parents, faculty and alumni. Trying to make economic sense of college budgets can be a surreal experience. Relationships between supply and demand, for example, or between price and cost, operate ambiguously if at all.

Matters are further complicated because what's good for one type of campus -- large public institutions, for example -- may be bad for another, such as small private colleges. All of this makes understanding trends -- such as rising costs -- immensely difficult. Sometimes the deeper you dig the odder things seem.

One thing is certain -- costs are going up. Since 1980, college tuition has risen 234 percent, according to the General Accounting Office, running well ahead of the consumer price index each year. While increased costs may seem in themselves unremarkable, analysts who have studied the phenomenon have reached some preliminary and in some cases deeply counter-intuitive conclusions about what's going on. Consider the following:

  • To some extent, public and private colleges are reversing their traditional roles. Increasingly, the children of high socioeconomic status families are electing to attend flagship public universities, while the children of the poor are seeking out smaller private colleges with a strong commitment to student aid. The result is that schools with tuition in the range of $15,000 to $20,000 sometimes serve a greater percentage of poor kids than colleges charging $3,000.
  • Many observers believe that from a social justice point of view tuition at public universities should be higher, not lower. Both access and quality, the argument runs, would be better served by increasing the costs for those who can afford to pay more.
  • Despite their bucolic image, small liberal arts colleges are today acting like entrepreneurs, hustling to find new products to deliver to new markets. The result is that some of these smaller colleges, including many Catholic campuses, are in fact much more innovative than major research institutions that market themselves as cutting-edge.
  • College enrollments are projected to rise up to 20 percent in the next decade. In virtually any other industry, rising demand would be seen as a good thing. In higher education, it's viewed with alarm, as educators -- especially in large public institutions -- wonder where the resources to accommodate new students will come from. Without those resources, bloated class sizes and more teaching assistants may push quality down.
  • Perversely, however, that trend may mean good news for struggling private colleges. If public institutions run into problems, image-sensitive parents and students may be drawn in greater numbers to the private sector. Private colleges may find themselves between the Scylla of wanting America to make the right educational choices in terms of public policy, and the Charybdis of survival.

For America's colleges and universities -- including the more than 230 Catholic institutions in the country -- these are strange days indeed.

Changing roles

The image of private colleges as bastions of elitism is so etched in popular consciousness that it's even become part of sports rivalries. At games between the University of California-Los Angeles and the University of Southern California, UCLA fans will sometimes taunt the USC crowd by waving credit cards, mocking the supposed preppy consumerism of USC students. At upscale Duke, basketball fans -- legendary for their derisive cheers -- often shout, "It's alright/it's okay/you're gonna work for us someday" at opposing teams and their supporters.

To some extent, these images ring true. Duke graduates do often move up into America's managerial class. But the private school mystique is also deceiving. The average household income of a UCLA student, for example, is now higher than for a USC student. In a city long accustomed to thinking of USC as a "rich kid's school" and UCLA as where the children of the middle class end up, it's hard for many Angelenos to accept how things have changed.

"The [socioeconomic status] profiles of UCLA and USC students actually crossed eight years ago," said Professor Morton Schapiro of USC, who this month published a study of trends in higher education finance coauthored with Michael McPherson, president of Macalester College in St. Paul, Minn. "It's just very difficult for people to understand. It contradicts the common sense notion that the richer kid should be going to the more expensive school."

Schapiro said the shift represents a clear national trend. As tuition has gone up in all sectors, more and more parents have become "bargain-hunters," looking to stretch their tuition dollars. "A lot of parents think, why should I pay tuition at Stanford when my kid can get just as good an education at Berkeley for so much less?" Schapiro said.

Schapiro and McPherson estimate that 38 percent of freshmen from families earning more than $200,000 are now attending public colleges; in 1980, the figure was barely above 30 percent. This trend holds even for the so-called "second tier" public colleges, such as the State University of New York campuses or the California state system, which are capturing an increasing market share of upper-income students.

"It really was never the case" that private schools primarily served wealthy families, said Jesuit Fr. Charles Currie, president of the Association of Jesuit Colleges and Universities, a service and advocacy group in Washington, which represents America's 28 Jesuit institutions. Currie noted that in the 1970s, data showed a significant number of low socioeconomic status students were enrolled in Catholic colleges. Still, Currie agreed that the current tendency among more affluent families to choose public universities means that lower-income students are coming to private schools in growing numbers. "It's getting tougher for schools to meet the total need of poorer students," he said.

Gentrification couldn't have come at a better time for public universities. Over the past decade, state governments have been less generous in budget allocations; higher education as a percentage of state budgets dropped from 14 to 12 percent. Federal student aid has declined as well. Between 1979 and 1995, for example, the Pell Grant lost 50 percent in real value. Meanwhile, labor, technology and construction costs have exploded, putting strong upward pressure on tuition. As a result, public universities need to enroll students from families who can pay more in absolute terms, and who can pay a greater percentage of the total cost of education. Increasingly, affluent families looking for educational bargains and public colleges looking for better-paying customers are finding each other.

Demand surges

In an era of low enrollment, this match might not mean much. But given the surging demand for higher education, every space in a public college taken by a high-income students means a low-income kid looking elsewhere. A projected 20 percent increase in the number of Americans in the 16-to-24-year age range, coupled with data showing that the income differential between those with a college degree and those without has never been greater, is creating an unparalleled demand for higher education.

While many low-income students squeezed out of public colleges enroll in two-year community colleges or don't go to school at all, growing numbers of them find their way into smaller liberal arts colleges, including many Catholic institutions. Most of these small Catholic or other private campuses charge substantially higher tuition fees.

How can the poor and lower middle class afford it? The answer lies in the difference between the "sticker price," that is, the charge for tuition as it appears in the student handbook, and the "actual price." The latter is determined by subtracting from the sticker price all the financial aid a student is offered, combining federal, state and institutional sources. Depending upon how much need a student has, the actual price of attending a private college can sometimes be competitive with what he or she would pay in the public sector. The result is that, while many poor students can't get into the flagship public universities, the doors of private education remain open.

Analysts suggest two reasons for this phenomenon. The first is that small private colleges, especially Catholic institutions, have historically had a strong commitment to student aid. Today, private schools devote a much higher percentage of their operating budget to student assistance. "The privates recycle far more of their tuition dollars in the form of aid," McPherson said. "That's how they're able to stay affordable even for very poor students."

Necessity, however, also plays a role. "Practically speaking, smaller privates are being forced to recycle those dollars," McPherson said. More elite private campuses, such as Harvard -- or, in the Catholic context, Notre Dame or Georgetown -- do not face quite the same pressures.

Second, while public universities also have been forced to pick up the slack in aid as the state and federal commitment has declined, they have increasingly shifted to merit-based aid rather than need-based. Fifty-four percent of institutional aid at public colleges is now merit-based, a sharp reversal from a decade ago. Simply put, merit-based aid tends to attract wealthier students. "The publics need wealthier kids to pay more of the cost," Schapiro said. He noted that a political demand for results has also played a role in the shift to merit-based aid. "When colleges are under pressure to prove how good they are, one way to do it is to attract better students to begin with -- you want the valedictorians, the kids with good SAT scores," he said, noting that these students are also typically from more affluent families.

Educating the poor

Thus, several factors -- bargain-hunting parents, declining state and federal support, increasing enrollment and political demands for accountability -- are pushing wealthy parents and public colleges together. At the same time, private colleges, especially smaller -- and often Catholic -- institutions are becoming the gateway to post-secondary opportunity for America's lower classes.

"These colleges, many of them Catholic, aren't receiving public support, but they are definitely performing a public service," Schapiro said. "They are taking over responsibility for the education of our poor."

So enrollment is going up, government support and student aid is going down and competition for space at lower-priced public universities is more intense than ever. Legions of parents are sweating tax forms and bank statements, wondering how they're going to pay for it all. What should colleges do?

For McPherson and Schapiro, the answer is simple: Raise tuition.

"The truth is, the wealthy are getting an incredibly good deal right now," McPherson said, referring to affluent families who enroll their children at public universities. "They pay nowhere near the actual cost of their kid's education and they could afford to pay a good deal more."

Herein lies one of higher education finance's most striking peculiarities -- the way to keep the product affordable is not always to lower the cost.

Higher education is an expensive commodity. With faculty salaries, technology, construction and support services, high-profile public universities can easily spend $15,000 or more per student. Most of them recover only $4,000 or $5,000 of that in tuition. Traditionally, state support and endowments have supplied the rest.

While right now is a good time for endowments -- the Dow's exceptional performance has helped higher education, whose endowments are heavily invested in stocks -- state support is declining. As enrollment surges over the next decade, costs will go up, putting even more strain on college budgets. To preserve access and maintain quality, new funds are going to have to come from somewhere.

Schapiro and McPherson argue that the relatively low cost of public higher education -- in 1996, tuition and fees at an in-state public university cost on the average $2,966 while the average private institution charged $12,823 -- amounts to a massive taxpayer subsidy for wealthy families. "It's an obvious form of regressive taxation," Schapiro said. "By keeping tuition low, public colleges in effect take from the poor and middle class and give to the rich."

Not high enough

While granting that the cost of public higher education has gone up dramatically, McPherson argues that it hasn't gone up nearly enough at public colleges, at least from a social justice point of view. "Don't give a wealthy family a $15,000 education for $3,000," he said. "They can pay more. We should charge more and use that money to hold the truly needy harmless," he said.

McPherson recognizes how idiosyncratic that suggestion sounds, given the present political climate. "The last thing politicians want to hear right now is that tuition should be even higher," he said. "They're under massive pressure from middle- and upper-class parents to bring tuition down, not jack it up."

Therein lies one reason why the social justice argument advanced by Schapiro and McPherson is unlikely to get much of a hearing -- politics. Congressman Howard P. "Buck" McKeon, R-Calif., chair of the postsecondary education subcommittee of the House Economic and Educational Opportunities Committee, led a successful effort this spring to create the Commission on the Cost of Higher Education. The stated purpose of this commission, according to a press release issued by McKeon's office, is to "get these [college] costs under control" and to "make higher education once again affordable."

The 11-member commission is made up of university administrators, faculty and representatives of education groups, including the independent college associations of Massachusetts and California, which count several Catholic colleges as members. It is scheduled to deliver its report to Congress by the end of December.

"I'm really not sure they can come up with anything of quality that fast," Currie said, "especially with all the political rhetoric flying around."

"The commission has the potential to be useful, if it gets into real analysis," McPherson said. "On the other hand, if they simply haul in a bunch of college presidents and call them jerks for raising prices, it won't accomplish very much."

Schapiro expects the commission to generate pressure on colleges, both public and private, to control rising costs. The effect would be much greater in the public sector, since price increases there have been running at an annual rate of 4.5 percent over the 1990s, as opposed to approximately 2 percent for private colleges.

If tuition is lowered rather than raised, "it will make for disastrous public policy," McPherson said. "Essentially, middle- and upper-income parents will be getting a break at the expense of everyone else. If we believe that higher education is an important public good that ought to be available to anyone who desires it, this is unconscionable."

Whatever the pressures at public institutions, these are even tougher times for most private colleges and universities. A privileged handful have endowments of sufficient magnitude to buffer the effect of cost increases, but most are much more tuition-dependent than their public counterparts; tuition accounts for 15 to 20 percent of the budget at an average public college, while it makes up between 50 and 75 percent of the operating budget at private institutions. As their best-paying customers move in larger numbers to the public sector, private colleges are finding that "business as usual" just won't cut it anymore.

The emergence of an entrepreneurial drive on small liberal arts campuses may strike those who haven't been paying attention as surprising. Such places are, in the mind's eye, associated with capital-T tradition. Their very names -- Swarthmore, Williams, Smith -- conjure up images of sculling, crew neck sweaters and seminars on Wittgenstein's Tractatus. While students can still find plenty of sweaters and obtuse seminars on private campuses as well as the occasional sculling squad, such places now actually define the cutting edge in terms of retooling the delivery of educational services to serve new markets.

Mostly, this is a matter of survival, which is why entrepreneurial creativity is much more characteristic of lesser-known and smaller private colleges. Still, everybody's getting in on the act to some extent. As wealthier families shop around, private colleges have been forced to keep a lid on tuition. At the same time, larger pools of needy students have meant more institutional aid. The private college budget has been placed in an economic vise, making "bang for the buck" paramount.

Most private colleges will weather the storm and come out alive, if transformed. "Most struggling colleges don't go out of business," McPherson said. "They change the business they're in."

High-tech Marist

How are small private colleges, especially Catholic ones, redefining the nature of their business? For an example, consider Marist College, a 30-year-old college in the Marianist tradition nestled in the Hudson River Valley in Poughkeepsie, N.Y. With an enrollment of 3,400, Marist is no bigger than a mid-sized high school in one of America's urban centers. It's exactly the type of private college -- small, relatively rural, expensive and religiously affiliated -- that should be struggling in today's climate.

Instead, Marist has earned the sobriquet "Construction U" because of all the building going on. In the last few years, new dormitories, a new recreation center and now a new library have come to the campus, with more new facilities on the way. Applications far outnumber available space, and this year's freshmen class of 950 is reputed to be the best and brightest in institutional memory.

How has Marist done it? In part, the answer lies in the old real estate maxim: "location, location, location." IBM's main research and development center is also in Poughkeepsie, and the school has formed a partnership with the computer giant to subsidize its new "digital library." Because of IBM's assistance, Marist was the first campus in America to be fully networked, back in the 1980s when such technology was considered a luxury. Today, Marist attracts students because of its high-tech prowess. A recent survey named it one of the four most technologically sophisticated campuses in America.

Part of the school's success, however, comes down to the pluck of university administrators, who have scrambled to tap every possible source of support. Area businesses have been enlisted to provide scholarship support, leading among other things to the unique designation of two Marist students as McDonald's Scholars.

"Our local McDonald's gave us about $5,000," said Tim Massie, spokesperson for Marist. "So we got a couple of kids who had worked there who qualified for aid and we decided to call them 'McDonald's Scholars,' " he said. "When the donor came in for the ceremony and realized he knew the kids who were getting the money, it really made him feel good," Massie said. "It put a face on the whole process for him."

While some ivy-covered-walls colleges might be embarrassed to boast McDonald's Scholars -- suggesting as it does corporate hucksterism -- not so Marist. "We believe in partnerships with businesses in the Hudson Valley area," said Massie. "It's one of the reasons we're doing so well."

Fisher commitment

Marist offers one model for how smaller private colleges can remain viable despite upward pressures on cost and institutional aid. St. John Fisher College in Rochester, N.Y., is another. With an annual tuition of $12,300 and an enrollment of 1,400, St. John Fisher is, like Marist, a school at risk in the present fiscal climate. But, like Marist, it is also a school that has responded creatively to the new pressures it faces.

At St. John's, that creativity takes the form of the "Fisher commitment." In simple terms, it's a guarantee that a Fisher graduate who follows the college's advice will get a job. If not, the school agrees to pay the graduate $417 a month for 12 months -- a total of $5,000 -- or until he or she receives a job offer.

"We realize that a private college education is an expensive investment," said Amy Israel in St. John Fisher's Student Development Center. "Students and parents today are looking around for the best value for their money." Moreover, Israel says the college understands that value means something different today. "Students have a much more pragmatic understanding of what they're after," she said. "It isn't some vague sense of the college experience. They want to know that they're being prepared to land a good job. This program offers them that assurance."

Available to incoming freshmen only, the Fisher commitment is a four-year program. Students and the school sign a contract that specifies certain steps the student must take, such as maintaining a 2.75 grade point average and participating in extracurricular activities. "We looked at the research on what makes a graduate successful in the job market," Israel said, "and designed the program around it." If a graduate follows all of the steps and is still unable to land a job, the payments begin seven months after graduation and can continue for up to a year.

"The Fisher commitment is a way of standing behind our graduates," Israel said. "It's also a way of distinguishing ourselves in a very competitive environment."

McPherson comments, "This is the sort of thing smaller private colleges are doing all over the place. They're becoming high-tech, and they're moving aggressively to form partnerships with businesses and other institutions."

McPherson noted that many small colleges have also shifted heavily into graduate education, away from their traditional but shrinking undergraduate market and toward evening and weekend programs. "It's all about staying competitive," he said. "Because small private colleges -- and again, Catholic colleges are very much part of this picture -- have been forced to adapt much more quickly, they've become a laboratory to sort out what works and what doesn't."

Of course, all the entrepreneurial zeal in the world won't matter much if the students just aren't there. Small rural colleges are especially marginal because for them it's much more difficult to shift away from undergraduate, liberal arts education to more lucrative business and professional graduate programs. The commuter students to whom such offerings appeal don't exist in those areas. Even for colleges in urban areas, however, the double whammy of rising costs and falling federal aid sometimes proves too much.

Monika Hellwig, executive director of the Association for Catholic Colleges and Universities, said, "It wouldn't surprise me to see a handful of our colleges fail this decade. After all, a handful closed in the last decade."

McPherson said, "When you go to national meetings [of private colleges] there's a lot of sweating and hand-wringing over these issues. Everybody is desperately seeking solutions," he said.

A Faustian dilemma

Over the next decade or so, the coming boom in the college-age population should provide some relief for struggling private colleges. At the same time, however, it creates a near-Faustian dilemma for the private sector. What do you hope for: that burgeoning enrollment will overwhelm public universities, driving appalled parents back into private colleges or that the right public policy decisions will keep public universities strong -- and perhaps consign more privates to oblivion?

"It's a tough situation," McPherson said. "We like to say as administrators that what's good for one college is good for all, but that's not always the case."

The problem of coping with new enrollment demonstrates once again how higher education is different from other areas of economic activity. In other industries, when more customers are chasing the same product, prices rise and demand levels off. Public colleges, however, do not have the authority to determine their own prices. That happens in the state legislature. Most of them are also under statutory obligations to admit a certain percentage -- in some states, it's all -- of in-state high school graduates. In other words, more students means greater demand for services without a corresponding increase in revenues.

Schapiro said, "States aren't going to allow tuition to rise fast enough to keep pace with enrollment growth. Nor are they going to kick in enough new money to do the job."

If that prophecy holds up, public universities will have real problems. Class sizes will shoot up, more classes will be taught by teaching assistants, it will take longer for students to graduate because of difficulty in getting the classes they need and campus life will generally be unpleasant. That's exactly what happened the last time a big demographic wave washed over the public universities in the early 1980s.

If so, some of the shine will start to wear off from public universities for those bargain-conscious, affluent families that are currently their biggest growth market. "It's not just price, it's value," McPherson said. "What's attracting parents to the public sector right now is the perception, backed up by all these national ranking services, that there's not much difference in quality between expensive private schools and many publics," he said. "If that starts to change, they'll go back to the privates."

Of course, more than competition between the public and private sectors is at stake. "From a public policy point of view, it would be a real tragedy if the quality of public universities is allowed to deteriorate," McPherson said. "Public higher education represents a substantial investment in our future.

"Nevertheless, bad news for public colleges could be good news for the privates," he said.

"It makes sense generically that if students aren't going to public colleges, they're probably considering privates more," said Currie of the Jesuit colleges and universities association. "To that extent, if the perception is that public universities are struggling, it may benefit Catholic colleges."

The real danger, Currie said, is that students stay away from both sectors -- in other words, don't attend college at all. For that reason, Currie said he supports "win/win scenarios" rather than the win/lose dynamic of the present debate over costs and quality.

"Our rallying cry in America has always been that every student should be able to attend the college of his or her choice," Currie said. "This means that both the public and private sectors have to be strong. The question is, can we deliver on that promise?"

National Catholic Reporter, September 26, 1997