Fri 14 Nov 2008
Raising prices, now? You must be joking
Posted by Ronit under Endowment, Finance, Financial Aid at 1:02 am
Much of the recent discussion about the impact of financial losses on college endowments has focused on ways in which colleges can make up the shortfall. Since no one really likes to contemplate layoffs and cutbacks, most of the suggestions tossed around in forums both high (the pages of the NYT) and low (EphBlog threads) have been about some combination of less financial aid, more full-price enrollments, and modest tuition increases. Some of our readers seem to positively relish the thought that the financial crisis can be used to cut back on those noisome “diversity” and “international” recruits who typically cost more money, and it would seem that administrators at Williams and elsewhere have been somewhat receptive to such a course of action. In general, the consensus seems to be that Williams must find a way to cut its “discount rate” and increase the average effective tuition being paid by students.
I have been trying to articulate for a while why this idea strikes me as absolutely insane, but the Epicurean Dealmaker has saved me the trouble of composing a lengthy post. His response to this idea of raising tuition (as expressed by Harvard’s President) is an entertaining and necessary screed. Some excerpts follow, but please, read the whole thing (and while reading, keep in mind that Williams, which charges nearly identical tuition to its much more well-known brethren on the Charles River, has, if anything, even less pricing power because of its utter lack of name recognition.):
Keep tuition increases moderate? Oh, President Faust, you were doing so well up until then. Since when have hallucinogenic mushrooms been on the menu at the Faculty Club?
To be fair to Ms Faust, I suspect that she is not alone among university heads in believing that raising prices in the face of a looming multi-year recession and the ongoing destruction of billions of dollars of net worth among the families which comprise her target consumers is even possible. When viewed in historic context, such apparent mass psychosis might even seem reasonable. After all, the price of a college education in this country has been rising at a compound annual rate over the past quarter of a century that is approximately double that of inflation. Given that this period has encompassed a couple of ruinous wars, the odd stock market boom and bust, general ups and downs in the economy, and several political administrations of varying fiscal rectitude, why shouldn’t college administrators believe their target market is as hopelessly price insensitive as your average crack whore?
Skipping lightly over a fascinating diversion into Baumol pricing, here is a bit that is oddly reminiscent of Williams over the last 4 or 5 years:
Last year, on the occasion of a reunion visit to the leafy groves of my own alma mater, I was dismayed to discover that practically all of the verdant green expanses of my salad days (perfect for snoozing over a physics textbook on a sunny day) were no more. There was almost no plot of grassy space left on campus that had not been filled with the hulking form of yet another architectural monument to the pride and vanity of some self-fellating panjandrum. On a previously nondescript and inoffensive corner, some brand-name architect had erected at undoubtedly outrageous expense a swooping steel and glass science library not ten minutes walk from a central library big enough to house in triplicate every book, magazine, and pornographic pamphlet published since 1362 plus have room left over for a small suburban mall. I did not see it then, but I fully expect to encounter gilded toilet paper in the Faculty Club mens room on my next visit.
In short, private education in America spends money like a drunken sailor with Warren Buffett’s credit card.
Why they should want to do so is completely clear. How they have been able to get away with it for so long is more opaque.
My view, which you are welcome to classify under Education, Gratuitous Unverified Crackpot Theories Of, is that private educational institutions have been able to charge whatever the hell they want to for so long because Education has become the new Religion of the socially ambitious…
Whether this new Religion of Education will become an ossified, out-of-touch edifice ripe for challenge and Reformation by the iconoclasts of Google, Wikipedia, and Web 2.0, or whether it will pass unreformed straight through to the increasingly marginalized, irrelevant, and underfunded status of actual religions in the leading centers of Western Civilization is unclear to me. As federal grant-grubbing denizens of academe are wont to say: further research is required.
What is clear to me is that while the spirit may still be willing, the flesh (or the wallet) is beginning to get weak. Spending over half a million after-tax dollars per kid just to say that Little Bobby lost his virginity at one of the best universities in the nation is becoming harder and harder to justify for more and more parents. (Especially since one of the major reasons to send him there in the first place was to guarantee him a position in the immensely lucrative and prestigious fields of investment banking, securities law, or private equity. Oops.)
There is even shocking anecdotal evidence leaking out that formerly flush lawyers, investment bankers, and luxury goods retailers are beginning to pull their progeny out of the hallowed “feeder” schools of Upper Manhattan because they cannot afford the freight. Laugh if you will, but this is the upwardly mobile’s equivalent of “jingle mail.” Having written more than my fair share of eye-watering checks to such schools, I can only hope that the formerly arrogant, self-satisfied Headmasters and Headmistresses of New York are beginning to wet their beds on a regular basis.
This problem is not limited to the Ivy League, or Manhattan private schools, either. The entire over-leveraged, over-invested edifice of higher education in America is beginning to teeter and sway, and cracks are spreading across the foundation. Gone are the days, in my opinion, when university and preparatory school administrators could add sums collected from private and public donors to income harvested from the endowment, subtract that total from the amount of money they would like to spend in a perfect world, and divide the difference by the incoming student body to set the tuition.
No, it appears that the iron laws of economics have finally arrived on the peaceful doorstep of the Academy.
It’s about time, too.
The main point is this: the American consumer is tapped out. The Home Equity ATM card is no longer available. Student loan availability has dried up for all but the most creditworthy co-signers. Those who’ve smartly saved for college by putting their money into mutual funds are sitting on something like a 40% paper loss this year, and close to zero returns over the last 10 years. Incomes have been flat for as long as anyone can remember, employment trends are entirely negative, and the asset bubbles that fed Americans’ illusion of wealth have been largely blown away. If you think there is any non-trivial number of American households who have the capacity and willingness to pay significantly more than they were paying last year so that their kids can have the pleasure of attending classes in Williamstown, you are kidding yourself.
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22 Responses to “Raising prices, now? You must be joking”
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frank uible says:
Gentlemen, start your engines, and let the special pleading begin. Nothing like a strike at one’s wallet to induce one to claim that only others should bear a new burden.
David Kane says:
1) I second Ronit’s recommendation for Epicurean Dealmaker in general and that post in particular.
2) Alas, it is my friend Ronit who is “kidding” himself. For matters of Williams pricing, it is largely irrelevant that (average) “[i]ncomes have been flat” or student loans are drying up for “all but the most creditworthy co-signers.” You might as well warn us what is happening to the income of cattle herders in Tanzania. What matters to Williams pricing is the income and debt capacity of the sort of people who Williams admits. Since 50% of them (at least) are so rich that they don’t require any financial aid, the impact of the current troubles is small. Even among the next 25% by family income, we are talking about, at worst (for now) modest belt-tightening. And, even if some of those families decided to turn down Williams for in-state tuition at a place like Michigan, there are hundreds of still-rich families without almost identical qualifications who would love to come to Williams.
Yes, there is a financial crisis and yes this impacts us all. But the effect on most Williams families (and would-be Williams families) is small relative to their overall wealth and their desire to come to a place like Williams.
Your mistake is in thinking that the forces of supply-and-demand are in meaningful equilibrium now. They aren’t. Williams could have, last year, dramatically raised its prices without meaningfully impacting the composition of its student body because demand is so high. (The reason it didn’t is that elite schools set their prices collusively and have, as a group, been raising them as fast as they dared for the last 20 years.)
3) Just what do you mean by “significantly more” in your last paragraph? No one is arguing that Williams will/should raise its tuition by 10%. But I bet that, over the next five years, we will see similar tuition increases (in either real terms) to what we have seen over the last 20 years.
4) Straw Eph alert!
Who are you talking about here? I have not seen a comment like that in 6 months at least. And, by the way, “diversity” students (by which I think you mean non-white US residents) are not meaningfully more expensive than non-diversity students. (You are right that international students, at least as they are currently recruited/admitted, are hugely expensive.)
lgeorge says:
Just a clarification: the difference isn’t really “U.S.” vs. “international” in terms of the cost but “U.S. citizen” vs. “non-U.S. citizen.” It’s my understanding that there’s a lot more outside money (including U.S. government funds) available for citizens than for non-U.S. citizens (someone want to help me out on where green card holders fit in?; somewhere in-between, I’d think). Although U.S. citizens who live abroad may be loosely (and, for some purposes, appropriately) thrown in as “internationals,” they are in the U.S. pool for financial aid purposes.
U.S. citizens living overseas could include people from a wide variety of cultural, racial and ethnic, and economic backgrounds.
Ronit says:
DK – “significantly more” should probably be interpreted to mean any increase above and beyond what one would expect from the trendline of tuition prices of the last 20 years; or in other words, an increase that is not already priced into college budget forecasts, and is therefore able to make up the unexpected shortfall.
Ronit says:
And, David, I think you and I fundamentally disagree over the health of the upper-middle-class US consumer (ie, Williams College’s “target” market), and the degree to which their illusion of upper-middle-class-ness over recent years derived from the real estate bubble and cheap credit. You may be right that Williams could have increased prices significantly last year and gotten away with it, but that’s probably because home equity lines of credit weren’t entirely tapped out yet, last year. This credit crisis is not just impacting the hoi polloi and the subprime. Every segment of American society needs to deleverage (the only exception might be the Treasury, which still seems to have excess borrowing capacity), and there are many more marginal, over-leveraged consumers among the so-called “wealthy” than you realize.
Permit me an analogy:
Who do you think will have a better quarter (relative to past expectations) – Saks Fifth Avenue or Wal Mart? A look the comparative performance of their stock prices over the last year may give you some idea of the degree to which the “wealthy” consumer has been affected by this crisis.
Williams College is Saks Fifth Avenue, and SUNY Binghamton is Wal Mart. Ceteris paribus, who do you think is likely to see better business over the next year?
David Kane says:
Fortunately, this is an empirical question! If the demand for Williams were to actually fall, you would expect to see at least three things.
1) Decrease in applications. (People applying to Binghamton instead of Williams.)
2) Decrease in yield among accepted students. (People choosing Binghamton over Williams.)
3) Decrease in quality of enrolled Williams students in the class of 2013, using average SAT scores as a rough proxy. (Williams needing to accept some students that it would have rejected in the past to fill spots left open by better students going to cheaper schools.)
None of those things will happen. From that we can conclude that, despite the financial crisis, the demand for Williams has not fallen.
Ronit says:
If Williams were to put through an above-trendline increase in effective tuition, or a cut in average financial aid packages, I would bet on some combination of 2 or 3 (1 is unlikely because people may just apply in the hope of getting an affordable package).
You sound, David, a lot like those who said in 2005 that house prices would never decline. Higher education over the last 20 years has been a great (so-far unpopped) bubble industry, but economic reality will inevitably catch up to it – even if such an outcome is unimaginable to those who have known only the bubble.
Soph Mom says:
Ronit, great post.
I think you were the one who first introduced me to the Epicurean and I’m pleased to be reminded. Finance can be a difficult read for me, but not the way he writes. Some funny, funny lines. I see myself in the cast of characters at which he pokes fun, but who can mind when it’s done that well?
And FWIW, (considering my admitted ignorance about fiscal matters), I agree that the crisis is going to affect the abundance of applications from those of us who don’t qualify for aid. I have already been through all the reasons why, so won’t belabor it again, but in conversations I have had, with other families like ours, all indications are that the belt-tightening will affect whether they consider a school like Williams, rather than a state school…especially for a second child.
“Rich enough”, is a relative term depending on how things go, and as Ronit and others pointed out in another thread, some costs start moving over into the ‘luxury item’ list very quickly when a family business starts to falter, or when there are two more kids in line for college, and when the nest-egg loses 20 years of growth, and the car costs $100 bucks to fill, and the cross-country air tickets need to be provided, and, etc. etc.
I think Williams is small enough, and desirable enough, to weather the storm better than most, but it all depends on how long the economy continues in this vein.
With all this in mind, I think Morty’s actions have been incredibly spot on, and I have every confidence that he is better equipped than most, to chart the route through these waters. Williams is lucky to have him, especially at this point in time.
David Kane says:
Ronit: Your previous claim seemed to be that demand for a Williams education would fall. Are you backpedaling? Obviously, the higher you raise the price of something, the less demand that there is but who was ever, ever talking about “an above-trendline increase in effective tuition?” No one. Every Williams official is claiming (with the possible exception of international students) that there will be no meaningful change in the College’s pricing/aid policies. Do you believe them? I do.
You claim that people will be selecting cheaper schools over more expensive schools like Williams. A plausible claim. I concur that you might not see that change in applications alone because applying is cheap. But unless you see a fall in yield and the quality of students, you have zero evidence of the fall in demand that you claim is inevitable.
And, for the record, I am only making a claim about Williams and (perhaps) other elite schools. I agree that there is a bubble in higher education overall. Too many people go to college and they get too little out of it. I agree with you that overall demand will drop.
We just won’t see that drop at Williams because demand and supply were never really balanced at Williams. The College would neither increase the number of seats nor raised prices to market clearing levels. (Nor should it have.) That means that there is a huge amount of slack in the system.
There are hundreds of rich AR 2 applicants who would love to go to Williams but who have, in the past, been rejected. In coming years, they will be admitted.
Ronit says:
If there is no meaningful change in pricing/aid policies, then the only alternative is serious cutbacks and layoffs, or a very sharp drawdown in the endowment.
Now, the constituencies that are closest to the decision-making center of the college are unlikely to ever endorse layoffs or serious cutbacks on operations. This scenario can be ruled out because the institutional self interest will be all in favor of raising revenue from students or drawing down the endowment.
My forecast: they’ll draw down the endowment by increasing the percentage of the endowment being spent per year. They simply can’t push through a price hike sufficient to make up the shortfall and still maintain yield/academic quality targets.
Ronit says:
another forecast – Stanford will come out of this in better fiscal shape than most of its competitors, because they have actually tried to figure out how much they need to cut:
hwc says:
You were being tongue in cheek, right? Stanford has identified $90 million in savings out of a $2.9 billion operating budget. By offering the broadest outline of a potential 3% cost reduction, they are somehow managing the economic downturn better than their competitors?
Honestly, Stanford said nothing more than “we are going to have to tighten our belts a little over the next few years.” Doh.
Morty was more specific than that with a quasi-hiring freeze and stopping construction of a new football field and library.
lgeorge says:
May have to wait one year (Class of 2014 admissions cycle) to see any big change, though. For many, admissions are a highly emotionally-fraught experience. Easier to steer Sue and Bill towards Michigan or Virginia if she or he is a junior and not yet emotionally invested in a private college. And I think a lot of people may still have their heads in the sand and believe that the markets and the general economy will improve considerably over the next nine months.
lgeorge says:
Even to “stay even,” they’d have to increase the percentage of the endowment being drawn down, of course, since the pot has shrunk considerably. So we ought to keep our eyes on what the actual $$ amount of the draw down is, as well as the percentage. Percentages can be misleading here (although we do obviously need to keep in mind that sound management has generally required a 5% or so cap, averaged over three years, and that for the future’s sake it really matters what percentage of the remaining endowment gets depleted).
I was reminded of how statements can be unintentionally misleading when I read recently in the Record that Dining Services was emphasizing that they had not cut their budget. With the cost of food having gone up considerably over the last year, that must actually mean that they have cut either the amount or quality of the food offered, or both, even if they’ve cleverly succeeded in finding cheaper sourcing that has sheltered them somewhat from rising costs.
eph '07 says:
The best part of this post is learning that the president of Harvard is an economics professor named Faust. Better than fiction!
How long do you think these hiring freezes and construction pauses will last?
Ronit says:
Wait, you can “conclude” the answer to an “empirical” question because you believe that “none of those things will happen” in the future? And you say I have no evidence for my prediction.
lgeorge says:
Actually, she is an historian. She recently wrote a well-received book about death in the Civil War.
David Kane says:
Sloppy writing on my part. If none of those things happen over the next 6 to 18 months, then we can conclude that you were wrong to predict a decrease in the demand for a Williams education.
ncram65 says:
Quite an interesting article.
But I don’t agree that the top colleges and universities are in any serious kind of trouble. Cut their endowments in half and they would still be wealthy institutions. Do they have to manage themselves a little more carefully? Of course. Spending practices have gotten a little loose.
To answer Epicurean’s question, I think that the “Religion of Education” will survive this downturn unscathed. There will still be huge demand from the moneyed classes for admission to elite colleges and universities. While the article seems to be a bit gleeful about the troubles in the securities industry at the moment, the fact is that whatever replaces Wall Street as the place to become wealthy and powerful will also be populated with graduates of the very same schools. (A little scary, no?)
Right now a top tier government job looks pretty good. The NYT has been publishing short bios of the various contenders for jobs in Obama’s administration. I’d venture to say that at least 95% of the people described are Ivy League grads. I haven’t noticed a single SUNY grad in the lot.
There will always be more well qualified wealthy applicants to a place like Williams than there are spots for them. Need a bit of kick in the revenue department? Make the entering class a little bigger—most of that revenue goes to the bottom line.
Now I don’t think anyone here is worried about the rich kids though—it is whether the schools will be able to maintain their commitment to creating racial, social and economic diversity on their campuses. I think those goals are so deeply held that they will be maintained. I saw Tony Marx speak last week and he was pretty clear about that.
I do completely agree with Epicurean’s criticism of the monument building that’s going on at these campuses. Schools are not the buildings, they are the faculty and the students and as long the quality of those two groups are tended to, schools like Williams will be fine.
Ronit says:
I completely agree with the point you make at the end. Would Williams have been in any material way a “worse” school had the money spent on the endless construction projects of recent years been put away instead for a rainy day? Was a new student center and a new library really central to fulfilling our educational mission? I seriously doubt it. But, if as a result of this crisis, Williams has to cut back on financial aid to needy but highly qualified students, or freeze hiring, or cut funding for academic events and visiting professors, then it would in fact lead to a lower quality educational experience for all.
ncram65 says:
I don’t have the numbers, so I don’t know. I know that Tony Marx said a week or two ago that financial aid cuts would’t happen. Amherst is taking other action, like postponing the renovation of the Lord Jeff Inn.
It is an interesting question you pose. Having been around 4 of the top NE LAC’s a fair amount over the past 10 years, I have been astounded at the “arms race” going on. Almost all facilities–residential, educational and athletic–at these schools have been either renovated or replaced and lavishly at that. It is still going on, although I think the current economic climate will slow it down.
Would Williams be as good as school today if it hadn’t built and renovated all those buildings? Would desirable students have picked other schools if William’s facilities were stuck in the ’80′s? Did it have to compete on this basis? I don’t know.
As I have said, I think schools like Williams still have resources to fulfill their core mission and I think there is broad consensus that creating racial and economic diversity at the school is central to the mission.
Where I think Epicurean’s predictions are on point are at less wealthy, less well known private colleges and universities. They will almost certainly have less financial aid available and the cost/benefit analysis of attending as compared to in state tuition at the state university will be much closer.
lgeorge says:
What’s weird about all the money that went into construction is that, to the extent they saved it for a rainy day (i.e., left it in the endowment fund), a large part of it would have just vanished in the meltdown recently (like my retirement funds). I was not in favor of the construction arms race but I do see a bright side to it now: all those schools have a lot of new, hopefully low-maintenance and low-operating cost, facilities to see them through the downturn and its aftermath.