The Chronicle of Higher Education recently reported tuition increases at public colleges outpaced private colleges over the last 10 years. The total increase in sticker price above the rate of inflation for public colleges was 72% versus 29% for privates. The divergence in price increases raises this question: Will the divergence lead to a convergence in prices between public and private colleges at some point in the future? This blog covers a dialogue on this issue between John Stevens, President of Stevens Strategy and Mike Townsley, Senior Consultant. The dialogue emerged from an email that Mike Townsley sent to John Stevens asking if he had seen the Chronicle article on pricing.
The problem for the public sector is a loss of state funding due to on-going declines in state tax revenue. The loss of state funding has pushed up the public sector’s sticker price at an average rate of more than 7% per year above the rate of inflation for the last ten years. A net reduction in the public sector discount rate (also caused by the same tax shortfall) caused the public sector net price to increase by even more over the same period, nearly 9% per year above the rate of inflation. Meanwhile the average ten-year change in the private sector book price and net price was about 3% and 0% above the rate of inflation, respectively. Private sector discount rates basically offset any increases in sticker price relative to inflation. So despite public and federal government perception, private sector net tuition has changed roughly at the rate of inflation. The increase in net price overall is wholly due to the public sector’s 9% increase. The unintended consequence of this de facto public sector policy could lead to the end of the automatic subsidy for all students in public sector, be they rich or poor; maybe not a bad policy result if financial aid is distributed primarily based upon need. The following charts show the rate of change in public and private sector sticker and net price over the last 5 years.
While the ending of the universal public subsidy is a laudatory goal, is it realistic? What would have to happen to reach a time when private and public net tuition are equalized? Achieving equalization would require first, a conscious decision by state legislatures to change a popular policy of low tuitions for all citizens, and second it would have to take place over many years. Chart III shows that net price (constant dollars) convergence would take thirty-nine years based upon the ten year rate of change for tuition increases and current private college discount rates. This chart suggests that “many a slip could occur between cup and lip” before convergence occurs.
My argument rests on the position that state legislators might eventually realize that a public subsidy to rich kids meets no sound policy objective relative to access (a few states have already done so). Once they reach that conclusion, logic should lead them to let the book price of public sector tuition rise to private sector levels and the level of discount to increase so that access for the neediest students is maintained; a quite positive result at far less cost to the states. If the private sector continues its current
trend of no increase in net price relative to inflation, convergence will occur at some point. The result will create balanced competition between the public sector and private, with more competition based upon quality, improving higher education generally.
The Chronicle article was taken from a report on the College Boards publication 2011 Trend in College Pricing that uses a broader definition of tuition discount that includes grants, tax credits, tax deductions, and federal loan subsidies. The Wall Street Journal on October 29th reported that there are nine separate tax or savings subsidies provided by the federal government that can make substantial additions to the computation of tuition discounts. The problem with federal subsidies or tax subsidies is that they can change on a dime. Often they can change dramatically within a few years depending upon policy, politics, and the economy. Of course, the same can be said of state subsidies. The uncertainty of future state and federal subsidies would render the issue of net tuition convergence too unpredictable given the long-time line required for the convergence.
Since federal tax and loan subsidies are income based, reductions in these subsidies will reduce the rate of convergence. Reductions in federal support should not obviate the convergence as long as across the board tuition subsidies from the state support do not return to the high levels that existed before 2008.
What could happen should not obscure the fact that net tuition at private colleges have not increased faster than the rate of inflation over the past 10 years and public sector tuition has increased at 9% above the rate of inflations annually.
There is a way for private colleges to accelerate the convergence given their willingness to moderate net price increases. Net price is dependent on the tuition discount rate and the rate of growth of the sticker price. Private colleges have managed the zero rate of growth in net price by increasing tuition discounts more than book price. If private colleges held sticker price increases to the rate of inflation, if they kept tuition discounts at the current rate, and if public institutions continued on their current path, convergence could occur in thirteen years instead of thirty-nine years shown in Chart III. Chart IV illustrates the change in this convergence trend.
State legislatures, Congress and public and private colleges should be thinking carefully now about the benefits of a convergence strategy. Convergence will make
more fair competition on price between public and private colleges, maintain access for poorer students at a lower overall cost to state governments and increase the overall quality of higher education through more focused competition. It will require private colleges to control price and costs strategically and public colleges to control costs, increase price and increase discounts strategically.
We would be delighted to hear your thoughts on this subject and to discuss the issue of conversion strategy with you. Email us any time at firstname.lastname@example.org.
John Stevens, EdD
President, Stevens Strategy
Michael Townsley, PhD
Senior Consultant, Stevens Strategy