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September 5, 2013

The Tsunami of Change—Has It Begun?

By Richard Vedder

The great transformation of higher education may be under way. Two indicators: First, the U.S. Census Bureau reported that enrollments at America's universities in 2012 fell for the first time in years. What the Census did not stress was that the decline was fairly substantial, about 500,000 students, or roughly three percent. Rather the Census, obsessed with personal attributes such as skin color and ethnicity, emphasized how enrollments held up among Hispanics. Second, a survey of more than a hundred higher-education administrators drew a fairly startling result. Asked by the well-known accounting and consulting firm KPMG if they had concerns about maintaining current enrollment levels, 37 percent said yes. This was up from 23 percent last year, itself a rise from the conventional response of just a relative few administrators saying yes.

Walter Russell Mead had this to say today on his American Interest blog:

"The high cost of college tuition has been endlessly debated by the chattering classes, but as long as students kept enrolling, universities had little incentive to lower it. Now, however, we're seeing the clearest signs yet that students and parents are beginning to balk at the price of college, which we hope will encourage schools to begin competing on price rather than expensive amenities. If this proves to be more than just a statistical blip, we could be seeing a higher ed transformation sooner rather than later."

 High-School Seniors Misled?

We do not have data to see if last year's fall-off of enrollment was a fluke, but I don't think it was. Lots of colleges seem to be having difficulties filling their classes. Long Island University even held an Admissions day where they tried to admit people on the spot to fill empty spaces. Loyola University in New Orleans laments financial problems associated with unanticipated enrollment decline. And virtually every law school in the U.S. faces dramatic declines in applications, leading many of them (most recently, to my knowledge, Case Western Reserve University) to reduce their first-year class size, often fairly dramatically.

In addition, high-school seniors have been misled on the statistical value of higher education for years, but increasingly they are catching on to a fact:  costs of higher education are rising relative to the perceived benefits - a lot. While college grads still on average earn more than high-school graduates, what is important is what is happening at the margin --- what are the earnings the first year or so out of college? And both data from the Bureau of Labor Statistics and reams of anecdotal evidence suggest lots of recent college graduates are getting jobs working in such relatively low-paying jobs as bartenders, taxi drivers, and retail sales clerks.

For most universities, tuition fees are now the most important revenue source. That doesn't hold for some mega-wealthy private universities, or some state schools still generously supported by state subsidies, or a few research universities with huge federal research grants, but over time tuition fees have grown as a percentage of collegiate revenues.

Most university costs are relatively fixed. Tenured faculty are on lifetime-employment contracts, and, increasingly, universities are laden with debt, with fairly large payments due to bondholders for the institutional addiction to new buildings, the Edifice Complex, if you will. Thus when revenues take an unanticipated tumble, schools without much endowment or cash reserves have to scramble.

Fiddling with Sticker Prices

Aggravating the problem, to entice increasingly scarce students schools have had to increase their tuition discounting. So while sticker prices (posted tuition fees) might rise, say, 4 percent, actual fee revenue per cent might actually fall, partly because there are fewer students in attendance, but also because the actual average net (after discounts) tuition paid is rising very little. Some schools are going farther -Ohio's Ashland University recently announced it was reducing its sticker price by $10,000, hoping to lure more applicants (and sharply reduce tuition discounting).

The culture of the university is anti-change. Professors want to teach the same courses the same way to the same number of students. Why not? They are not incentivized by higher salaries if they teach more students in different ways. Senior administrators, accustomed to increasingly lavish perks (subsidized second homes, private jet travel, and lots of assistants to do the heavy lifting of dealing with irksome faculty, students and alumni), are loathe to give any of them up. Yet as cash flow diminishes, some schools are being forced to choose: change or go broke.

This provides an opening for educational innovation. On-line education is getting more favorable treatment, and resistance to the granting transfer credit for very low cost or none at all (such as provided by the MOOCs), is falling, although a number of practical problems remain, including with accrediting agencies. Discussion of three-year degrees is growing.  While most university trustees would jump off the highest building on campus if the university president asked them to, I am hearing more complaints from trustees about massive building programs that increase fixed costs. Maybe--horrors of horrors--we will have a moratorium on construction and start using campus physical plants as much as they do in private industry, including teaching classes on Friday (!), in July, and at other times that interfere with the social life of the faculty, but are routine work periods in most of American economic life.

 Some universities should fail. This would scare trustees into doing what they haven't had the guts to do: rein in their institution's voracious spending. It would reduce the overinvestment in higher education that has given us more than 115,000 janitors with bachelor's degrees. It is Schumpeterian creative destruction at its very best: forcing a reallocation of resources that is good for American society.
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Richard Vedder directs the Center for College Affordability and Productivity, teaches at Ohio University, and is an Adjunct Scholar at the American Enterprise Institute.



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