Higher Education

Why falling demand for college hasn’t brought down sticker prices

A Planet Money podcast about the market-defying logic behind college costs

The supply of students continues to decline, but college and university sticker prices haven’t.

This market-defying logic is the subject of a Planet Money podcast with Hechinger Report higher education editor Jon Marcus.

Many institutions boasted, in the admission season just ended, that they had received record numbers of applications. What most very carefully didn’t say was that record numbers of applicants are lining up to be accepted.

That’s because the number of students is actually down by 2.6 million since the last peak in 2011.

Economics 101 suggests that declining demand results in lower prices.

In one sense, that’s happened. A study released last month by the National Association for College and University Business Officers shows that colleges and universities now give away a record half of their tuition in the form of discounts and financial aid for freshmen.

But advertised prices continue to outpace inflation. And colleges have been careful to avoid talking about their enrollment woes, meaning only the savviest consumers know they can negotiate to lower their bills.

Meanwhile, they have struggled to reduce their costs, something higher-education institutions generally never had to do when they enjoyed a seemingly unending supply of customers.

Instead, they’ve borrowed billions of dollars to build amenities they think will attract students — often, experts say, without success. Nine percent of operating budgets now go to serving that debt.

Colleges and universities collectively owe $240 billion, the Moody’s bond-rating service reports. That debt rose 18 percent, to $145 billion, in the last five years at public universities, Moody’s says. At privates, it went up 3 percent, to $95 billion.

So while their sticker prices outpace inflation, colleges are actually falling behind.

Some have gotten serious about reducing costs. Many are leveraging their purchasing power by banding together to collaborate on everything from shuttle buses to security and from course offerings to classroom space, for example.

But institutions also have begun to close, most of them small, tuition dependent, and focused on the liberal arts.

These include St. Gregory’s University in Oklahoma, Atlantic Union College and Mount Ida College in Massachusetts and Trinity Lutheran in Washington.

Marygrove College in Michigan is shuttering all of its undergraduate programs. Sweet Briar and Antioch colleges, both of which were famously rescued by alumni and donors after announcing they would shut down, remain disproportionately dependent on outside contributions to survive.

Some observers consider this a needed market correction. But it also costs jobs and threatens the communities around these shuttered campuses, which depend on them for the innovation and skilled graduates they provide, and for the boost to local businesses they bring.

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Everything that needs to be said about the state of higher education has been said by Brian Caplan, Robin Hanson, and Elizier Yudkowsky.

It boils down simply: signaling.

- from Mark, May 14, 2018