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Ceiling for Tuition Hikes

Ceiling for Tuition Hikes
February 16, 2010

Middlebury College's president, Ronald D. Liebowitz, wants to take away some of his own flexibility. Starting this year, under a plan that Middlebury's board is expected to approve, the college will plan its budgets each year by capping its "comprehensive fee" -- the equivalent of tuition, room and board at other private colleges -- at an upward limit of 1 percentage point above the Consumer Price Index.

One percentage point above inflation might not seem like much to celebrate for students and parents facing the bills, especially at institutions like Middlebury, where charges top $50,000. But if Middlebury sticks to its policy, it could result in a slowing of increases that have typically run well above the inflation rate at such colleges.

This year, for example, the College Board calculated the average increase for private, four-year colleges at 4.4 percent -- even though the period covered was one in which there was no inflation. Middlebury's increase for the current 2009-10 year was 3.2 percent, which Liebowitz noted was more than 3 percentage points above the CPI, and would have been cut to 1 percent had the college been operating under this new philosophy. (The college gives up about $900,000 for each percentage point increase it doesn't make.)

While last year's comparison may be unusual given the minimal inflation, Liebowitz said that during the last decade, Middlebury saw increases in tuition fees that were often 2 percentage points above CPI and sometimes as much as 4 percentage points higher (and those levels are not unusual compared to other competitive private colleges).

Several elite colleges have in years past had one-year tuition freezes -- Princeton University in 2007 and Williams College in 2000 -- only to revert to increases the following years, with little sign that other colleges were paying attention. Middlebury, however, is adopting the CPI+1 model not for a year but as a financial model to continue indefinitely.

"It's a very brave thing to propose for the long term," said Sandy Baum, an economist at Skidmore College and a senior policy analyst at the College Board.

Why would Middlebury impose a limit on its tuition revenue at a time when its endowment has taken a huge hit?

"The prolonged greater-than-CPI increases in our comprehensive fee have ramifications for the college both internally and externally. We need to recognize that the demand for a four-year liberal arts degree, while still great, is not inelastic: There will be a price point at which even the most affluent of families will question their investment; the sooner we are able to reduce our fee increases the better," said Liebowitz, in a speech at the college on Friday announcing the policy shift.

In an interview, Liebowitz said that even though Middlebury is receiving record numbers of applications, the college shouldn't take advantage of that by avoiding the problem that total costs -- even with all the aid available -- simply are too high. "I thought it was time to put a stick in the ground," he said. "It's not that people aren't applying, but there is a tipping point coming some time. It's time to recognize that."

Liebowitz accompanied his tuition proposal with other news that will further limit the ability of the college to spend. He is lowering long-term assumptions for endowment earnings and gift revenue, and adding to contingency funds, while at the same time pledging to stick to the college's policy of admitting all domestic students without regard to their financial ability to pay. (Unlike many of its peers that adopted "no loans" policies that some are now reversing, Middlebury never made that move.)

"If we didn't already know it, our traditional sources of revenue are constrained, and the sooner we recognize that, the healthier all of us would be," he said.

There is a danger, he acknowledged, that Middlebury's competitors will continue with tuition increases in excess of the college's self-imposed limit, giving them relatively more money to spend. But Liebowitz said that "if a gap opens up, perhaps we'll be viewed more favorably" not only by prospective students and their families, but also by donors. And he said that some college has to start making a long-term commitment to smaller increases. "It's a matter of changing the psychology of how we and others think about the future," he said.

Liebowitz said that he did not want to "dampen the creativity of the institution," and that he envisioned growing sources of revenue through Middlebury's summer language programs at the main campus and abroad, which already earn the college millions in net revenue and may earn more.

To the extent that the tuition policy limits the availability of funds for salary increases at the college (still frozen under austerity measures announced a year ago), Liebowitz said that he was hopeful for faculty backing, and that initial responses have been favorable. Prior to developing the plan, the college surveyed various constituencies about possible areas for cuts in spending. Faculty members felt more strongly about preserving financial aid and policies that provided student access than they did about their salaries, he said. (The speech also took layoffs off the table, barring a deep further deterioration in the economy.)

Several experts on colleges' tuition policies said that they were both surprised and encouraged by the Middlebury shift.

Laura W. Perna, associate professor of education at the University of Pennsylvania, who has written extensively on college affordability issues, said that "from a market perspective, they don't need to take this action. They have lots of applications and don't need to reduce price to meet enrollment needs. But higher education should be listening to more than the market. They should be serving society and the public good, so I think this is a really important step."

While Perna said that this will be "challenging" from an institutional finance perspective, she said it was a "great" step, adding that "it will be interesting to see if other colleges respond."

Baum said that she saw the Middlebury move as quite different from the one-year freezes, and that she didn't know of a comparable policy at a private college. "If they can do it without compromising their financial aid policies, then it's great," she said. (Middlebury says that it can.)

It is important for colleges to realize that such policies will almost certainly result in cuts somewhere. "You can't have lower revenue from all sources" without cutting somewhere, she said.

Still, Baum applauded the move by Middlebury. "It's a challenging promise to make, but we need to slow down this [tuition growth] trend and maybe they can be a leader."

 

 

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