Wait, Isn't This the Old Normal?

March 21, 2012

Despite the national political conversation that President Obama has spurred about keeping the price of college down, it would be understandable to think that a few institutions missed the memo this year.

Princeton University’s 4.5 percent tuition increase for next year, bringing the price excluding room and board to $38,650, is the university’s largest price rise in six years. Similarly, Dartmouth College’s increase of 4.9 percent, to $43,782, is larger than its increases in recent years. Yale University's comprehensive fee will also increase about 5 percent next year.

Some less elite private institutions are also raising tuition significantly. Kalamazoo College is increasing its comprehensive fee 4.75 percent to $45,984.

While a handful of elite private institutions -- mostly liberal arts colleges -- with no shortage of demand and strong financial positions recently made headlines by announcing tuition freezes or increases close to or at inflation for the 2012-13 academic year, some of the most selective private universities are increasing their sticker price by almost 5 percent, which for many is the largest increase since the 2008 recession began.

While 5 percent pales in comparison to pre-recession increases -- especially when this year’s 3.6 percent inflation is factored in -- the hikes seem to contradict the notion that tuition surges in the “new normal” era would be more muted and that sticker price itself is a problem.

At a time when everyone seems focused on controlling the price of education, these large increases complicate the affordability picture, particularly when one considers the fact that these institutions could be more affordable for many families than public institutions are, after financial aid is taken into account. While these institutions might look similar to other elite colleges, their overwhelming demand and massive endowments, which fund up to half of their operating budgets and subsidize the massive financial aid programs, allow them to seemingly bypass the conversation about sticker price -- while other institutions face increasing scrutiny from families and lawmakers.

“Those schools that are need-blind and able to meet full need are in a different category from those of us who don’t,” said John McCardell, vice chancellor of the University of the South, an institution that made headlines last year for lowering tuition about 10 percent, freezing that rate for current students, and guaranteeing a four-year tuition price for incoming students.

The tuition announcements by Princeton, Dartmouth and others came as somewhat of a surprise to many in the field, who believed the market for higher education changed in 2008 when many families’ savings took a significant hit. A survey by Sallie Mae found that, on average, families paid 9 percent less for higher education than they did the previous year. The drop was sharpest among high-income families, which spent 18 percent less than they did the year before.

John R. Curry, managing director of Huron Consulting Group, said in an interview in February that the Sallie Mae report could indicate that families are reaching the upper limit of what they are willing to pay for higher education. “During the recession, families began to shop,” he said. What happened since then was an increased emphasis on affordability, with more colleges discounting tuition and providing financial aid, and public institutions trying to lure high-achieving students with honors colleges and low sticker prices.

Before the recession, both public and private institutions regularly imposed increases of about 4 percent annually. But the tuition hikes that have grabbed headlines in the past three years have come mostly from public universities (typically following deep cuts in state appropriations), and the trend is likely to hold next year.

Public four-year universities raised tuition an average of 8.3 percent last year, compared to an average 4.5 percent increase in privates. Increases in the University of North Carolina system for next year will average close to 9 percent. Price hikes will be similarly large for the California State University System. But because they are starting from a lower baseline, the total dollar increase for these institutions is still less than the smaller percentage increases at privates.

The justification for the large increases at publics has been the need to maintain quality in the face of state appropriations cuts, an excuse private universities don’t have. For many privates, other revenue sources, including endowment returns and private giving, are back to where they were before the recession. And almost half the presidents of private doctoral universities surveyed recently by Inside Higher Ed said their institutions could make additional spending cuts without hurting quality, meaning there is little imperative for increases.

For this reason, the presidents of several private institutions have taken some measures to control costs. “Somewhere out there is a line, on the other side of which we become unaffordable. We haven’t crossed it yet, but we know we’re getting closer to it,” McCardell said. Total cost of attendance at some liberal arts colleges, including tuition, room, and board, is more than $50,000 a year.

But those concerns about sticker price don’t seem to have spread to other elites, particularly those with enough revenue from other sources to fund generous financial aid programs. Princeton and Dartmouth, as well as other highly selective privates, said in their tuition announcements that meeting financial need is a chief priority.

"One of Princeton's defining commitments is its promise to ensure that a Princeton education is affordable to every student," Princeton Provost Christopher Eisgruber said in the university’s press release. "All students who receive financial aid are insulated from any increases, because aid packages are automatically adjusted to compensate for changes in fees, so Princeton's scholarship budget will once again rise more rapidly than the fee package."

And most do a good job of meeting need. Sixty percent of students at Princeton received financial aid and, after aid is considered, the average price students pay at Princeton is actually lower this year than it was in 2001. A recent article in the San Jose Mercury News, which was widely circulated, found that attending Harvard University, whose sticker price is $36,305 a year, and other elite privates could be more affordable for a middle-income family than universities in the California State University System, which charge less but provide much less in aid.

Despite a sticker price that was several times greater, Princeton actually took in less money in net tuition revenue per student in 2009 than did several prominent public institutions, including the University of Virginia and the University of Michigan. It took in only about $500 more per student than did the University of California at Berkeley and the University of North Carolina at Chapel Hill, two public institutions notable for low tuition prices.

The question is whether such institutions can get lawmakers and the public to focus their own conversations on net price -- the cost after aid is factored in -- rather than having them fixate on the listed price.

Administrators at Princeton said the tuition hike for next year is needed to help restore the university’s financial position after the economic downturn. The institution spread out its cuts during the downturn to avoid immediate big cuts. “The university is still drawing on reserves to balance its budget, and one of the goals of the committee is not only to eliminate the need to do that, but to begin to replenish the reserves that we rely upon to recruit new talent, fund new initiatives and respond to economic adversity as we did during the recession,” said Martin Mbugua, a spokesman for the university.

Lisa Lapin, director of public affairs at Stanford University, which will increase tuition only 3 percent next year, said her institution did the opposite, taking a big cut in 2009 but setting itself up to be in a position this year where it didn’t have to rely on big cuts.

Other university administrators said decisions about price -- particularly for those that meet full need and have substantial revenue from other sources -- are less about these institutions’ financial positions than the market place. “In the end, what you charge is less a financial decision than a marketing decision,” McCardell said. “Princeton and Dartmouth are making a marketing decision.

"If we were in business, we would charge what it costs us to produce, and at Sewanee that’s $65,000. Well, if we were making a financial decision, we would charge $65,000, but we’re not, and neither is any place else. They’re charging only a fraction of what it costs them to educate a student. Their decision, and ours, is a marketing decision, and while it has financial implications, it is not strictly about finances.”

Like the elite private research institutions with large increases this year, Mount Holyoke College also meets full need, but it is not increasing its tuition next year, and president Lynn Pasquerella said in an interview last month that the university would seek to maintain tuition costs if possible in years ahead.

When the college decided to freeze its tuition, Pasquerella said part of the reasoning was the concern about hitting the ceiling McCardell mentioned. Unlike private research universities like Princeton and Stanford that are engaged in almost limitless pursuits, liberal arts colleges have a specific mission and model they need to stick to, which could help control costs. “We can’t continue to raise tuition and spend resources, because there’s always something more to do with tuition revenue,” she said.

Karen Kedem, vice president and senior analyst for the public finance group at Moody’s Investors Service, also noted the games that institutions are playing with tuition prices. “If their rate of increase has been lower than their peers over the past few years, then they might be playing a little bit of catch-up. I think it’s all about relative positioning.”

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