Unnatural Acts

Burck Smith -- though a fan of nontraditional ways to deliver instruction -- worries about deals signed by some colleges that will add to what students must pay.

April 8, 2010

Financial crises cause public colleges to do funny things. Driven by enrollment limits, Bristol Community College in Massachusetts and Penn Foster University have come to an agreement allowing community college students to pay more to take Bristol classes delivered by Penn Foster. This deal comes upon the heels of the California Community College system announcing a deal that lets its students matriculate to Kaplan University, instead of the capacity-constrained California State University System, at a tuition level significantly steeper than Cal State’s though less expensive than Kaplan’s. Also in California, the College of the Sequoias, like many other colleges, is dipping into its rainy day fund and increasing class sizes while keeping tuition the same for now and likely higher in the future. At Bristol and through Kaplan, students pay more for the same. At College of the Sequoias, they pay the same for less.

Let me state my biases up front. I love unnatural acts -- particularly in higher education. My company, StraighterLine, which offers general education courses for which colleges can award transfer credit, has also been accused of performing unnatural acts with colleges. Kudos to Bristol Community College and the California Community College System for being willing to consider innovative options for their students. That said, these deals and actions worry me. Not because they are asking students to pay more – students always have the option to pay more – but because they do not give the students options to pay less.

Pay less? In these budget times? Any student who passed Econ 101 can tell you that, in a perfect market, price restrictions cause capacity constraints. State-mandated tuition levels and political resistance to tuition increases certainly qualify as price restrictions for public colleges. Therefore, the way to increase capacity is to allow higher prices for those willing to pay for it through a provider that’s not subject to state oversight. While these deals will undoubtedly allow greater enrollments and expand access to higher education, they do nothing to address the core failures of higher education economics. Indeed, higher education, abetted by an outdated accrediting and financial aid model, dramatically overprices many courses.

As printed in these virtual pages, it costs the University of Alabama $82 per student to deliver an intermediate math class and Frostburg State University in Maryland $25 per student to deliver an Introductory Psychology class. These two schools charge $2,680 and $2,100 for an out-of-state student for a three-credit class (out-of-state tuition better measures the nonsubsidized price per course). Further, these are face-to-face classes. Online classes can cost even less to deliver. These institutions, along with dozens of others with similar cost per student numbers, submitted this information to the National Center for Academic Transformation (NCAT) as part of the application process for grants to redesign their high enrollment general education courses. The profit margins on these general education courses for these nonprofit schools exceed 2000 percent. The same Econ 101 student would rightly note that, in a perfect market, this course-level profit margin would not be sustainable for long as new entrants would quickly enter the market to reduce the profit margin.

But it has been sustained. Why aren’t these extremely low prices for commonly taught courses passed onto students? First and foremost, most students rely on tuition subsidies available from the federal government through Pell Grants and loan subsidies. These benefits can only be accessed if the student enrolls in an institution – not just a course – that is accredited. Once enrolled, this financial aid cannot be applied to lower-priced courses at other institutions. Therefore, a market for lower-priced courses can only be supported by out-of-pocket expenditures or by a student completely transferring from one college to another. Further, lurking underneath a college’s tuition schedule is a nest of cross-subsidies. The profit margins on general education courses support low-enrollment courses, low-enrollment majors, administrators, sports teams, facilities and other nonacademic elements.

Indeed, though the price of college has risen, the amount dedicated to academics has declined. While many students enjoy the benefits of these subsidies, many others – such as commuter students, extension students or distance education students – do not. Lastly, the accreditation process itself takes five or more years, can only be undertaken by an institution (rather than a provider of courses), and requires a significant amount of overhead to be incurred – all of which pushes the overall price higher.

Agreements and actions like those of Bristol and the California community colleges, the nationwide growth in public college tuition, increases in Pell Grants, and further subsidized loans funneled through an institution-focused – as opposed to course-focused -- financial aid system point to continued rampant price escalation. So, it’s not an accident that Penn Foster, which is not regionally accredited, is working with Bristol, which is. Such an agreement gives students attending Bristol-branded/Penn Foster-provided programs access to a much larger pool of grants, subsidies and loans that can be spent on tuition. This deal expands slots for students, grows revenue for Penn Foster and grows revenue for Bristol. More importantly, it creates a precedent for variable tuition for the same credential from within the same institution. If public colleges are going to allow variable tuition for comparable credentials – and I think they should – they should allow it for those willing to pay more and pay less.

StraighterLine, the company that I run, offers a handful of general education courses for a subscription of about $100 per month without any taxpayer subsidies. As a provider of courses rather than a provider of degrees, we cannot be, nor do we want to be, accredited. Instead, our students receive credit for our courses at many hundreds of colleges via the American Council on Education Credit Recommendation Service or through direct arrangements with regionally accredited partner colleges. This can save students as much as 90 percent of the cost of their freshman year. On the one hand, since we’re not accredited, our prices only reflect the cost of individual course delivery, rather than subsidizing other elements of a traditional college. On the other, only students with the resources to pay out of pocket can take advantage of these prices. Call it an Accreditation Surcharge on taxpayers and poorer students.

Though our courses have received a variety of third-party endorsements – such as approval by the American Council of Education, approval by the Distance Education and Training Council (DETC), the appointment of an august advisory board, and review by partner colleges – awarding credit for these courses at these price points makes public colleges very nervous. When pushed by financial crisis, colleges search for deals that will help the college. They are not searching for deals that will help the student or the taxpayer.

Economist Paul Romer wryly noted that “a crisis is a terrible thing to waste.” Indeed, the higher education financial crisis presents an opportunity to examine basic pricing and financing assumptions in higher education. Agreements like the ones made by Bristol and in California should be welcomed as a way to expand capacity in high-demand fields. However, such agreements can only be embraced if similar agreements are made or policies enacted that allow students to more easily receive credit for taking much more affordable courses at other institutions and in other formats. If public colleges plan to allow students to pay variable tuition for more expensive courses, they should also allow variable pricing for less expensive courses. With many education providers – for-profit, nonprofit, accredited and unaccredited – available to provide additional educational capacity, colleges and their legislative overseers need to look at partnerships that will help students reduce tuition in addition to those that increase it. Given that this is in the student’s interest, not the institution’s, this might be the most unnatural act of all.


Burck Smith is the founder and CEO of StraighterLine and the founder and former CEO of SMARTHINKING.


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