Will Demographics Solve the College Tuition Problem? (A: I Don’t Know)
I’ve got two girls in middle school. They are lovely and (in my opinion as a proud dad) smart. I wonder, on occasion, what college will they go to and what their higher education experience will be like? No matter how lovely or smart my daughters are, though, it will be hard to fork over all of that tuition money. It sure would be nice if college somehow got cheaper by the time my daughters are ready in 6 or 8 years!
How likely is this? There has been plenty of coverage about how the cost of college has risen so dramatically over the past decades. A number of smart people have argued that the reason tuition has increased so much is because of all of the amenities that schools have built in recent years. Others are unconvinced that’s the reason, pointing out that increased spending by universities grew at a lower than the rate of tuition increases. Perhaps schools have been buoyed by a rising demographic trend – but it’s clear tuition increases have had a great run.
One way colleges have been able to keep increasing tuitions is by competing aggressively for wealthy students who can pay the full price of tuition (which also enables the schools to offer more aid to less than wealthy students). The children of the wealthy overseas are particularly desirable targets, apparently. I heard a great quote yesterday about this by Brad Delong – that his school, Berkeley, and other top universities presumably had become “finishing school[s] for the superrich of Asia.” It’s an odd sort of competition, though, where schools are competing for a particular customer (wealthy students) by raising prices. Presumably, this suggests that colleges have had pricing power to raise tuition due to increased demand (perhaps aided by increase in student loans, but that’s an argument for another day).
Will colleges continue to have this pricing power? For the optimistic future tuition payer, there are some signs that university pricing power may be eroding. Tuition increased at a slower rate this year (a bit more than 3%) but still at a rate that well exceeds inflation. And law schools are already resorting to price cutting after precipitous declines in applications – down 37% in 2014 compared to 2010!
College enrollment trends are a mixed bag and frequently obscured by studies from in-industry sources. Clearly, the 1990s and 2000s were a time a great growth for colleges – college enrollment grew by 48% from 1990 (12 million students) to 2012 (17.7 million). But 2010 appears to be the recent peak and enrollment fell by 2% from 2010 to 2012. In addition, overall college enrollment declined by 2.3% in 2014, although this decline is attributed to the 9.6% decline in two-year colleges while 4-year college enrollment actually increased by 1.2%.
It makes sense that the recent college enrollment trend would be down – the number of high school graduates appears to have peaked in 2010 at 3.3 million or so and is projected to decline to about 3.1 million in 2016 and stay lowish for the next few years. The US Census reports that there was a bulge of kids that are college age now (i.e. there were 22.04 million 14-19 year olds at the 2010 Census), but there are about 1.7 million fewer kids that are my daughters’ age (i.e., 5-9 year olds in the 2010 Census). That’s a pretty steep drop off (about 8%) in this pool of potential college students. These demographic trends have got some people worried. Moody’s, which rates the debt of a lot of colleges, has been downgrading a lot of smaller schools and says that this type of school has already been hit by declining enrollment and revenue. One analyst went so far as to warn of a “death spiral” at some schools due to declining enrollment. Moody’s analysis of declining revenue is an interesting factor, in light of reports of ever-increasing tuition. Last year Moody’s reported that 40% of colleges or universities (that were rated) faced stagnant or declining net tuition revenue.
Speaking strictly, again, as a future payer of my daughters’ college tuition, falling college age population and falling enrollment would seem to point to the possibility that tuition will be lower for my kids when the time comes. Plus there are a lot of other factors that seem to be lining up against the prospects for college tuition – like continued flat or declining wages, the enormous student loan bubble (it can’t keep growing, right?), the rise of online education…
And yet, I’m not feeling that confident. Elite universities (and it certainly would be nice if my girls could get into such a school) seem to have found a way to collect a lot of tuition from foreign students (it’s hard to find a good data source for that though) which protects them from the adverse demographic and economic trends. I’ve wondered if US students could get turned off by the perception that top US schools have too many foreign students and are too much, as Delong says, elite finishing schools. But that’s hard to predict and may take many years to reach a tipping point. Plus if tuition and enrollment drop a lot, that may cripple the schools that have taken out a lot of debt to build all of those nice amenities. A Harvard Business School professor rather bearishly projects that as many as half of the 4,000 US colleges and universities may fail in the next 15 years. Would a sharp decrease in the number of colleges due to falling enrollment have the effect of reducing competition at the remaining schools? If so, what impact would that have on tuition?
Both college tuition and student loans have been described as bubbles thanks to their recent rate of growth. At some point, bubbles burst (in theory). As someone who watched, first hand and with great discomfort, the growth of the subprime and housing bubbles before the crisis, I’ve painfully learned that bubbles can last much longer than you would rationally expect. And despite all sorts of analysis and calculation about what should happen, the thing that triggers the bursting of the bubble is really hard to predict. As is when it will happen. To the extent I’ve learned a lesson from mortgage land, it’s that you shouldn’t do anything stupid in anticipation of the bubble either bursting or continuing. So, as much as I hope and even expect that the trend for increased college tuition will reverse in the coming years, I guess I’ll have to keep on trying to save for when my daughters will be heading off to college.