Why falling demand hasn't brought down college sticker prices | Hacker News Reader

Why falling demand hasn't brought down college sticker prices

hechingerreport.org

45 pointsjseliger54 comments

I only read the article (and not the podcast, if it's different) but I think their argument misrepresents how the economics of higher education work.

> "Economics 101 suggests that declining demand results in lower prices."

This isn't true for college sticker prices because colleges have perfect price discrimination. Most students don't pay the sticker price; they pay exactly what they "can".

In no other industry do we have such perfect incentives aligned on the provider side to increase prices--

- People who can't afford the higher prices can pay less, through financial aid and scholarship programs.

- To determine what is the "maximum" price you can pay, the student/parent voluntarily provides literally every data point possible. Every tax record, every loan, etc.

- Because of this perfect price discrimination, an upward trend in college costs (that outpaces inflation) is not only reasonable but expected. It's in the interest of the institution to maximize its surplus/profit to the student's upper limit.

Also, Econ 101 is essentially a naïve exercise in optimizing price-demand curves (find where f'(x) = 0), which assumes prices always converge on a supply-demand equilibrium point.

Another model, found in utilities, fixes the cost point, so when demand falls, prices rise. Did you ever buy into your electric company's "conservation program" and cut your consumption, only to have your rates rise?

Congrats, you just got rick-rolled by capitalism, comrade sucker.

The point of the podcast, at least, is that despite all of your points, colleges are taking on enormous amounts of debt, while enrollment is shrinking. They are losing money.

For established non-profit schools? Or new, mostly for-profit schools?

I find it hard to believe any reputable, 20+ year-old, non-profit schools are losing money. They should own their assets outright, have extremely low interest rates on any outstanding debt, pay close to 0 taxes. Wages for non-executive staff are not keeping pace with inflation. How are they losing money?

Gotta have newer, shinier buildings! Not sure my alma mater has stopped construction since I went there, not sure how they pay for it all.

Same here. When I started my undergrad degree in 2006, my university had just built the first new residence hall in 20+ years. Since since I left in 2010, they've added two new academic buildings and two more 4+ story residence halls. Granted, enrollment continues to climb at the school, but they haven't stopped calling me multiple times a year looking for alumni donations...

At least in top-tier research institutions I think this is because big-time philanthropists would rather see their name on a new building or expansion, than earmarked for maintenance of existing buildings. So capital expenditures outpace general operation costs born by state/local and current students/non-wealthy alumni.

Berkeley is arguably the poster child for many of these problems. They continue running on a deficit.

Berkeley is intentionally a subsidized public school, so their deficit is entangled with their subsidy. Nearly government-funded programs are likewise.

In addition to large amounts of new construction, administrative staff has expanded massively [0].

Between 1975 and 2011, the number of full-time, tenured faculty at universities grew by 23%. The number of administrators grew by 369%. The trend seems to be to hire part-time and untenured faculty to keep salaries down, then hire more administrators.

[0]: See "Full-Time Nonfaculty Professional" at https://www.aaup.org/sites/default/files/files/2014%20salary...

Why??

Wow, looks like the financialization of education is almost complete. That graph literally looks like a nightmare.

Can you expand on what you mean by that?

Anyone can spend beyond their means. New dorms, fancy technology, state of the art gyms, expensive non-revenue sports....

The nature of their governance structures makes it easy to spend money but harder to save it.

Most of their costs are self inflicted. A cynic would say that colleges have an incentive to keep their their net low to justify ever higher costs. Look at things like the completely bloated administrative and managerial structures which are now also regularly paired with bloated compensation. And something that happened at my universities, which I expect is typical, is that there was massive and widespread construction. They were constantly building up and tearing down things, even when what they were tearing down was completely functional. It was nonsensical, at least if you assign any value to money.

You can even just see things on a macro level. The product that the universities are offering has not meaningfully changed or improved, yet their costs have gone into lala land.

Don’t other countries have similar forms of price discrimination? Are their education costs rising at the same rate?

Other countries have education funded directly by the State. In the US it is funded by a crazy mish-mash of the State, the federal government, endowments, subsidized loans, unsubsidized loans, etc.

> This isn't true for college sticker prices because colleges have perfect price discrimination. Most students don't pay the sticker price; they pay exactly what they "can".

> In no other industry do we have such perfect incentives aligned on the provider side to increase prices--

(Healthcare.)

The article doesn't mention that middle management exploded at colleges in the last few years, and those people are going to try to hold on to their jobs no matter how low enrollment gets. http://blogs.wgbh.org/on-campus/2014/2/6/growth-nonacademic-...

Also I think the part about half of tuition at one school going to "discounts and financial aid for freshmen" is misleading. That's not really costing the college money, they're just charging less to begin with.

It’s costs the college revenue, just as tax cuts cost the government revenue.

Kinda, I mean they're not really spending half their tuition on breaks so much as overstating tuition by 100%.

That's like saying piracy costs $TICKET_PRICE * #viewings, or that the value of donated software is its sticker price, or that buying a department store shirt "on sale" costs the seller any money.

It completely ignores the possibility of non-purchase, which is the dominant alternative among options. "Would have paid" is a tiny fraction.

I wonder how this drop in demand is distributed between American students who are eligible for financial aid and federally-backed student loans and foreign students who almost always pay full price.

As an anecdote from my own engineering school experience, a staggeringly large proportion of my classes were populated by foreign, usually Chinese and Indian, students. My college has a pretty good brand, and I understand many of these students were willing to pay to have its cachet on their resume. Also, many of these students, especially the Chinese ones, seemed to be from very well-off families (at least if the number of Canada Goose coats and Supreme hoodies is any indication).

This is an anecdote, so take it with a grain of salt, but it suggests a hypothesis: maybe the drop in demand is among American students who are mostly paying discounted prices anyway, while demand among foreign students who are willing and able to pay the staggering sticker price remains high.

> (at least if the number of Canada Goose coats and Supreme hoodies is any indication).

Why crane your neck to check the outfits, when you can glance at their cars?

http://www.mlive.com/lansing-news/index.ssf/2014/04/michigan...

"People who haven't visited Michigan State University's campus lately may be surprised to find Maseratis, Lamborghinis and Bentleys driving around. ...:

In most class environments it's a lot easier to look at someone's clothing than to follow them out to the parking lot and check their car.

A few observations about this "will the traditional college survive" situation, which I've been following for a long time.

The higher education market feels a bit like the healthcare market in that it's somewhat difficult for the consumer to tell what the actual cost will be prior to purchasing the product. Published tuition rates and other costs of attending school feel like they're abstracted until a long-term commitment has been made and it's too late to get a refund.

It may seem strange that, with the increasing debt being amassed by universities, record-breaking new salaries are being offered by many of these schools to football and basketball coaches. The 25 salaries for college football coaches range from $3.5M to over $11M per year. I'd assume that in each of those cases, the value received from the coaching hire contributes overall to the school's bottom line.

As much of the same information that is taught in college becomes more accessible for free on the internet, it's hard to see how colleges can compete with smaller, more agile competitors who don't have nearly the overhead that universities do. It feels a bit like retail stores trying to compete with Amazon.

Except that the raw "information" taught in colleges doesn't represent enough value to even show up as a line item in a cost breakdown. Anyone can read a book, or even watch a lecture; the value add is access to research, access to professors, and perhaps most importantly, access to a community of motivated(to a degree) students all in plus/minus the same point in their lives.

MOOCs on the internet can't compete on any of these metrics.

The only "value add" for colleges is the signaling provided by getting the degree, i.e. going through the application process and committing to finishing a 4 year degree.

This is most easily measured in the income data for college-grads vs non-college-grads. This data is so easy to measure that you can measure the "value" of a college degree, currently something like $17K per year more for the graduates.

Don't underestimate the value of circulating amongst the children of the wealthy. These are the connections that will get you work and investors, especially if you manage to marry one of them, which has always historically been the most common mode of class mobility.

Your wealth is directly related to the people who you associate with. If you're any lower than upper-middle class, college will be your last opportunity to associate with the rich through simple elbow grease and charm.

Right. The "basic core education" is what you get from a community college or a European public school -- and look at what the expenses is for those (total funding, per student).

The rest is all up-charge for intangibles

I think the fundamental problem is that providing "meaningful" credentials requires critiquing your own customers in a complex and non-quantative process. A school needs to amass a major amount of social and other capital that it risks losing when it gives all students an A and even then it is often too tempting to placate the lazy customer (see Harvard undergad scandals such as grade inflation).

The expensive coach and sports team is part of a complex signal of an organizational reputation being risked when the school backs little Bobby-Billionaire Low-IQ's transcript and also accepts a new wing from Bobby's dad.

I wanted to see MOOCs lead to a rise of separate standardized tests to replace integrated education and credentials, but I also recognize that teaching to those tests would end up ruining many MOOCs..

IMHO, the whole mindset about college is broken. There was a time in this country when the value of educating someone was viewed more from the perspective of society. We wanted people to go to college to have a more informed electorate and a more professional workforce. This started to change under Ronald Reagan's governorship in California and was completed under his presidency. And that was a shift towards viewing education as a benefit to the student.

It seems a subtle distinction, but it has a crucial effect on tuition rates. When it's looked at from the perspective of the benefit to the student, the upper bounds for how much an educational institution can charge is the financial benefit over the course of that student's career. When you look at it from the standpoint of benefiting society, it's in the best interest of the state to educate students as cheaply as possible. And we've seen the predictable results of the change in perspective with tuitions slowly rising towards that upper bound.

But you're right...placing the primary funding burden on an entity that is sensitive to price will likely put pressure on colleges to offer educations more efficiently. Though I do think your focus on football coaches is unwarranted. That's a simple equation...football brings in $Xm/yr so they give it a budget of $Ym/yr. As long as the delta between X and Y is as big as possible, it doesn't matter what Y is. The far more concerning thing, to me, is how long we've known about the concussion issue at this point and how little college football programs have done about this. We can look at the time period since CTE was first discovered as willfully endangering college football players and colleges will be on the hook for billions of dollars in lawsuits over the next 2 decades. This isn't particularly relevant to the issue we're talking about, but will have major ramifications in bottom lines for Universities, so will probably impact tuitions as well.

I think salaries for football coaches is the one area where they aren't having issues because they get direct revenue from their sports teams in terms of ticket sales, merchandise sales, and TV rights. If the teams do better, all of those metrics increase, so investing there would make sense. Additionally they don't have one of the largest costs for traditional sports teams, player salaries.

Except that the players are the ones who get screwed - see much of the controversy about the NCAA.

I have no idea, but I would think the sports department of any college would be run more like a profit generating business (or any losses would be tracked, but treated like "advertising" or investment in "prestige").

We tend to think of inflation and spending power as something that changes over time and affects all goods equally, but this is one of the big problems education and healthcare share; they're driven by humans. Food, furniture, and clothes have dropped in cost significantly over 100 years and the productivity of a single worker has skyrocketed. Education and healthcare have very similar ratios of patient:doctor and student:teacher over the past 100 years, so those higher salaries affect the cost. There's been a lot of talk that the true cost of teachers has been historically undervalued since women were discriminated out of most other jobs (this may not necessarily apply to colleges). Now that women have more opportunities, there's more pressure to pay the true cost of these teachers.

I do realize that colleges have push for fewer tenured professors, brought on more TAs and temporary teachers, and administrative headcount has ballooned. But that hasn't had anywhere near the magnitude of change most other industries have made.

Everyone knows you go to business school to network and a other degrees are branding (if they have X degree from school Y, you're confident they've they've met some bar). Maybe I'm wrong, but I think it'd be an uphill climb to disrupt that. Even if they get replaced, I can only see it happening by another monolithic institution that would carry all of the baggage associated with that. I think Coursera has been making very strong efforts for many years, but still hasn't found a successful model.

The first university I went to was probably suffering from all of the following:

> the number of students is actually down by 2.6 million

> they have struggled to reduce their costs

> they’ve borrowed billions of dollars to build amenities they think will attract students

After two years (2/3 of a degree in South Africa) I had been challenged by precisely one subject - all the while I was hemorrhaging money. The amenities were fantastic and I never once used them. Not realizing how the importance of a degree and anger from learning sweet nothing resulted in me leaving. It was an expensive degree printing press and nothing more.

Ten years later I need a degree to help with my visa. The experience is night and day. In a course that I just completed, I had to submit an assignment, and the feedback my lecturer provided was incredible: I honestly don't know how she finds the time of day if she's working that hard for all of her students. I walked away feeling as though I had learned something valuable, even though it is one of those general courses that you usually question why you have to take. These people seem to really care about furthering and imparting knowledge. It shows. The entire experience is streamlined around learning. You can't send your kids there (as they require a professional background), but I hope this catches on by the time my kids have to go to college.

If these behemoths want to reduce costs while attracting more students, it's all too easy; do less and focus on the product: learning. That approach saved IT/CS from ballooning costs and deadlines, and I have first-hand experience suggesting that it can also work in education.

I'm not sure I understood your comment correctly - did you return to the same institution 10 years later, or did you go to a new one?

I should have clarified that: a new one.

"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."

I read this like 3 times, then the article, then again, but I can't parse it. What is it really saying here?

I am guessing that total applications are up while total numbers of applicants are down (and thus there are more applications submitted per person)?

Probably one student would apply to more schools? So even though they had a ton of applications (each school would have seen a rise in # of applications), these schools are chasing down a fewer number of actual people.

When I was a student, I applied to 3 colleges (1 nearby, 2 far away), nowadays maybe students apply to 20 or 30?

This sounds like a reasonable explanation, but do colleges have transparency into who applied where nationwide? I would expect a college to know the absolute exact number of its own applicants/applications, but beyond that it should be only an educated guess, as long as the SAT is not in the business of selling everybody their data. But then, who knows, maybe the SAT is doing exactly that.

Yes. One of the things that's different is that there's now https://www.commonapp.org/ which says "you can apply to more than 700 colleges" using it.

To some degree, application fees (paid per college) are still a deterrent but some people qualify for free application fees. There was an article about a young woman who was accepted at more than 100 colleges. http://www.ibtimes.com/teen-gets-accepted-more-100-colleges-...

Applying to X more colleges at $50 or $75 each where one of them may offer 10% or 20% more in aid makes for an interesting decision.

Common App is at least 20 years old.

It says that a record number of applicants are applying to each institution but the number that are going to attend is lower.

Shotgun approach.

Similar to how people apply for a bunch of software engineer positions at a plethora of companies, when they only would really want to work for maybe 1/5 of them.

Back when I was a senior in high school there was a newer (at the time, I suppose) idea that college admission was a "crapshoot", so the common suggestion was to apply to a bunch of universities, even the ones you weren't very interested in as "backups" or whatever.

This happened a long time ago in med school admissions. You can essentially calculate how many schools you need to apply to in order to get accepted. You will have to route d up or down given your demographics, but US News and World Reports will give you a really good guess.

Lots of impressions, very few conversions.

The average person is applying to more colleges, but the total number of people attending college is decreasing. Therefore each college can promote that they received more applications than the previous year. People don't typically attend more than one college simultaneously.

ex: 20 people applying to 3 colleges each, vs 10 people applying to 10 colleges each.

So basically like a conversion rate of applicants to students.

Perhaps student loans should be co-signed by the universities they get their degree from?

At least this way, there may be a reasonable alignment of incentives for the university to provide valuable, cost-effective education.

Obviously they need larger football stadiums to bring in that TV money.

Federal Student Loan bubble sets a price floor screwing all the poor students with debt they otherwise could avoid in a free market.

Sadly, they would also avoid college in a free market. The problem is that the state should be setting a price floor of $0, which would limit the motivation to compete on debt to private schools.

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