Remaking College: Innovation and the Liberal Arts

3. Economics and Affordability

Chapter 3 Economics and Affordability Catharine Bond Hill President, Vassar College Jill Tiefenthaler President, Colorado College Suzanne P. Welsh Vice President for Finance and Treasurer, Swarthmore College At a time when the cost of a college education is rising and household incomes are declining, university and college leaders are faced with some difficult questions about the price and affordability of higher education. Indeed, President Barack Obama emphasized this very point in his 2012 State of the Union address, saying, “Let me put colleges and universities on notice: If you can’t stop tuition from going up, the funding you get from taxpayers will go down. Higher education can’t be a luxury—it is an economic imperative that every family in America should be able to afford.”1 How do we propose an effective response to this challenge? One way is for leaders at liberal arts colleges to define and explain the issues. In particular, it is important to recognize that there are more than four thousand institutions of higher education in the United States, including community colleges, public twoand four-year colleges and universities, private non-profit colleges and universities , and a rapidly growing for-profit sector—all with economic models that differ in important ways. While some issues facing these sectors are similar, each faces a variety of unique challenges. It is also important to remember that many people—including some of the press—do not understand the difference between cost, price, and net price, and yet these distinctions help define the issues facing different sectors and could inform solutions.2 For some institutions, cost is the main issue and, given other revenue streams, drives price and net price. For other institutions, price is the 44 An Opportunity to Lead main issue as schools push up tuition charges to offset declining revenues from other sources. We want to clarify some of the challenges facing American higher education generally, and liberal arts colleges in particular, and to propose possible paths forward, keeping in mind the specific issues faced by different types of institutions . We start by presenting data on the higher education sector in the United States and discussing the challenges it is facing broadly. We then present data on a representative selective liberal arts college (based on the data of twelve liberal arts colleges3), highlighting the particular challenges of this one segment of American higher education. Finally, we discuss some possible policy responses—some that our sector can adopt, some that would have to be implemented by others (but where we might play a role), and some that could be imposed on us. The Economics of Higher Education To understand the new economic reality facing higher education generally, we need to recognize some of the forces shaping higher education in the United States today. An article in the science magazine Seed described the current situation succinctly: “Our world is not the stable workhorse we once presumed it to be. Financial markets are inherently volatile; seemingly healthy ecosystems can collapse suddenly; the favorable window of life-supporting conditions that humans currently enjoy is an anomaly in the cosmic history of the planet. Change, sometimes in the form of radical, transformative shifts, is the defining characteristic of our existence.”4 Applying these ideas to higher education, one could say that the decades before the Great Recession, when we could count on a steady stream of endowment earnings , philanthropy, and tuition increases, were the anomaly, and we are unlikely to see that kind of stability again. Now we are in a period of enormous transition , with institutions trying to do more with less while continuing to make sure that students and faculty receive the resources, support, and encouragement they need. Given that most colleges and universities have streamlined their operations and are doing all they can to ensure access, the next step may be educating the public—especially students, parents, alumni, and boards—of our efforts to support the traditions and values that have made the U.S. system of higher education the gold standard across the world. Demand and Supply Higher education is one of the largest industries in the United States and one of this country’s top service exports. More than four thousand degree-granting in- Economics and Affordability 45 stitutions are spread across the country, educating 21 million students and employing 3.4 million people. Public colleges and universities represent 40 percent of all U...