Recessions Drive Rising Tuition and Privatization of Public Universities

effect of recession on net tuition
from State Higher Education Executive Officers Association SHEF FY2015 Report

The university system in the US struggles. After a prolonged period of rising enrollments, the tide seems to have turned. After peaking in 2011 both undergraduate and graduate enrollment are both on the decline. This is not a waning demographic bubble. Something else is going on.

This is especially problematic since, as a general rule, the costs of education delivery are largely fixed. The university solution is to distribute these costs across many students, some who pay very little in tuition and some who pay full retail, with many gradations between due to various scholarships. The net tuition is the sum of all tuition actually collected from students.

To the extent a university’s costs increase–for whatever reason–they are offset by the rising tuition paid by some students, and/or by increasing student enrollment. Yet, both of those solutions are now pretty much constrained. Rising tuition may have hit a ceiling.

Indeed, the current enrollment drop could be a signal from potential students to universities that they fail to see a value proposition.

Whereas private non-profit universities predominantly rely upon tuition revenue to offset educational costs, public universities do have the additional stream of state subsidies.

Yet these same public institutions have faced a decades-long pattern of diminishing state support. As a consequence, they’ve had no choice but to rely more and more upon rising tuition revenue to cover their costs of education.

I call this trend the “privatization” of public universities. Simply, as state support erodes the cost and behavior of public universities is more and more like that of private universities.

The rising tuition rates at public schools leaves some people costed out of higher education completely. For others who previously would have only considered public universities, private institutions become more attractive.

Second, public university recruitment and admissions practices become more selective, much like those at private schools. For example, many public universities develop programs to recruit higher paying out-of-state students, who sometimes end up in seats that would have otherwise been occupied by state residents. To digress briefly, this is self-defeating in the long run since it diminishes the political will within a state to support higher education.

The net effect from the student perspective is that the value proposition advantage that public universities once enjoyed is reduced. Indeed, the fact that more graduate students are now enrolled in private universities than in public universities pretty much establishes this case.

The big question is what fundamental force drives this privatization trend? I was struck by the figure above when reading the 2015 State Higher Education Finance report (pdf) which is produced by the  State Higher Education Executive Officers association. The data show quite dramatically how economic recessions drive public university privatization.

What’s truly remarkable is the episodic aspect of this pattern, repeated cycles of revenue disruption followed by periods of relative homeostasis.

It appears to work something like this: During recessions, state legislatures withdraw subsidies for higher education, presumably because state tax revenues are down. But lets not underestimate the degree to which the political climate drives the funding decisions and how this is enabled by the will of the electorate.

The public universities adjust by increasing tuition revenue. As the economy improves, the state legislators fail to return university subsidies to pre-recession levels of support, and thus the rising tuition matrix is embedded permanently in the overall university revenue structure.

A period of relative homeostasis ensues….until the next recession occurs and the cycle repeats.

To me, this doesn’t look like a pattern of out of control costs, nor does it look like a pattern of recklessly rising tuition and sticking it on students.

It looks to me, instead, like public universities making adjustments–and holding the line–to and against forces that they have little control over. When state legislatures withhold support, universities have no choice but to cost shift to students. Between recessions they appear to make a good effort to maintain a status quo by ensuring that they maintain net tuition revenue at a reasonably constant level.

However, peeking around the corner, if the pattern is not broken, these SHEEO data predict that we’re about 3 or 4 economic cycles from the point where public higher education in the US becomes, for all intents and purposes, completely privatized.

Author: TJ Murphy

Gradschoolmatch Founder