I should note the math and economics I use below are 'casual'. I believe in my thought process but, this being just itty-bitty TOA, I did not spend much time fact-checking or numbers-crunching. My apologies if I've blurred the line of fact and fiction with my assumptions.
Thanks for reading.
Tim
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When I decided to apply to college over ten (!) years ago, I never considered doing anything else. If I was qualified to attend any college, going was just assumed to be worth the price. This assumption is changing, perhaps slowly, but merely the thought itself is a little surprising given how strong the pressure to go to college felt a decade ago.
I sense this shift because the big chatter these days seems to be about rising college tuition. As tuition continues to rise, the debt burden on recent college graduates increases. It has reached the point where some potential college applicants are looking at these debts and questioning the value of college degrees.
It is easy to find information confirming these tuition hikes. There are all kinds of stats out there about how it is rising (so it must be true) and quick Google searches return hundreds of links demanding some kind of resolution for this issue (so it must be important). But these links don't really address why the tuition is going up so much (this article says sticker price, not net tuition, is rising, a clever premise which entirely misses the point). Without understanding why the price level is rising, I suspect it will be difficult to do anything about it.
Luckily, I went to college and learned some stuff about prices. Maybe I can answer my own question. So, let's dust off my economics degree and take a crack at it, shall we? We'll start with a simple review of 'Econ 101' principles before digging into the more complex dynamics of price competition.
Ready? Here we go!
Suppose a business generally sells units of product at $1 per sale. Each day, customers arrive, look at their phones, and make purchases. There is no hint of a shortage for the business and no hint of a line for the customer. Everyone goes home happy after a stress-free day of Shopping.
One day, demand surges. Suddenly, a line forms out the door. Soon, the queue snakes around the block. The price remains at $1 and the product sells out before closing time. Some customers go home happy, others do so empty-handed, and the employees are bewildered by the empty shelves.
So, then what?
The business has two extreme options (and literally everything in between). It can raise prices to prevent a sellout the next time. Or, it can expand production and meet demand at the $1 price. In real life, most businesses opt for a combination (and we'll use this strategy as a working assumption for the rest of this example).
It will not be immediately clear what the exact combination of the two extreme options was in this case. Most of the time, companies will not make announcements about small price changes and customers rarely will see how production is changing to meet demand. However, regardless of the decision, an outside observer will be able to figure out some part of the decision based on the price. If the price holds, it suggests an increase in production capacity and signals intent to at least try to keep pace with demand changes. If the price goes up, it shows production capacity is not going up to fully meet the recent demand surge.
This brings me to my only real insight into college admissions. Extending the basic idea above, if price levels are rising, it suggests capacity is not rising fast enough to meet the demand. In the context of a college, it suggests schools are not expanding fast enough to meet the surge in qualified applicants. Put another way, schools failing to maintain their admissions rates from years past are likely turning away candidates they once found (literally) acceptable.
This is partly based on my assumption about the college applicant pool: there are more people qualified for a top school this year than there were last year (1). And I bet there will be more people qualified for a top school next year than there were this year. The bar being raised, so to speak, to define a 'top high school student' is a good thing in general. But if the number of places in a college remain fixed while the number of qualified applicants increase, the situation is going to resemble my hypothetical business above: the acceptance rate will drop and prospective students will find a different place to 'buy' their education.
This is where it gets complicated (and not just because almost everything is more complicated than a business selling product at one dollar). One line of thinking suggests a student's undergraduate degree is an important signal to future employers or graduate schools. A person who went to an Ivy League school is thought to be a better candidate than someone who did not. Fair enough. I've been on the job search for almost a year as I write this and I've yet to be asked about my GPA. The implication is college performance matters less to employers than the college itself.
If we accept that the school matters more than the performance, it makes sense to see anyone preparing a child for college do everything possible to get a given student into a top college. All this effort leading up to and during high school means students graduate better prepared than ever for top colleges.
So, what does a top school do in response to this rising quality level in its applicant pool? Let's start right at the top and use Harvard as an example.
Harvard is currently not increasing enrollment fast enough to match student quality as evidenced by their ever-falling acceptance rate (and implied by their ever-increasing endowment which reached a record-high $37.6 billion in 2015). So each Harvard-quality reject goes to another school simply because Harvard isn't big enough. Put another way, each Harvard-quality applicant rejected by Harvard gives a lesser school the chance to enroll a Harvard-quality student. (2)
If the trend of the general college applicant pool becoming better and better continues, some non-Harvard schools will soon be full of Harvard-caliber students. There is a word for a school full of Harvard-caliber students: Harvard. Let's call this school full of Harvard-caliber students 'Reject Harvard' to differentiate it from the real school these kids just got turned down by.
At some point, my hypothetical 'Reject Harvard' will soon move alongside 'Real Harvard' (or just 'Harvard') in the minds of potential employers. After all, these schools accept the same caliber students and these employers don't really care about college performance! So if Harvard wishes to remain atop college quality rankings, it must differentiate itself from these Reject Harvards it creates every time its acceptance rate drops. Real Harvard will always feel this pressure as long as employers believe college environments matter more in proving credentials than college performance.
One way Harvard differentiates itself is to make its learning experience superior (3). This argument suggests two equally capable high school graduates will emerge as entirely different college graduates if one goes to Harvard and the other goes to 'Reject Harvard'. Colleges do this by competing for top professors, investing in modern facilities, and marketing (advertising, visiting high schools, successful sports programs, etc.). Not one of these differentiating steps is free, however, and I think largely explains the continuing rise in education costs.
I understood this a little better after a recent road trip up to my alma mater, Colby College. The school is located on a picturesque campus in Waterville, Maine and does a tremendous job of preparing students for
But I cannot say I agree with how the school spends its money. The trip back to campus allowed me to take a stroll through the renovated library, have a look at the new science center, and note the construction plans for buildings going up in downtown ('downtown') Waterville. These are all fine, fine ideas, I'm sure, but they solve problems I was unaware of when I was a student.
In fact, when I think about it, I didn't really agree with how the school spent money when I was a student. For every glittering new multi-million dollar construction project completed during my time on campus, a host of trivial concerns (such as only half the students receiving financial aid for a $50k tuition bill) went unfunded. In looking at the situation today, it just seems like the incredible generosity shown to me in order to make the school affordable could have been extended to a few more of my classmates.
The effects of spending decisions eventually add up and, like many things, not always in the most flattering ways. Colby recently finished just off the medal podium in this New York Times Power Rankings of...well, just click and see, I guess. (4)
Semi-embarrassing articles circulated on poorly read blogs aren't going to change spending decisions, though. For schools like Colby firmly on the second-tier of higher education, I think it is in their best interest to remain small and spend big on amenities while elite schools refuse to expand in line with the number of qualified applicants. This strategy keeps them ready to lure the top applicants being turned away on the account of all the dorm rooms at Harvard being filled. If schools on the second-tier consistently enroll first-tier caliber students, the gap between the tiers will eventually disappear. But to get there, all of these second-tier schools will run up costs as they compete among themselves for Harvard-quality-Harvard-rejects suddenly interested in little liberal arts colleges located in central Maine.
What was highlighted to me as a seventeen year old prospective student were features like the gorgeous campus, the excellent meals, and the shiny new treadmills in the athletic center (5). At the time, I did not know most schools similar to Colby had these amenities as well. With a little more research, perhaps I would not have been so impressed by these 'differentiating' features.
Again, I think these schools have little choice. They all run up costs as they compete among themselves because there is no other way to move up in a hierarchical system. The resulting upward price trend will hold, I'm sure, as long as top schools fail to expand in response to increased applications. A fixed supply combined with increasing demand always leads to a rising price level.
Of course, the problem for consumers is exacerbated when everyone holds supply fixed. And yet, it doesn't pay to be the first supplier to expand unless it can guarantee quality will not drop. So we have this current situation where all schools tout the same expensive amenities and prospective students simply move on to the next set of criteria on their decision making checklist while accepting the rising tuition bill as 'the way it is'.
Footnotes / imagined complaints
0. So, the problem with writing these blogs months in advance...
On August 7, Russ Roberts of EconTalk released a podcast where he and guest Tyler Cowen discussed in detail some of the concepts I've tap danced around in this blog. Interested readers can give the podcast a try HERE. There is also a transcript of the episode for those who would prefer reading along.
This situation comes up often enough whenever I sit on a post. It's the Big Risk, I suppose, of waiting. But I do not have any illusions about the originality of my ideas. If I'm able to conclude colleges failing to expand impacts prices in some way, I'm sure thousands of others have done the same. With my own irrelevance firmly in mind, I rarely redo a post even if I've heard someone else discuss it in the time between proofreading and 'publication'.
1. A non-exhaustive list of why I believe this...
*Increasing global wealth levels: better home lives leave more time for school.
*Booming population growth: if we assume one out of every one thousand kids is Harvard-caliber, then more kids would mean more Harvard-caliber students.
*Stronger international competition as non-English speaking countries better prepare their students to study in the USA.
*Better systems in place to help prepare students for college such as SAT prep, AP coursework, or the Sunday True On Average reading reviews.
2. This could potentially be a huge waste of money, but it's my blog and I can cry if I want to...
An interesting tactic for a school seeking to quickly raise the quality of its students would be to offer a full scholarship to anyone who was put on the wait list at Harvard.
Also, about the endowment number referenced in the paragraph: thirty-seven-point-six-billion? Why does Harvard sit on all those resources just to allow really smart applicants to go to another school and compete against them? It seems obvious to build more buildings and hire more professors but obviously if anyone could figure out The Best Strategy, it would probably be Harvard. And yet, they do not do this, indicating either I'm really far off the mark, or...
For the record, this is where I think it gets complicated.
3. Some of us are visual learners, others need food analogies...
It's like a restaurant with a line out the door. Instead of bending over backwards to serve everyone immediately, the restaurant focuses on keeping the quality high enough to keep people willing to wait in line and be served in order of arrival. This means the staff is working at top speed for almost the entire time and all the equipment is on at full power throughout the night. A tiring job will require higher pay and equipment used more frequently will require more maintenance, two factors I'm sure contribute mightily to any cost increases seen at a popular restaurant.
4. Sometimes, we use humor to hide our pain, hurt, or embarrassment...
At the time, the results prompted me to joke about how Colby 'never manages to win at anything'. Still, fourth is good. Do we qualify for the Champions League?
In any event, I'm betting today's high school juniors won't see the charts from this article on their Colby recruiting brochures
5. Things I probably should have considered at seventeen...
I did not consider as much the school's excellent reputation for keeping student loan debts low for students with my background or strong alumni presence in my hometown area. And it took me about a year and a half into school to learn the economics department was considered 'pretty good'.
