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It maybe that the Traditional Universities’ (TUs) cost model is at least partially responsible for the expansion and profitability of Capitalized Universities (CUs). In other words, I think that the very fast and very high tuition rate increases at TUs, have made it possible for CUs to compete on price. This becomes evident by studying the places where CUs choose to locate and how they have pegged their tuition to the market.

University of California Historical and Projected Tuition

CUs cluster around high cost public universities operating in expanding markets. Both of these conditions are essential in attracting CUs to a given area but the cost model goes beyond expanding markets as the key reason CUs grow and prosper. It is also evident that, while the CU’s cost model is significantly more efficient than TU’s, their profitability has been unparalleled, when compared with the private for-profit post-secondary institutions before the 1980’s, before the CU expansion began. The growth and profitability experience of the for-profit post-secondary sector back then would not have attracted venture capital and would not have made it possible for the CUs to go public and therefore have access to all the capital they needed to compete effectively.

Therefore, unwittingly, TUs tuition cost increases, once considered impervious to market forces, (ie. the student must pay whatever the tuition is of the place he/she has chosen to attend) actually make it possible for CU’s to be competitive and for those for whom a degree is all that they seek, the private university’s tuition rates are attractive when compared with the TUs.

Since most of the tuition students pay will be borrowed from the government, the cost differences are not as meaningful as they would be if the student was forced to pay from his/her own current budget. And since, the CUs are not hesitant to point out, a BA degree, any BA degree, from any university –research says—will increase the holder’s lifetime income by $1 million, the present value of the tuition seems less than significant to a potential student. Pay $ 30,000-80,000 for four years of schooling and get a million back.

Had TU’s held their tuition down at the level of inflation, for example, CU’s would have a very difficult time competing on price. Their CU’s tuition would have to be half as much as it is now in order to be competitive and with that, their profitability would be much harder to obtain. Capital would not have rushed into their treasuries, after all, the U. S. experience investor’s with for-profit post-secondary schools had been that they were slow to grow and barely profitable. TU’s may have made it possible for them to grow and thrive.

Do TU’s need as much money as they have required through tuition and fee increases in the past thirty years? The simple answer is, under the current cost model, yes they do. Since 1980 when States contributed an average of about 60% of the cost of running a TU, States have reduced their overall support of public institutions by 48%, adjusted for inflation, while tuition and fees have increased by 210% making the current State level of support for higher education less than 30% of State’s budgets, depending on the State. Rather than facing this reality by modifying their cost model, TUs sought to replace the loss and then some, adding more to the students’ tuition burden.

Since the 1980’s TU’s have grown their non-instructional side of the budget at twice the rate of the instructional side and have done nothing to adjust their cost model to account for the reduced support. This is so because they don’t have to.  Students pay whatever they are charged –or so TUs think—and until CUs began to compete for their students, they had no reason to fear. Until now.

Next Post: Is a university education too expensive for the sons and daughters of the middle class?