Europe’s first university, the University of Bologna, started with students hiring their own professors who would read and explain the classics and soon, it seems, we will be back to the same student-supported model, except that now the state is permanently there, regulating as if it was still paying for it.
Last year England decided it could no longer afford to subsidize higher education to the extent they had for the last 500 years. Things must be very bad in the realm for something like that to happen. Allowing higher education support to decline has traditionally been political dynamite in England. Conversely their American cousins across the pond were lowering their support of higher education every year and no one in the US noticed or protested very effectively. But when, in 2009, Tony Blair proposed a program whereby students would have to pay a higher proportion of the costs, the BBC reported “That move proved even more contentious in Parliament than Mr. Blair’s decision to wage war on Iraq.”
This year there are new cuts proposed that continue shifting the
cost of higher education from the taxpayer to the student, but they are modest in comparison. Compared to the U.S., England’s reform could be said to be negligible. In England, the entering student contributes approximately 47 percent (£3,290 of an average tuition of £7,000) towards their annual educational costs. In the U.S. the average student entering state supported institutions pay 72 percent of the costs. In England, the state partially subsidizes the gap, and also lends students the money to pay their fees and living expenses. These student loans are repaid once the graduate is employed at a job paying £15,000 [about $25,000] a year or more. In the U.S. interest accrues from day one and the borrowers must begin paying as soon as they leave school, whether or not they are employed. Nonetheless, the BBC predicts, “A new proposal for graduates to contribute more to their education could spark a rift in the Conservative-Liberal Democrat coalition government.”
Demand for higher education is increasing rapidly around the world. In England of fifty years ago, only 5 percent of the 18 year olds went to college, now it is forty-five percent and rising. Other European governments have experienced similar increases and responded to this high demand in the same way, by forcing students to contribute a higher percentage of the costs. Germany, Spain, Ireland and England have already submitted proposals to their parliaments. Der Spiegel of Germany contends that the increase in higher education tuition is responsible for the ruling party’s decline, “… after forming a coalition with Chancellor Merkel, the Social Democratic Party (which was the guardian of free education) slipped to 23 percent of the vote.” In Spain the national newspaper El Pais documents an even longer history of free higher education (900 years) and asks the government whether they can afford not to continue with the investment. “In a time of unemployment when youth can either go to college or live on welfare, the government has chosen welfare.”
This week the University of California at Berkeley announced it will be the first public university to charge out-of-state residents $50,649 for tuition, fees, room, and board. The price for in-state residents is $27,770. In California, higher education is no longer a public good; it is now a private burden.
There are 100 universities in the U.S. that belong to the $50,000-plus club, but UC Berkeley is the only public institution. In 2009, there were 58, so the club has expanded considerably in the face of decreasing endowments, decreasing support and currently increasing demand. This demand will flatten out over the next decade and that makes for the perfect storm.
The number of 18-24 year olds in the U.S. will decline by more than a million over the next decade and assuming the rosiest projections, that the percentage of that population going to college increases to 70 percent (from 49 percent now) over the same time, it would then make the overall demand stay flat. This will force universities to raise tuitions every year, because it would not be likely that the taxpayer will see increasing their contribution as a good idea. Decreasing value of endowments, decreasing support from state and private sources, flat demand and increasing student-paid tuition is a horrible set of circumstances for Traditional Universities (TUs).
What an excellent opportunity for Capitalized Universities (CUs). TU’s are raising their tuitions to levels above the CUs resulting in CUs becoming economically more competitive. At the same time, CU’s traditional market of 25-40 year olds without a degree will increase substantially over the next decade. This is not a market TUs have traditionally served well. We can project that CUs will continue to advance in this market.
Presently, the Senate is going after the CU’s and in particular their participation in the student loan program. The Senate wants CUs to provide evidence at time of recruiting that their students will be able to secure a job (an impossible thing to do) when they graduate. These threats to CUs have resulted in the price of their stock to fall to the point that Apollo Group Inc., owners of the University of Phoenix, is selling at 9.8 times earnings, clearly a bargain for a growth stock with a promising future.
TU’s cannot continue to raise tuition and fees in order to survive. This is analogous to when a Wal-Mart opens in a small town, forcing local retail stores to raise their prices to maintain their income, and gradually these higher prices resulting in their loss of sales. TUs will experience the same fate and some will be forced to close as well.
Some universities are taking on debt to cover current deficits. Stanford University has borrowed millions in order to replace the income their endowment is no longer producing. When an institution borrows to meet operating expenses, things are very, very, bad indeed. Stanford has “kicked the can down the road” as the popular phrase of the day goes. Why shouldn’t they when everybody else seems to be doing the same thing? But for Stanford it could be fatal.
There will come a time when the Stanford University bonds will have to be paid. A scenario might ensue whereby Stanford fails to attract enough students to break even, as they gradually raise their tuition to $100,000 a year, and then payment is due.
In that scenario I can see Apollo Group purchasing Stanford’s bonds and merging it into their system, nuclear accelerator and all.