Date: 11/1/2010
Dear Reader:
NACAC has come and gone, and the mid-term election is upon us. The prospect of a second major shift in our political and policy landscape in two years appears likely. Not coincidentally, our economic circumstances have hardly changed at all—at least at the family level. And what the future holds for taxes, costs, and regulation is uncertain, suppressing the economic activity that would buoy the boats of family finance.
For private colleges, this environment has delivered increased discount rates and a loss of consideration, especially among affluent families—who are either not so affluent anymore, or hoping to preserve their affluence by moving toward the public sector for college.
For those affluent families still entertaining a private college education, there has been a decline in yield as the competition for their affluence intensifies.
Increasingly, presidents and higher education observers make reference to the pricing model being unsustainable, and if they mean “not generating as much revenue as last year” they’re right.
So, is higher education the next pricing bubble? In my view, higher education was the first and remains the most extended pricing bubble in contemporary economic history.
The price of college—at least private colleges—has always been too high for most people. But colleges have always turned private giving to public purpose, offering scholarships to deserving students. And in recent history a combination of government and institutional aid, much of that in the form of an unfunded discount, has made private colleges affordable for many students from across the economic spectrum. More recently, easy access to rising home equity made private colleges more attractive and more accessible. All of this kept the bubble from bursting.
But now, as government aid especially at the state level declines, and home equity borrowing is just a warm memory, have colleges reached the end of their institutional ability to discount and still grow revenue year to year? Is the bubble bursting?
To offer a more learned exposition of pricing bubbles and how they behave, I asked our friend and colleague Jon McGee to interview the economics correspondent Chris Farrell. I think you’ll enjoy their PowerPoint-free discussion.
Best regards,
Jim
