Victor E. Ferrall, Jr., a former college president trained in law and economics, is the author of Liberal Arts at the Brink, new this month. As he explains in the book, intense competition to attract the most promising students has created an untenable economic reality for liberal arts colleges. In the piece below, Ferrall does the math for a typical liberal arts college and argues that the only solution is to increase revenues. Not by raising tuition, but by decreasing discounts and repairing the public perception of liberal education.
Every day, one clarion call, louder than all others, sounds from the towers of academe: “We need more money!” College development departments swell. Fund-raising campaigns follow one after another, like taxis in the airport queue. Alumni are relentlessly pursued for donations. The number one criterion for choosing a president is ability to generate contributions. Does the candidate have a golden rolodex? The name of the higher education game is Grow the Endowment. For most colleges, however, the growth is never enough. Why is this?
Consider Old Overshoe College, a typical small liberal arts college with 2,500 students and an endowment of $125 million. A few colleges, of course, have larger endowments -- $500 million, $1 billion, or even more -- but most do not. Like almost all colleges, Old Overshoe (known to its students as OOC) spends only a small portion of its endowment -- on average 4.6 percent each year -- hoping that such restraint will permit its endowment to grow (or at least not contract). At this spending rate, OOC’s endowment contributes $5.75 million to its annual revenues, or $2,300 per student.
The list price (tuition) to attend OOC is $30,000. Again like almost every other college, few OOC students actually pay the list price. Most receive substantial discounts in the form of financial aid. The average financial aid discount at OOC is 45 percent ($13,500). That is, the average student pays $16,500; not $30,000. OOC takes in $41,250,000 in total annual tuition revenues (2500 x $16,500), but it forgoes $33,750,000 (2,500 x $13,500) by discounting. Since its annual operating expenses are $75 million, the $5.75 million in endowment revenues that OOC receives are important even if the money covers less than 8 percent of OCC’s expenses.
The most serious financial problem OOC faces is not that its endowment is too small, but that its huge discount is too large. Every one percent of discount costs it $750,000. If OOC could cut its average tuition discount from 45 to 37 percent, it would take in an additional $6 million; more than its endowment is providing. In order to generate the total amount of revenues it is losing by discounting, OOC’s endowment would have to be more than $725,000,000! This is never going to happen. OOC is lucky if its endowment grows 2 or 3 percent per year.
What OOC clearly needs to do is cut its discount rate. Even though it is financially strapped, however, like almost all other colleges OOC it is increasing its discounts. Why?
First, there are too few potential students who are willing to pay full price for a liberal education, and the number is dwindling. Students want the college degree credential, but more and more of them do not want liberal arts courses, which some see as high school redux. Second, even if they want to attend OOC, many simply cannot afford to pay its tuition that rises every year faster than inflation. Third -- and here is the kicker -- financial aid is really not a discount; it is a purchase price. Colleges are buying students. The primary measure of a college’s quality is the quality of its students. OOC and all the colleges with which it competes are trying to purchase the best students to keep from sinking in the rankings. This is why they don’t simply accept any student willing and able to pay full tuition. For colleges, unlike virtually every other business, one customer’s money is not as good as the next.
Some believe that now that the stock market is righting itself and the nightmare drop in endowments (for many colleges 25 percent or more) is slowly reversing, colleges can heave a sigh or relief and get back to business as usual. Sadly, they are wrong. When potential customers of a business are not willing to pay a cost-covering price, and their numbers and the amount they are willing to pay are falling, the business, no matter what it is selling, is in trouble.
If the ongoing decline in demand for liberal arts is to be reversed, the case for its inherent value (not for the value of a particular college or university) must be made to society as a whole (not merely to high school seniors and their nervous parents). Liberal arts colleges have important allies – their own graduates – an extraordinary cadre of talented and respected men and women who fully understand and appreciate the life value of the education they received. After decades of competing for students from a shrinking pool, rather than cooperating to expand the pool, however, colleges have developed patterns of conduct that, if not erased, will frustrate making the case.
Liberal arts colleges are under increasing pressure to replace some or all of their offerings with more “practical,” career-oriented courses of study: business administration, accounting, physical therapy, law enforcement, parks and recreation, and computer game design to mention only a few. By doing so, they may survive, but not as liberal arts colleges.