Much of the recent discussion about the impact of financial losses on college endowments has focused on ways in which colleges can make up the shortfall. Since no one really likes to contemplate layoffs and cutbacks, most of the suggestions tossed around in forums both high (the pages of the NYT) and low (EphBlog threads) have been about some combination of less financial aid, more full-price enrollments, and modest tuition increases. Some of our readers seem to positively relish the thought that the financial crisis can be used to cut back on those noisome “diversity” and “international” recruits who typically cost more money, and it would seem that administrators at Williams and elsewhere have been somewhat receptive to such a course of action. In general, the consensus seems to be that Williams must find a way to cut its “discount rate” and increase the average effective tuition being paid by students.

I have been trying to articulate for a while why this idea strikes me as absolutely insane, but the Epicurean Dealmaker has saved me the trouble of composing a lengthy post. His response to this idea of raising tuition (as expressed by Harvard’s President) is an entertaining and necessary screed. Some excerpts follow, but please, read the whole thing (and while reading, keep in mind that Williams, which charges nearly identical tuition to its much more well-known brethren on the Charles River, has, if anything, even less pricing power because of its utter lack of name recognition.):

Keep tuition increases moderate? Oh, President Faust, you were doing so well up until then. Since when have hallucinogenic mushrooms been on the menu at the Faculty Club?

To be fair to Ms Faust, I suspect that she is not alone among university heads in believing that raising prices in the face of a looming multi-year recession and the ongoing destruction of billions of dollars of net worth among the families which comprise her target consumers is even possible. When viewed in historic context, such apparent mass psychosis might even seem reasonable. After all, the price of a college education in this country has been rising at a compound annual rate over the past quarter of a century that is approximately double that of inflation. Given that this period has encompassed a couple of ruinous wars, the odd stock market boom and bust, general ups and downs in the economy, and several political administrations of varying fiscal rectitude, why shouldn’t college administrators believe their target market is as hopelessly price insensitive as your average crack whore?

Skipping lightly over a fascinating diversion into Baumol pricing, here is a bit that is oddly reminiscent of Williams over the last 4 or 5 years:

Last year, on the occasion of a reunion visit to the leafy groves of my own alma mater, I was dismayed to discover that practically all of the verdant green expanses of my salad days (perfect for snoozing over a physics textbook on a sunny day) were no more. There was almost no plot of grassy space left on campus that had not been filled with the hulking form of yet another architectural monument to the pride and vanity of some self-fellating panjandrum. On a previously nondescript and inoffensive corner, some brand-name architect had erected at undoubtedly outrageous expense a swooping steel and glass science library not ten minutes walk from a central library big enough to house in triplicate every book, magazine, and pornographic pamphlet published since 1362 plus have room left over for a small suburban mall. I did not see it then, but I fully expect to encounter gilded toilet paper in the Faculty Club mens room on my next visit.

In short, private education in America spends money like a drunken sailor with Warren Buffett’s credit card.

Why they should want to do so is completely clear. How they have been able to get away with it for so long is more opaque.

My view, which you are welcome to classify under Education, Gratuitous Unverified Crackpot Theories Of, is that private educational institutions have been able to charge whatever the hell they want to for so long because Education has become the new Religion of the socially ambitious…

Whether this new Religion of Education will become an ossified, out-of-touch edifice ripe for challenge and Reformation by the iconoclasts of Google, Wikipedia, and Web 2.0, or whether it will pass unreformed straight through to the increasingly marginalized, irrelevant, and underfunded status of actual religions in the leading centers of Western Civilization is unclear to me. As federal grant-grubbing denizens of academe are wont to say: further research is required.

What is clear to me is that while the spirit may still be willing, the flesh (or the wallet) is beginning to get weak. Spending over half a million after-tax dollars per kid just to say that Little Bobby lost his virginity at one of the best universities in the nation is becoming harder and harder to justify for more and more parents. (Especially since one of the major reasons to send him there in the first place was to guarantee him a position in the immensely lucrative and prestigious fields of investment banking, securities law, or private equity. Oops.)

There is even shocking anecdotal evidence leaking out that formerly flush lawyers, investment bankers, and luxury goods retailers are beginning to pull their progeny out of the hallowed “feeder” schools of Upper Manhattan because they cannot afford the freight. Laugh if you will, but this is the upwardly mobile’s equivalent of “jingle mail.” Having written more than my fair share of eye-watering checks to such schools, I can only hope that the formerly arrogant, self-satisfied Headmasters and Headmistresses of New York are beginning to wet their beds on a regular basis.

This problem is not limited to the Ivy League, or Manhattan private schools, either. The entire over-leveraged, over-invested edifice of higher education in America is beginning to teeter and sway, and cracks are spreading across the foundation. Gone are the days, in my opinion, when university and preparatory school administrators could add sums collected from private and public donors to income harvested from the endowment, subtract that total from the amount of money they would like to spend in a perfect world, and divide the difference by the incoming student body to set the tuition.

No, it appears that the iron laws of economics have finally arrived on the peaceful doorstep of the Academy.

It’s about time, too.

The main point is this: the American consumer is tapped out. The Home Equity ATM card is no longer available. Student loan availability has dried up for all but the most creditworthy co-signers. Those who’ve smartly saved for college by putting their money into mutual funds are sitting on something like a 40% paper loss this year, and close to zero returns over the last 10 years. Incomes have been flat for as long as anyone can remember, employment trends are entirely negative, and the asset bubbles that fed Americans’ illusion of wealth have been largely blown away. If you think there is any non-trivial number of American households who have the capacity and willingness to pay significantly more than they were paying last year so that their kids can have the pleasure of attending classes in Williamstown, you are kidding yourself.

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