The Price You Pay For College

Audio Length: 00:49:08


S2: Hello, welcome to The Price You Pay for college episode of Slate Money, the podcast that gives you the business and finance news of the week.

S3: I’m Felix Salmon of Axios. I’m here with Alan of Breakingviews. Hello. I’m here with Emily Peck of Huff Post. Hello. And we have from The New York Times, Mr. Ron Lieber. Welcome, Ron. It’s great to be back. I think the last time you were on the show, we were talking about airline miles or something like that. But this time you have a whole book out. What is your book about?

S1: The book is about who pays what and why for college, how the system became so complicated and opaque, and when if ever anybody ought to pay up to two hundred thousand dollars more for a college education than whatever it is that their flagship state university is charging.

S3: We are going to dive into that very subject here on Slate Monday. We’re going to talk about what it means for parental finances. We’re going to talk about student loan relief, which is a big thing on Capitol Hill right now. We are also going to talk about another one of your investigations, which we have going on right now into how to get vaccinated against COVID, which is of relevance to everyone. So all of that coming up on slate money. So, Ron, you have obviously been working on this book about paying for college for a while since long before the pandemic hit. And now suddenly the pandemic seems to have turned the entire question about paying for college and whether you should even go to college on its head. Has anything changed permanently, do you think?

S1: I don’t think that anything has changed permanently. I mean, here’s how I see it. All right. There’s three reasons to go to college. You go to college for the education. You go to college for the kinship. You go to college for the credential. Right. So when everybody went home last March, the education got really bad, really fast, which is not the fault of the institutions. Nobody was ready for this or saw it coming. But the education was nowhere like what it once was. The opportunities for making friends and finding mentors that obviously went by the wayside to a fair bit as well. And so the other thing that was left was, you know, the sheepskin which, you know, came electronically or in a plain brown envelope and not with pomp and circumstance on the quad in May. And so much of what people used to pay for was essentially stripped away. And so is it any great surprise that teenagers came flocking back in September to very compromised situations and were willing to pay effectively what they paid before? It actually wasn’t surprising to me, because we’ve come to see this residential undergraduate education experience as a sort of rite of passage in the United States. And I don’t see any freight train of technology coming down the tracks that’s going to blow all that to smithereens.

S4: If anything, I’m wondering if the pandemic experience showed people that actually being in physical proximity to other people and teachers is actually really important, despite what some people, in fact, might say.

S1: Well, so here’s the thing about that, right? For all of the intellectual and research prowess of these institutions, they are remarkably uncurious about themselves. We don’t know very much about how people learn and what people learn and how much they learn and what makes for an ultimately satisfying undergraduate educational experience. It’s almost as if they’re afraid to find out. Right. But if you look at what’s supposed experts are saying in public, right. The president of Spelman College wrote just a searing essay in The New York Times in the spring about all that had been lost academically when everybody went home. It’s just taken as a given. Jonathan Zimmerman at Penn just wrote a book about college teaching called The Amateur Hour. Right. Which gives you some sense of how well he thinks he was trained. Right. And, you know, given that the state of undergraduate teaching is uneven in general, when you throw a bunch of middle aged professors into a Zoom room. Right. It’s not necessarily going to get better.

S5: It sounds like the pandemic didn’t do much to tamp down demand for college. Like customers came flocking back in September, like you said, Ron. But what about financial consequences for the schools? Is there anything that we need to be thinking about or worried about, especially for public schools now that the pandemic’s economic consequences have been so grave?

S1: So the trouble tends to start for the public institutions. Roughly twenty four months after any recession, it takes a while for the system’s. Kind of gears to a creek into action, right, because what needs to happen when a bunch of people lose their jobs or the dominoes to start to fall is that tax revenues need to decline and then budgets need to be adjusted for the following year. And then the universities themselves need to adjust their prices, which can take 12 months in a cycle. So, you know, two years later, you start to see the after effects. And, you know, it absolutely went down in a really severe way during the last recession. But it is unclear what we’ll see this time. Right, because every recession is different and, you know, the market for higher education might be a little different right now, too, but the effects will be non-zero for public institutions. That’s absolutely right.

S3: And private institutions, too. Right. There was a lot of hand-wringing about how the big cash cow for universities in general across the United States, not all of them, but many of them was foreign students who invariably pay full whack. And obviously, no foreign students are coming to crossing borders right now. And it’s not clear when or whether they might start doing that again. How how big of an impact is that going to have?

S1: The loss of revenue from full paying international students has been a real factor for these higher education institutions. But, wow, did they have a good week? Right. I mean, it may be a year until 19 year olds, you know, in the developed world, you have needles in their arms, but it’s not going to be four more years of Donald Trump making them feel completely unwelcome. And so they are stoked to use an academic term and the Muslim ban has already been overturned.

S3: So that’s step one.

S4: And could you maybe explain a little bit about what actually happened at universities and their finances and how that affected financial aid after the financial crisis?

S1: Sure, well, let’s start with the private institutions, the richer ones have large endowments and, you know, if your endowment falls by 20 or 30 or 40 percent over the course of a year or two, that means that it throws off less income and you have less money to spend on things like financial aid. And so you have to make a decision as an institution how you allocate limited resources. And in many instances, there were schools that used to admit people without any consideration for their ability to pay, who then had to make an adjustment right. Where maybe the last quarter of the class, if you could write a check for seventy thousand dollars, you might have a better chance of getting it lower down the food chain. There were schools that just had more trouble getting bodies in the door. Right, because Americans were suffering. A lot of people use home equity and borrow against home equity to pay for college. The banks were cutting people off, 50 percent of equity was disappearing. And some parts of the country and it was it was a real mess. And the way in which some colleges respond to that was just to discount further, not based so much on the ability to pay, but just as a sort of coupon to get people in the door. So how will it work this time? You know, it’s not completely clear. I mean, it’s a very different recession. And there are lots of people, especially educated people, which, you know, people with degrees are more likely to send their kids to get degrees. Those people are better off than they were 12 months ago. Economically, for the most part, the market has gone up. Their 529 college savings plans have gone up. Their incomes have stayed intact. In many instances. They’re not spending on fancy clothing or going away for the weekend or for the week. And so, you know, it’s possible that those folks have more money to spend and might be more likely to invest it in a, you know, fancier, more expensive institution that might provide a sort of forcefield shield of protection for their twenty two year old. I mean, you can see how people talk themselves into things when the world looks very scary outside their window.

S3: So I’m fascinated by this concept of what you just called the food chain and the top tier institutions, middle tier, bottom tier, that kind of thing. And one of the things that really jumped out at me, probably the main thing that really jumped out at me from your book is this idea that universities really do compete on price and that different universities have different like clearing prices, that there’s a revealed preference at each university in terms of how much people are willing and able to pay to send their kids there. And that number is different from university to university, obviously, like it’s higher at USC than it is some place in Alabama that we’ve never heard of. And universities have an incredibly sophisticated and incredibly opaque system. Basically, it’s a little bit like airline seats. Everyone pays something slightly different. No one knows how much anyone else is paying. And this, I think, cuts against the impression that I had before I read your book that universities were largely processes. They were like, this is the price and this is how much you’re going to have to pay. And if you want to come here, this is the bill and it turns out to be much more reactive to demand. And so I have two questions. First of which is like, does this basically mean that universities don’t have any real room to raise prices because they’ve already been trying to? Most of them, like the bottom 95 percent of them, have already been trying to maximize revenues anyway. And secondly, do you think this revealed preference that people express in terms of willingness to pay for this university rather than that university? Does that correlate significantly with those three things that you were talking about earlier, the education, the credential, the friends you make along the way, those clearly or implicitly better at the more expensive institutions.

S1: So, you know, Felix, you’re describing the world as I would like to see it and as I would like people to to act in it. But what we’re really talking about here is, you know, a world governed by snobbery and elitism and pride and shame. All right. So how does that work? Right. What are we talking about here? Well, the thing that I was most fascinated by, it’s sort of a corollary to what you were talking about, is that I wanted to explore the part of the market where the ability to pay was crashing into the willingness to pay. So if we’re just going to like name checks, some schools here, you know, if you look at like the 25th most selective college or university in the United States, if you’re at like spot twenty five. So selectivity, maybe you’re Colby College in Maine. Kolby is. Really worried that it is going to have an Oberlin problem. So what is the Oberlin problem? The Oberlin problem is that 10 or 15 years ago, maybe 20 now, people in the Midwest in particular decided that while they had the ability to pay for Oberlin, they were no longer going to have the willingness to pay full price. And that was because all of the other small liberal arts colleges in Ohio had already made the decision to give out coupons, including to the affluent, to try and sort of induce the smart set to come there and then had to sort of fold and begin to offer discounting as well. Oberlin was one of a tiny number of institutions that flat out refused to talk to me about this. They want nothing to do with this conversation. Are they ashamed or are they embarrassed to be participating in what is essentially red blooded capitalism and discounting, even though they’re a nonprofit institution? I don’t know. They wouldn’t say. But if I’m the president of Colby College, I am worried sick right now because in my sports league, Connecticut College in the last couple of years has started aggressively using merit. Right. And so, you know, Colbys, a more selective institution. But now we’re competing in the same sports league for lacrosse players who can get a twenty thousand dollar coupon for going to New London instead of being in Waterville, Maine. And the market is eroding. But. Right. You asked about pricing power just down the road for Colby in the same day I met with the president of Bowdoin College and the president of Bates, and they just sort of like blithely tossed off the fact that, you know, they’re headed to a one hundred thousand dollar a year list price and eight or nine years. And, you know, the president of Bowdon is also on the board of Bank of America, and he’s no elbow patched slouch when it comes to understanding, pricing and economics. And he just assumes it’s going to happen. And why is it going to happen? Well, if you look at the demography here, you see that because of inequality, they’re actually going to be more people, not a ton more, but they’re going to be more with the ability to pay full price. And what are we going to pay full price for in America and around the world?

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