Perspectives on future college tuition

A friend of mine asked, "how will the current economy effect college tuitions?" Here's what I told her.

College tuition has been supported primarily by (1) the pervasive belief of getting a "better" job with a degree than without, (2) abundant sources of long-term credit willing to finance college tuition with very long payback periods, and (3) a populus willing to take on that much debt, at those interest rates, for the terms of those loans. There is one more element to the college tuition financing experience - financial aid paid for by endowments swells the ranks, which creates efficiencies, which lowers the cost/student, which helps regulate tuition increases. In other words, stable or growing enrollment is key to the current systems' maintenance.

At the moment, we are on the verge of all of these elements breaking down. (I could use words like "we may be...", but it's more fun to tell you what I think than advice you on what "could be.") I'm talking full-blown 1930's-like depression, and based on that environment, here is what would (will) happen to the college scene:

1. High unemployment for an extended period of time would severely diminish the expectation of a "better" job

2. High unemployment for an extended period of time would limit a family's ability to pay for college tuition, reducing the ranks of students that can pay their own way

3. Sources of long-term credit will greatly diminish, first because of the liquidity of entities that provide such credit, and thereafter, as endowed schools "step in" to provide the lack of liquidity (much like the Treasury today) but quickly learn that consuming their own nest eggs to live day to day is not a solution. The example here is GMAC providing loans so you can buy a GM car. Without this credit, fewer students will be able to attend.

4. A strong aversion to debt as an answer to any problem will emerge, and students will rationalize that college is not worth it given the amount of debt necessary, particularly given the employment outlook.

5. As schools redirect their diminished endowments (diminished today by significant losses in the stock market, and later by overuse to support a student base that is more and more needy of "help" (i.e., aid or step-in loans), they will realize that the "need" base, as defined by incomes & assets of families versus tuition costs, has swelled to >50% of their current students (let alone their goal of students, which is now unatttainable due to enrollment reductions), they will be forced to reduce tuition to rebalance the rolls between those needing aid and those not needing aid. This rebalancing is a fancy way of making tuition affordable.

6. At first, the wave of lowering tuitions may be validation of the original class who passed up the college degree on the prospect of lack of jobs, unwillingness to take on debt, etc. Those folks will say, "see, I was right because "value" of college at the time I was looking was much less than what they were trying to get me to pay. I went to the school of hard knocks instead and look how well I turned out."

7. Still, quietly and slowly, a new generation will emerge that sees the "new price" of college as simply the current environment, and as it is more attainable, as wages are beginning to increase and unemployment begins to return to normal levels, they become more willing to pay the price and, if necessary, finance the cost with debt. Enrollments will begin to advance for the first time in 10 years.

8. With the expansion of college rolls, sentiment about college degrees will begin to improve, eventually driving more pride of college degreed individuals. Together with improved unemployment and job prospects, wealth expands, putting a generation in the position of donating to endowments to pump up "their" schools...and eventually tuition begins to swell again like it did in the 80's and 90's when everyone had to have an MBA or they couldn't get a job.

Today, if you a recent grad with an MBA you can't get a job. So, the short answer to your question is, tuition will be coming down, probably pretty hard, in the 3-10 year window, unless you think the Fed and Treasury and save the world.

I would also not be surprised if a new set of colleges emerges from this cycle as "Ivy League II," with the greatest of great schools' arrogance causing them to take bigger and bigger risks in managing their endowment to try to make up losses because "they're the smartest guys in the room" thus completely destroying their endowments, while conservative schools with lower endowments preserve what they have and are in a better position to provide aid when college degrees return to social desirability.

You can take the steps above and change "tuition" to just about anything in today's economy and see that we have already begun a deflationary cycle, and deflationary cycles don't end until all consumption is sapped out of the system. It's already happening with homes, cars and appliances, all of which rely on credit to provoke sales. Home values have fallen 30-40% from the peak (that's called "deflation") with another 20+% to go; car companies are doing everything they can to forestall the inevitable, and they will soon start massive price reductions just to purge inventory and generate cash, and if you saw Whirlpool's financial results you'd see that it has begun with large appliances.