SANDWICH ART – WHEN A FATHER DRAWS ON THE SANDWICHES FOR HIS SON, EVERY DAY SINCE 2008
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As high-school seniors around the country open their mailboxes looking for thick envelopes from colleges and universities, their parents are undoubtedly thinking, "Why does college cost so damn much?"—particularly if those children are headed to elite private institutions. Based on my experience as the vice president for finance and administration at a prominent college in the early 2000s, I suggest that the answer is simple: Top private institutions charge what they do because a substantial number of people will pay it.
... at the beginning of my tenure as an elite school's chief financial officer, I was surprised to learn from my colleagues that tuition and fees were not set by analyzing budget projections. Instead they were set by looking at a chart of the prior year's tuition charges at comparable schools and then trying to predict their increases for the next year. The goal was to maintain the college's position in the pecking order of total charges. I learned that the most prestigious and desirable institutions have a good deal of information about the shape of the demand curve for the families seeking to obtain elite higher education for their offspring. These schools have the capacity to estimate with some precision how many applicants will go elsewhere for each additional dollar they charge in tuition and fees. Each sets its tuition so as to produce a targeted "yield"—the percentage of accepted students who actually enroll there. If in any year we over- or under-estimated the price changes made by the other schools, and we had moved up or down in rank, we corrected the following year by raising or lowering tuition by more or less to compensate. We essentially followed the price leadership of the wealthiest, most prestigious institutions.
The results of this market pricing power are straightforward. First, and most significantly—given that 60% to 75% of college costs go to salary and benefits—is handsome compensation for senior faculty and administrators. In the not-so-distant past, the stereotypical scholar was a tweedy professor in a worn sports coat who did underpaid but satisfying work. Today, most junior faculty continue to receive relatively low pay. But senior, tenured faculty at elite schools are firmly entrenched in the well-compensated professional class (top salaries at elite schools often exceed $150,000; and for scholars in economics, business and law schools, earnings can be substantially in excess of that) with superior benefits, such as university-subsided housing, lifetime heath care and seven-figure retirement accounts. Once tenure has been achieved, generally after less than ten years of work, top college teachers face no professional risk and, by and large, teach three or fewer courses a semester. Also, college faculty members usually receive free or highly subsidized higher education for their children—making them even less sensitive to the burden that college tuition and fees impose on other families.