It should come as no surprise that university tuition has been rising at a rate faster than inflation, and faster than income growth. In fact, Tamar Lewin at the New York Times recently published a fascinating article about tuition trends (see Higher Education May Soon Be Unaffordable). She writes:

The rising cost of college — even before the recession — threatens to put higher education out of reach for most Americans, according to the biennial report from the National Center for Public Policy and Higher Education.

Over all, the report found, published college tuition and fees increased 439 percent from 1982 to 2007 while median family income rose 147 percent. Student borrowing has more than doubled in the last decade…

“If we go on this way for another 25 years, we won’t have an affordable system of higher education,” said Patrick M. Callan, president of the center, a nonpartisan organization that promotes access to higher education.

Although I agree with the premise, I am not sure I agree with the inference.

Yes, tuition has been rising at an unsustainable pace. Yes, a university education may be priced higher than the fundamentals will currently bear. Yes, it is a problem that American families have funded tertiary education by relying increasingly on debt (but c’mon, haven’t American families funded much of their recent consumption with debt??).

I agree that the cost of higher education might price some out of the market entirely. However, I do not think the effect will be as large as the author believes. Rather, the cost of higher education, coupled with what I view as a fundamental shift in consumer behavior as a result of the recession, will more likely usher in a shift in consumption versus an end to consumption.

Gone are the days of taking on exorbitant amounts of debt to send children to private institutions with tuition (not including living expenses) of $40,000 per year, or more. Instead, families will increasingly opt  for public universities with tuition in the $10,000-$15,000 range.

For example, families in Texas might start asking tough questions like, “Is the difference in the price between Harvard and the University of Texas really worth the $120,000 difference?” I am not willing to argue that real differences between being educated at a private university and a public university do not exist; however, I am not sure whether those “benefits” (to the extent that they do, in fact, exist) justify the additional premium in all cases. And those considerations are likely to impact the decisions of consumers.

Let’s face it, frugality is here (see Mish on Frugality or BusinessWeek’s The New Age of Frugality). I view this largely as a welcome development. After years of spending well beyond our means, Americans have discovered discipline.

The question for universities (private and public alike) is whether this frugality represents a temporal or structural shift in consumption patterns. In my opinion, the shift toward thrift is likely to persist for some time. If frugality represents a fundamental structural shift in consumer mentality and behavior (as I believe it does), individual universities (private universities especially) would be well served to carefully consider what that might mean for their institution in the coming years, and prepare accordingly.

One thing’s for certain: Frugality is likely to hold tuition increases in check for the foreseeable future.

This entry was posted on Thursday, December 18th, 2008 at 7:42 pm and is filed under Business Schools. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.