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The High Costs of Grad School (Pt. 2)

This is part two in my review of the unsustainable growth in the slush fund that is tuition dollars. I will analyze graduate tuition rate. Accordingly, I will make conclusions regarding how much tuition rate is actually paid to each teacher, and how much goes to school “overhead” that is undoubtedly moved to other areas of the educational “business model.”

I was recently provided information that the parent company of my law school, DePaul University, recently created an “Alliance for Health Sciences” partnership with Rosalind Franklin University Medical School (“RFUMS”). In the business world, in which DePaul University would be the holding company, this would likely be called a “strategic alliance.” The article specifically mentions that DePaul does not have a health professional’s school (medical or nursing school), and that this is NOT a merger or acquisition. Anyone who reads any business journal worth its salt knows that this type of action is an initial foray into purchasing or acquiring a medical school in and of itself, so as to grow the DePaul brand.

As Jamie Dimon is want to say, there are benefits to size. Having a curriculum that is all-encompassing that offers cross-functional school programming in multiple areas COULD be extremely valuable. However, there are also costs to size, which range from the very individual nature and focus of each program of study to something less intrusive like the letterhead of your school. It would be difficult to argue that DePaul would be better at running a medical school than a medical school, yet all signs point to an eventual acquisition. This is why corporations that buy-out companies without having expertise IN that field, fail (see the massive bank growth in 2008 in which services and offerings were purchased only to find that being aware of the risks, i.e. hedging home loans to consumers, was something about which the banks were for the most part, in the dark. Calamity, please ensue).

I would normally have no problem with this. Higher Education Holding Companies (an “HEHC” as I’m terming it, DePaul University being the holding company of all the undergraduate and graduate schools) can be a valuable business tool to separate your liabilities but link your product or service offerings. Here, the service offered is education. However, unlike Rand Paul and other educational extremists, I do not believe that education is a purely private good (and apparently neither have many public figures in history given the public nature of education since Horace Mann). Increasingly, a college education is required to be successful in this new world in which the paradigm of knowledge has shifted from specific to all-encompassing (Don’t know something? Consult google/Wikipedia).

It is obvious, then, that HEHC’s seek to capitalize on this increased demand for education. Institutions can call themselves “non-profit” all they want in order to meet the demands for special taxation rates and government benefits, but the bottom line is still just that: the bottom line (financially speaking). Again, this is acceptable to some extent. When it becomes unacceptable is when these schools, which are public goods, are used as slush funds to make administrators rich at the expense of tuition on the students (researching these numbers will be in part 3).

Let me be very clear: In a private company, should the cost structure of their products increases solely for personal enrichment, the cost becomes unsustainable and a competitor can enter the field and undercut their price (this is how market competition works). This protects against cost increases. In education, however, given the reputational barriers to entry and extremely high initial fixed costs, this is very difficult to do. Additionally, becoming certified for all your programs takes time, resources, and can be quite onerous[1]. This is why personal enrichment in a private company is completely appropriate, yet inappropriate in government-subsidized or controlled institutions (The answer is NOT to privatize education, as privatizing encourages pricing out some consumers, and basic education is a fundamental right). In fact, the answer is the opposite: we must treat public goods to which all people are entitled in a separate manner.

However, this is precisely the competitive advantage DePaul enjoys. The brand that exists as is one that took significant effort, capital, and work to create. As a private institution without government funding, it is more closely linked to the private marketplace than that of the public, which creates a disconnect in and of itself: in a market that is heavily publicly subsidized, DePaul has been highly successful, and this is to be commended. However, do not forget that customers (students) are highly subsidized through government loans to education. In a sense, all institutions of higher learning benefit significantly from it.

I am much in favor of HEHC’s in the sense that I am in favor of holding companies, but the industry still requires an appropriate amount of regulation. My approach to this, as you will undoubtedly see throughout this blog, is surgical: large obtrusive government regulations burden the smaller and medium sized firms, the larger firms that have the capital (human and financial) to effectively deal with such regulations can easily escape the effect of the proposed rules. I’ll propose my solution at the end of the next posting, but it is clear. First, and finally, let’s get to the numbers.

As with undergraduate education (see previous post here), the numbers reflect, relative to 2009-2010 dollars adjusted for inflation, the following results:

  1. Data based on 2007-2008 Tuition

  2. Data calculated using a linear increase over 29 years from 1989-1990 to 2008-2009

  3. For In-State Tuition Only

These numbers provide the same as our conclusions from the undergraduate educational statistics: that tuition and required fees are rising at an alarming rate[2] (see HERE for similar calculations with respect to undergraduate education). The percentages below quantify the rate of increases or decreases over a ten-year period with respect to tuition and fees at the noted graduate schools:

While it appears that public institutions drastically increased their tuition rates and fees (though for in-state tuition). Even more alarming, tuition rate increases are accelerating (the second derivative), meaning schools are raising rates higher, faster. This is yet another unsustainable trend. In order to contextualize these numbers, let us again analyze the numbers against the average person’s income in the United States in 2009 (per capita income) of $38,846. As a function of your pre-tax level of income, as applied to graduate school required tuition and fees, the following figures instruct:

Nearly all graduate schools (with the exception of law school) are accelerating their tuition fee increases, while law school and dentistry school make up the highest portion of a per-capita income. What does this all mean?

It is clear that the relative costs of law school, medical school, and dentistry school are far HIGHER than that of other disciplines. The median pay for a doctor is $166,400[3], while the median starting salary of a lawyer is $112,760[4], and that of dentists is $146,920[5]. Not surprisingly, the Bureau of Labor Statistics notes that with respect to lawyers “Competition for jobs should continue to be strong because more students are graduating from law school each year than there are jobs available.” Conversely, it projects increased need for doctors and dentists, allowing for more jobs, higher pay, and the ability of students to pay off their debt. Competition may drive down prices, but it also drives down income in those disciplines. Is it any wonder we are encountering a significant correction in the legal market?

Graduate statistic conclusions aside, let’s get back to the original point: as the statistics above show, schools can continue to charge more money, and can increase tuition rates as the demand allows it. Until rates raise to unsustainable levels (a point I would argue the legal market hit in 2010), universities can continue to charge higher fees as long as competition and demand drives the ability to accelerate the cost of education.

I reiterate: in a normal marketplace, this is the exact result we desire. Demand goes up, cost goes up. However, the education market operates differently. Regardless of the nature of student loan payments (which many have argued distort supply and demand), the only acceptable reason for tuition rates to rise should be if the INPUTS for those costs have increased as well. There is a disconnect in these marketplaces between the supply of labor, and the demand for labor. Nonetheless, we have rising classroom size, decreased teacher interaction, and the ability of technology to decrease teaching costs. Conversely, we see INCREASED rates: it is clear that the money is being allocated elsewhere.

The last post in this series will examine the tuition rates of schools in 2010, the amount of monies that were actually allocated to those schools versus other schools in the HEHC, and a couple of solutions to how to handle this problem.

[1] See a future post for my discussion on how regulations and their assistance to large institutions at the behest of smaller and medium institutions. [2] Statistics obtained from [3] [4] [5]

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