Higher education, and particularly the small liberal-arts college, faces a difficult future in the pricing arena. Colleges are giving bigger discounts on tuition, as they compete for a shrinking number of 18-year-olds. Those students going to college will increasingly be immigrants and minorities, who traditionally need the most financial aid.
Now that Harvard, Swarthmore, and several other elite institutions have followed Princeton's lead in awarding bachelor's degrees tuition-free to low-income students and those in the middle and even upper-middle class, less-well-endowed colleges will have to find other ways to compete for students.
We believe there is a better model for pricing higher education, a model that will increase student retention, encourage more students to get master's degrees, and allow less-well-endowed colleges to fill seats that are now going empty.
Many liberal-arts colleges are struggling—partly because their costs of attendance cannot compete with those of state universities, community colleges, and online institutions. Every week we are surprised by discount rates. How can a liberal-arts institution without much of an endowment survive when it makes an offer to a prospective student that represents a 50-percent discount on the published tuition?
Today the average student debt at graduation for someone with a bachelor's degree is around $26,000. A larger debt is impossible to pay off for a someone with a bachelor's degree in education who starts a teaching position at, say, $32,000. It may be somewhat easier for a nursing graduate who starts at $50,000.
What's more, many colleges have retention rates that are appalling. So what to do?
General Motors has learned that the way to get you into a car (and get you back for 10 or 12 cars in your lifetime) is to get you into a car every three or four years. They do it by conducting their own financing and buying back your old car in order to get you into a new one. Colleges need to start thinking differently—just like GM—to help students manage and reduce debt.
We believe that we should refocus the recruitment effort. It should not be about the latest campus center or sports team. It should be about undergraduate debt, since that is the real concern of families.
Before the student enrolls, the college could establish what we call the incentive. The incentive expects that a student will still have to borrow $26,000 to get a degree in four years. In the admissions office, the college could enlist the parents and the ideal students (let's call them Johnny and Sally) in a discussion of how performance can reduce debt upon graduation.
Each institution, having its own values, degrees, and clubs and activities, can vary the contents of the incentive, but the essence of the plan is as follows: If Johnny stays enrolled continuously, does well, and finishes on time, the college will buy back a portion of the $26,000 debt on the day that the first payment is due, four and a half years after matriculation.
For instance, if Johnny finishes in the top 10 percent of his class, is president of student government, and letters in football, then the institution will reduce his debt to $10,000 upon his graduation, a $16,000 buyback.
If Sally letters on the women's basketball team, finishes in the top 15 percent of her class, and leads a club, then the college will reduce her debt from $26,000 to $15,000 upon graduation.
If an institution that enrolls 500 students in the freshman class loses 150, or 30 percent of them, after one year, the loss would be $2,550,000 (assuming an average tuition of $17,000, after discounts).
By keeping no more than 50 of those 150 dropouts, the college would save $850,000 in the second year, and $1,700,000 in the third and fourth years together. That sum would accumulate while Johnny and Sally are on campus and would be available for the buyback.
Why does this make financial sense for smaller colleges? The plan will fill some of the empty seats, since the promise of reduced debt will attract more students. And it will increase the number of students who graduate—some of whom will then pay full price for a master's degree at the college. The college will collect tuition each year and earn interest on it for several years before having to pay down Johnny's debt.
The plan also makes sense for parents because it gets them involved from the beginning in helping Johnny or Sally graduate in four years and with good grades.
Smaller colleges should realize that the competition they face isn't only about campus centers and better residence halls. It's also about outcompeting the community college and the state university while putting their own financial houses in shape to get people interested and to keep coming back. Just like GM.