Monday, January 13, 2014

Too Many Colleges (public and private) Are Following the FAILED Sears Playbook by Overcharging Their Core Middle Class Customer Base ... Conceit and Deceit

Many colleges are charging their core customers, the students, EXTRA tuition, aka "tuition set-asides," in order to subsidize the operating costs of those colleges. They are using that money to attract more butts in the seats from lower income students as well as to pay the salaries and administrative costs of the colleges. Money is fungible, a dollar is a dollar, and whether it's used to help the poor and deserving or the faculty and administrative staff, who will notice? But what if the middle class paying students wise up and go elsewhere? Then the exact same thing will happen to these colleges that happened to Sears, that's what.

Once upon a time not all that long ago, Sears was the largest and most successful retailer on planet earth. Now it's struggling to survive. What happened? Well, among other things, it lost focus on what had made it successful --- maintaining the fair and competitive prices it had long charged to its loyal middle class consumer. And as a result, of course, it took its eye off the operating cost ball at the same time. That in combination made it relatively easy for other retailers to feast on Sears customers.

Thus, over the years Home Depot, Lowe's, Wal-Mart and Amazon took advantage of the opportunity, and the former Sears customers became their customers. Today the sad Sears story of conceit, deceit and hubris is perhaps near an end.

Now let's consider the plight of many colleges today who seem to be pulling a Sears. They are taking their core middle class customer for granted by charging that customer too much for the education they are offering. And the fact that colleges are mistreating, aka sticking it to, their middle class customer base is clear evidence of their conceited and deceitful ways, and if that's not enough, it is just plain stupid! When (not if) the customer wises up, and he will, colleges with affordable tuitions will gain lots of market share and put the weak ones out of business. At least that's what my crystal ball suggests.

You see, instead of overcharging those who can pay in order to raise money to pay the salaries of professors and administrators, albeit under the guise of collecting money for the purpose of helping needy students with grants and funds, what they should be doing is dealing with their bloated cost structure and the brave new world of limited and fewer taxpayer subsidies. The days of the blank check are over.

It seems that government grants, student loans, endowment funds and normal tuition and fees aren't enough to make ends meet for colleges today. Extra and often hidden subsidies in the form of higher tuition charged to students who can pay them are part of the collegiate financing plan as well.

Now all this may surprise you. It did me.

More Students Subsidize Classmates' Tuition says this in pertinent part:

"Well-off students at private schools have long subsidized poorer classmates. But as states grapple with the rising cost of higher education, middle-income students at public colleges in a dozen states now pay a growing share of their tuition to aid those lower on the economic ladder.

The student subsidies, which are distributed based on need, don't show up on most tuition bills. . . .
At private schools without large endowments, more than half of the tuition may be set aside for financial-aid scholarships. At public schools, set-asides range between 5% and 40% . . . .

The growth of subsidies is directly related to cutbacks in state aid, according to school administrators. Reductions in public spending for higher education have prompted universities to raise tuition levels, they said, making it tougher for students from poorer families to cover costs. To offset that burden, wealthy and middle-class students pay more in subsidies known as tuition set-asides. . . . Most public and private universities pool their financial aid from a variety of sources, including endowments, taxes and state scholarship funds. . . . The lack of transparency inside university balance sheets makes it difficult to calculate how much one student is subsidizing another. . . .

This type of student subsidy began at private colleges in the 1970s and spread to public schools in the 1980s, said Joni Finney, of the Institute for Research on Higher Education at the University of Pennsylvania. . . .

But opaque college financing generally keeps this accounting hidden from public view, Ms. Finney said, largely to keep a lid on complaints from parents.

"Institutions don't want people to know how they are financed because you might get upset," she said. "We barely accept the idea of redistribution of income at the government level and this is basically what we're doing in higher education."

Schools say shrinking state support for higher education has forced them to ask more of students who can afford it. Between 2001 and 2011, state aid to public universities in the U.S. fell 21%, on a per-student, inflation-adjusted basis, according to the State Higher Education Executive Officers Association, a national research and advocacy group. . . .

"It's an additional tax, and it's hidden," said Fred Eshelman, a member of the Board of Governors at the University of North Carolina, where the cost of set-asides has tripled to $1,724 in 2012 from $535 in 2006, according to university officials. "If folks are paying full boat and supporting others without knowing it, I don't think that's right."

In the current budget squeeze, there is stepped-up pressure on schools to admit wealthier students, often with merit scholarships as an inducement. The students neither accomplished enough to earn merit scholarships nor poor enough to get need-based aid end up the hardest hit. "If you're not rich or your kid's not a rocket scientist, you're screwed," (an upset parent) said. . . .

Enrolling more students at schools charging higher tuition has led to an explosion in student debt, estimated at $1.2 trillion. Per-student borrowing climbed 55% in inflation-adjusted dollars between 2002 and 2012, according to the College Board. Students with debt now owe, on average, nearly $30,000. . . .

(The same upset parent said) "I feel like I'm paying not only for mine but for somebody else's," he said. "I give my charity elsewhere. I don't expect to do it at the state university.""

So what's a well managed college to do? Well, how about cutting tuition, cutting expenses and making the college affordable. That will grow revenues and increase butts in the seats at the same time. And that's exactly what a well run private sector company would do. Otherwise they go broke and out of business.

But let's look at Sears as a company that didn't take that approach and see what happens. Moody's Cuts Sears Rating Following Dismal Outlook says this about the current plight of the old line retailer:

"Moody's Investors Service downgraded Sears Holdings deeper into junk territory, citing the department-store operator's weaker-than-expected 2013 performance and expectations of more difficulties this year.

The ratings cut comes a day after Sears projected adjusted losses for the fiscal fourth quarter and full year that badly missed Wall Street's expectations, as the company warned of continued same-store sales weakness. . . .

Moody's expects Sears to burn around $1.2 billion of cash in 2013, and projected around $1 billion in cash burn this year.

That view comes after some observers questioned the company's future viability. For example, a longtime bearish analyst at Credit Suisse sees a remote likelihood of a turnaround as Sears loses market share to stronger retailers . . . ."

Summing Up

When costs are too high and customers are too few, it's time to reduce costs. That's true for colleges as well as private sector companies.

Sam Walton used to say the following: when Wal-Mart's profits became higher than normal, it was time for the retailer to reduce its prices; and when profits were less than normal, it was time to reduce costs. Sam had it right.

Raising prices in the form of hidden tuition charges for those able to pay or borrow is deceitful and evidence of the conceit of college administrators today.

It's just not right.

At least that's my take.

Thanks. Bob.

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