Tuesday, December 30, 2014

"Cost Based Pricing" Is One Huge Reason College Costs Are Too High ... Easy to Get Government Sponsored Student Loans Don't Help

Government sponsored and subsidized entities price their services based on the costs incurred to provide those services, aka 'cost based pricing.' In contrast, private sector companies operate in a competitive world and practice 'price based costing.' They must generate a profit and still price their offerings low enough to attract customers. Thus, unlike the way things are done in the public arena, cost control in the competitive private sector is essential.

There is a world of difference between organizations that practice 'cost based pricing' and those who employ 'price based costing.'

College costs are too high. Student loans are easy to get. These loans make college costs higher than they otherwise would be, and make thereby big debtors out of young students at an early age. This debt dilemma affects college attendees from all backgrounds. (See Colleges' New Aid Target: the Middle Class.)

And contrary to popular belief, these student loans frequently do more harm to, than good for, those students and their families who receive them. And just why is that, you may ask?

Well, the vast majority of the money loaned to students for tuition goes to hire and compensate professors and administrators, but also for such things as building or renovating expensive campus facilities. The cost of college is essentially a cost based formula where all the costs of the college (primarily personnel related) are added together, and only then are tuition and fees determined.

And after all that has been factored into the equation, student loan balances fill in the remaining financial shortfall. Thus, what becomes free money to the college results from expensive loans to students. But that dirty little secret isn't even part of the college recruitment and enrollment discussion.

{NOTE: We're using student loans as the prime example of the dangers of debt which all too often begins at an early age. We're skipping other lender related problems such as (1) punitive interest rate credit cards, (2) lengthy car loans which make the purchase price high, monthly payments low, and result in the borrower going under water before the loan is paid off, and (3) low money down home mortgages to buy otherwise unaffordable houses, and which mortgages put all of the risk of a price decline on the often unsuspecting home buyers.}

Colleges Need a Business Productivity Audit is subtitled 'Professors are teaching less while administrators proliferate. Let's find out how all that tuition is being spent:'

"College tuition rates are ridiculously out of hand. Since the late 1970s, tuition has surged more than 1,000%, while the consumer-price index has risen only 240%. The percentage of annual household income required to pay the average private four-year tuition reached 36% in 2010, up from 16% in 1970. What explains the ever-increasing costs?

For one, three quarters of a typical college budget is spent on personnel expenses, including benefits. Yet the average professor spends much less time in the classroom today than two decades ago. In 2010 44% of full-time faculty reported that they spent nine or more hours a week in the classroom . . . . In 1989 more than 60% said they did. The traditional 12-15 hours a week teaching load is changing into a six-to-nine-hour workweek, a significant decrease in productivity. . . .

There’s another problem: The number of college administrators has increased 50% faster than the number of instructors since 2001, according to the Education Department. Administrative costs have far outpaced other college expenses during the past two decades.

There are numerous examples, but some of the more stunning cases include the University of Minnesota, which added 1,000 administrators in the past decade, reaching a ratio of one administrator for every 3.5 students . . . .

All the while, colleges launched a prestige arms race, dropping millions on extravagant buildings. Higher-education construction spending has doubled since 1994, with a peak of $15 billion in 2006 that has leveled off at $11 billion in recent years. . . .

On top of that, student-loan debt has skyrocketed to $1.2 trillion. Easy access to government loan money has given colleges license to boost tuition with no motivation to keep costs down. College counselors encourage incoming freshmen to take on unconscionably large loans that ultimately fatten school coffers. The institutions know they will not be held liable for missed loan payments. More than 20% of the nation’s households have incurred student debt, averaging $33,000 for the class of 2014 . . . . Default rates stand at 14%—higher than for mortgages, autos or credit cards.

In short, colleges and universities engaged in a spending spree because they can."

Summing Up

In the private sector, companies that don't offer competitive prices and compelling values cease to exist. They go broke.

But that market based price competition factor simply doesn't exist in our sick monopolistic system of government sponsored and subsidized higher education.

As colleges spend more, they just raise the price and 'help' the students secure more government loans to pay the higher tuition and fees. It's a monopoly with no price discipline imposed by the 'buyers.'

This makes a mockery of fiscal responsibility and the presumed fiduciary role of college leaders and their government allies. They certainly aren't acting in the best interests of American citizens, and especially college students and their hard working families.

If less money were available, then competition would be introduced and college costs would inevitably and properly decrease in dramatic fashion.

Let's teach our young college friends to have a healthy aversion to debt lest they find themselves in a deep hole from which it will be very difficult to escape.

That's my take.

Thanks. Bob.

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