Vance H. Fried | January 6, 2009
Adding Value in Higher Education
Vance H. Fried
The cost of undergraduate education nationwide has skyrocketed over the last 20 years.
For example, the current cost at Oklahoma and Oklahoma State is now roughly1 $18,000 per student (not including room, board, and football).2 In-state students pay about $8,000 in tuition and the taxpayers pick up most of the remainder.
When I started on the Oklahoma State faculty in January 1987, costs were about $2,650 and in-state tuition was $834. Adjusting for inflation, those 1987 costs (in 2008 dollars) were $5,183 and in-state tuition was $1,643.
As a researcher who studies entrepreneurship (and a parent of college students), I often wondered if cost could be lowered and quality increased by a major wave of entrepreneurially driven innovation. So in a recent study published by the Center for College Affordability and Productivity ("The $7,376 ‘Ivies': Value-Designed Models of Undergraduate Education"3), I looked at undergraduate education for traditional students as if I were exploring a new venture opportunity.
I started by creating a value-designed model for a hypothetical college, and then determined its cost by developing a detailed pro forma income statement. By value-designed model, I mean a model designed for value "customers." These are the students (or perhaps more often their parents) who are looking for "value"-a high-quality product at a relatively low price. When buying a car, they'll take a $22,000 Toyota Camry over a $105,000 Mercedes S or a $12,000 Chevy Aveo5.
The basic premise of value-designing is simple: Make all decisions so as to maximize value to the student. Determine what package of benefits (primarily learning) and price is attractive to them. If an activity has a high cost but provides a substantial benefit, then do it-but do it as efficiently as possible. If an activity adds significant cost but only minor benefits, then don't do it.
Sometimes decisions are hard because they require a cost/quality trade-off, but most don't. In fact, I didn't cut any corners with my hypothetical college. A laptop is included in tuition, there is a residential college system like Harvard and Yale, faculty members are high quality, the football stadium has a JumboTron, and so on.
The hypothetical school I designed is called the College of Entrepreneurial Leadership and Society (CELS). CELS is for traditional, undergraduate college students of moderately selective to highly selective academic standing who want to be actively involved in the "college experience." CELS is not for students interested in a pure vocational school or an ivory tower. Rather, CELS targets students who want to exit college a better, more mature person with a solid foundation for life and a successful career.
CELS will offer a broad curriculum that provides students with a strong liberal education, appropriate technical skill for entry-level jobs, potential to be general manager of an organization in their chosen profession early in their career, plus foundational skills and knowledge for life outside of work. Majors will be offered in Behavioral Science, Business, Communication Arts, Education, Engineering Science, Information Technology, Letters and Civilization (interdisciplinary humanities), Public Affairs, and Science and Technology.
When I costed out CELS, the savings were striking. A CELS with 3,200 students would have a total operating cost (without room and board) of under $8,000 per student. Not surprisingly, CELS's cost is drastically below the cost of "top" liberal arts colleges ($25,000 to $62,000) that cater to prestige-oriented customers, but it is also substantially below the current cost at Oklahoma and Oklahoma State.
Besides a drastically lower cost, I think CELS provides a better package of benefits than any existing college, including the "top" liberal arts colleges. Others may not share this view. That is fine. The market for higher education is large with multiple segments. Several value-designed models are viable, and can produce significant savings to society.
A Win-Win for Students and Taxpayers
Let's assume a small private college is created using the CELS model. Further, assume that the college doesn't get any operating support from the state or donors, so it must charge tuition of $8,000 to break even. Currently, private colleges in Oklahoma charge between $17,000 and $25,000 for tuition.4 Students who would otherwise go to one of these colleges would be better off by $9,000 to $17,000 per year if they switched to CELS.
Historically, state schools have a big price advantage over privates because the state schools get a subsidy from the state for educating students who are state citizens. Because of a $9,000 subsidy for every in-state student,5 Oklahoma and Oklahoma State can charge in-state tuition of $8,000. Because of the subsidy, some students who would prefer to go to a private college instead go to a public college because of the large price difference. Because CELS is price-competitive with in-state tuition at public universities, some students who in the past would go to a public institution will now go to CELS. The student comes out ahead by getting a higher-quality education at the same cost, and the state is a huge winner financially because it no longer pays the $9,000 subsidy.
Indeed, the state could choose to subsidize Oklahomans attending CELS. Oklahoma already subsidizes Oklahoma private college students to some extent through its Oklahoma Tuition Equalization Grant program for lower-income students. If the state gave CELS students from Oklahoma a tuition equalization grant of $8,000, CELS would be tuition free to Oklahoma students and the taxpayers would still save $1,000.
CELS can provide superior student benefits cost-effectively as a small school, but it can also work as one of many colleges in a multi-college university like Oklahoma or Oklahoma State. (Oklahoma, for example, already has 22 separate colleges.) Because CELS is operationally self-sufficient, it can provide its value proposition without interfering in any way with the operations of the rest of the university. Indeed, it needs little from the university. The major benefit to the CELS student is being part of a big school environment. This is achieved simply by being physically located at a big university, and having access to university-wide student life, such as student organizations, speakers, intramurals, student tickets for sporting events, and so on. Because of CELS's advantageous cost position, it can pay full cost for any services it needs from the university, pay a reasonable tax to the university to support the university's research and public service missions, and still have significant cost savings to pass on to its students.
So, let's assume a private college operates under the CELS model in a confederation agreement with Oklahoma or Oklahoma State. The college costs would be the same $8,000 plus a confederation tax (let's say of $2,000). This means CELS tuition would be $10,000. Let's have the state provide Oklahoma students a tuition equalization grant of $6,000. So net tuition for Oklahoma students is $4,000 (half of current tuition), the university would get $2,000 for research and public service, and the taxpayers' cost would go down by $3,000.
With more than 90,000 students6 attending Oklahoma's four-year colleges and research universities, the potential savings to Oklahoma students and taxpayers from CELS and other value designed models is at least half a billion dollars a year!7 Unfortunately, statewide savings of this magnitude can't come quickly.
The improved quality and reduced costs inherent in the CELS model come from an integration of existing best practices in instruction and professional service firm management, so operating a college under the CELS model is technically feasible today.
Unfortunately, there are major barriers to its implementation at existing colleges. First and foremost is the Ivory Tower mentality that dominates the college landscape. Abandoning it would be difficult if not impossible at existing colleges. Moreover, reducing costs at existing colleges would also require painful layoffs of surplus faculty and administrators.
However, in a state the size of Oklahoma, it is feasible to launch one or two small pilot colleges to operate under a value-designed model. As the pilot college is successful, existing colleges will imitate it-both because the pilot has demonstrated the benefit of a value-designed model, and because the pilot's success creates competitive pressure on underper-forming institutions to change.
Creating a pilot college today is a small step, but it will lead to huge system-wide benefits over time. Now is the time to start.
1. An exact number is hard to pin down because the costs of undergraduate and graduate education are often mingled together for accounting purposes. However, a good proxy for discussion purposes is out-of-state tuition and mandatory fees.
2. The $18,000 cost does not include costs of research and public service that are paid for by third parties like the National Science Foundation or Department of Agriculture, or separately funded by the state like the Cooperative Extension Service or the OU Health Sciences Center. Funded research and public service like that is done on a break-even basis and is not included in the regular budget. The regular budget does include research and public service expenses that are not reimbursed by outside funds or separately funded by the state. It does not include the costs associated with auxiliary enterprises like housing and Division I intercollegiate athletics.
4. Some of these colleges aggressively price discriminate through the use of institutional scholarships (a euphemism for discounts off sticker tuition). The amount of the discount can vary a lot from student to student, but except for a chosen few (e.g., National Merit Scholars and athletes), actual tuition at any of the privates is going to be 60 to 300 percent higher than at CELS.
5. This oversimplifies the state funding system, but is appropriate for purposes of this discussion.
6. Currently 36,000 undergraduate FTEs are enrolled at OU and OSU, 42,000 at the regional colleges, and 14,000 at the private colleges.
7. Assuming average savings per student of $6,000 per year, total savings to state and student would be $552 million.
Vance H. Fried (J.D., University of Michigan) is the Brattain Professor of Entrepreneurship at Oklahoma State University. Prior to joining the faculty at Oklahoma State, Mr. Fried worked as an attorney in private practice, as an executive at an independent oil company, and as an investment banker working with small- and mid-cap companies. He is also a CPA.
Vance H. Fried