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Profitable Non-Profits

Jun 19th, 2011 by

Vance Fried has a new study out at Cato. Here is the executive summary:

Undergraduate education is a highly profitable business for nonprofit colleges and universities.
They do not show profits on their books, but instead take their profits in the form of spending
on some combination of research, graduate education, low-demand majors, low faculty teaching
loads, excess compensation, and featherbedding. The industry’s high profits come at the expense
of students and taxpayer.
To lower the cost of education, federal government policies should encourage competition.
Regulations should not favor nonprofits over for-profits. Further, the accreditation process
should be reformed so that any qualified institution can easily enter the industry. The
financial-aid process should be redesigned to remove the bargaining advantage that colleges
currently hold over prospective students.
The higher-education industry is heavily subsidized by the federal government. These subsidies
play a significant role in the high profitability of the industry and represent a massive
transfer of wealth from the taxpayer to the industry. This should change. All tax credits and
deductions should be eliminated immediately, as should all direct subsidies. The federal loan
program should be restructured to eliminate the government subsidy and ensure that any deserving
student can graduate from college without excessive debt, and eligibility for Pell grants
should be tightened significantly. The net result of these changes would be greater efficiency and
annual savings of $50 to $60 billion. To the extent that the federal government continues to
play any role in higher education, its goal should be to ensure that all deserving students have access
to higher education, not to maintain high industry profits.
Readers will know that I am highly sympathetic to this argument. However, do not oversell the fact that for many families, higher education as we know it is a consumption good and regardless of how much innovation and competition we see in the sector there will be a portion of kids who will still desire the traditional route. I can even envision a situation where the prices of the elite colleges increase even as overall college costs fall.
Second, Professor Fried is spot-on regarding accreditation. I once worked on a reaccreditation committee and it was astonishing how it was just a large exercise in rubber stamping each others’ ideas on how to spend money on amenities and creatively figure out ways to call it “co-curricular” learning. For example, building a state of the art dining room with wonderful chefs in there would encourage better communication among students to speak about their work and facilitate better faculty-student interactions outside of the classrooms. Every one of our competitors sits on the accreditation committee, as we do on theirs, so there is little incentive to raise any hard questions about the proposals of the schools or the quality of their curricula.
Imagine I wanted to start a new college right here in Rochester (as is my intention). I’d have to get U of Rochester, RIT, Nazareth, St. John Fisher, Roberts Wesleyan, each charging well over $30,000 per year, to agree to it and to determine than my curriculum is acceptable. Imagine if we did the same thing in the auto sector?  Oh wait, we basically do that already.

Posted in Competition

One Response to “Profitable Non-Profits”

  1. Rod says:
    June 20, 2011 at 10:12 am

    It has become a trend in these parts (southeastern PA) to go to the community college for two years to get the basic requirements and then to transfer to a four-year college for the bachelor’s degree. Because Montco is subsidized by the state, the net price after financial aid for a kid who is living with his parents and is a member of a family of four with a $45,000 income is about $8 K a year.

    When I went to the MCCC website, I could not find a straight answer to the cost of tuition and fees. Instead, I had to plug numbers into a cost calculator on the website. Socialism at its best. Maybe I shoulda plugged in a tax the rich income and one kid in the family.

    Anyway, four-year colleges in the Philadelphia area are quickly pricing themselves out of the middle class American market. A high percentage of the students at, say, Bryn Mawr, are foreign students, mostly from Asia and India (only thirty percent or so are white Americans).

    Reply

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