Why tuition-driven colleges are the future of higher education

To listen to the pundits, including such luminaries as Stanford President John Hennessy and Khan Academy founder Salman Khan, tuition-driven institutions of higher education are dying. In fact, in a recent Wall Street Journal interview, Hennessy said, "if you look at the vast majority of colleges in the U.S., there are way too many that are [dependent on tuition to fund their budgets]. That is not sustainable."

Let me respond.  Baloney.  In fact, it is increasingly likely that the only institutions of higher education that will survive in the future are tuition-driven, that is, schools where students pay roughly what it costs to educate them in order to get an education.  Tuition-driven schools have a pricing problem--by-and-large we have not found the equilibrium price between what a student wants to pay and what it costs to educate them.  Hennessy and Khan are correct that the use of technology might help us find that price. So might many other things, including greater specialization, clearer curricula, more straight-forward pricing, better loan options, competency-based education, and about a thousand other innovations already rolling out in higher education.

But schools like Stanford, and Khan Academy,  and your local public institution have much more than a pricing problem.  They have a business model problem.  Here is what I mean.  All three of those institutions have built business models that rely on massive and unpredictable sources of revenue to stay open.

Start with the clearest example--state institutions.  For several generations, the subsidy that states provided to state institutions, plus a moderate amount of tuition money, kept the doors of state institutions open.  But the amount of subsidy, at least in comparison to the cost of education, is in sharp decline. And it is tremendously unlikely that that subsidy will return in my lifetime.  So state schools are hunting for a new business model.  What are they turning to?  Tuition.

Consider Stanford and other highly selective research institutions, private and public.  These schools will likely survive long into the future.  But it is unlikely that they will survive as schools dedicated to educating students.  Already, in fact, the chance of enrolling at Stanford as an undergraduate is perishingly small, not because Stanford is incapable of educating more students, but because education isn't its business model.  Instead, its future depends on donations from alumni and wealthy fans, effective management of its endowment, and the ability to capture research contracts from the federal government and corporations.  That is, Stanford is a foundation, an investment firm, and an R&D contractor.  There are almost no existing schools who, not being in the Stanford  category already, are likely to be able to follow that business model in the future.

Finally, think about Khan Academy.  Its mission is to provide a "free world-class education to anyone anywhere."  Except, of course, that the education is not free.  Students simply do not pay for it.  Instead, the cost is borne by investors, and donors, and advertisers who hope that running ads on YouTube sites associated with Khan Academy will drive traffic to their businesses.  It may be that Khan Academy can survive and prosper with a business model reliant almost entirely on subsidies.  But I doubt that the future of higher education lies with such a model.

(Please note that I am not arguing that the waning of state subsidies for education is necessarily a good thing.  It indicates a weakening of our sense of common purpose, of the notion that I am better off when my neighbor is well and wise, and of the idea that communities in the United States protect their futures by educating their young. That weakening is sad indeed.)

Which returns us, again, to tuition as a model of educational funding.  There is a certain logic to paying tuition, since it aligns exactly with what we do elsewhere.  Buying a snowcone involves exchanging money for a product.  So does buying a shirt.  When purchases are very expensive (as with cars, health care, and houses), industries arise to help buyers manage costs and avoid shocks.  Variety of quality and services emerge so there is a continuum of options available to purchasers. And subsidies arise on the margins of the industry to help those who need the thing obtain it at a reasonable cost.

So I can imagine a future with a much greater range of prices (as opposed to quite inexpensive state institutions and quite expensive private institutions) and services in higher education.  And I can imagine a future where there are some state subsidies for some students.  But the thing I am most certain for is that more and more people will pay for their own educations.