I find myself inundated with news from multiple sources. I subscribe to many publications, mostly online. I also watch the local and national news, usually once a day. An article in The Economist about Tesla triggered a few thoughts about the cost of private education when I first read it last week.
Tesla Sales Decline
The gist of the article was that Tesla has had a “bumpy ride” in recent months. The company alerted shareholders in January that growth would be “notably lower” this year as demand for electric vehicles (EVs) declines. In China, the company is losing market share as it fends off cheaper local competition in the EV market.
On April 2, Tesla reported that first-quarter sales were down 8.5% from a year ago, worse than analysts expected, despite the warning in January. However, The Economist staff noted that if you think Tesla is having a rough time, you should look at its competitors.
Other EV Manufacturers Decline in Value
Specifically, the article called out two American EV manufacturers, Lucid and Rivian, and three Chinese EV manufacturers, Li Auto, Nio, and Xpeng, for their falling market capitalization. Two others, Fisker and HiPhi, have paused production. Faraday Future is on the verge of bankruptcy, and Lordstown filed for bankruptcy last year.
According to The Economist, the EV market was supposed to be different from the traditional internal combustion engine vehicle market. Making money from internal combustion engine vehicles requires large volumes because of the thousands of parts required to assemble them.
EV Manufacturing Costs Require Critical Mass
EV manufacturers have been able to keep costs low by using simpler designs and a different production process. Batteries and electric motors can be bought off the shelf, allowing the EV manufacturers to focus on developing software that would differentiate their companies.
EV manufacturing advantages failed to outweigh the need for critical mass, however. According to The Economist, turning a profit from cars requires producing at least 500,000 vehicles each year. Tesla only turned a profit once it figured out how to produce and sell high numbers of its cheaper Model 3.
Tesla imitators have taken too long to launch new models. Additionally, the chances of surviving by serving only a high-margin, high-price niche are low. The imitators are looking downmarket.
In March, Rivian announced three lower-priced models that will arrive in 2026. Xpeng plans to partner with Didi Global to make cheaper cars. Nio plans to launch two more affordable cars, and Lucid plans to add a $50,000 model to offset its $250,000 model.
Chinese EV Makers Have Superior Advantages
The Economist reports that the likeliest EV manufacturers to survive are the Chinese. One reason is their innovative products. Another reason is their pricing. With support from the central government, they keep their costs and prices down. This results in market share growth in China’s large domestic market. More sales equate to great economies of scale.
Is the Car Market Similar to Private Education?
After reading The Economist article, I forwarded a copy of it to two friends. My email said, “Will private schools have to find similar pricing points to survive?”
Over the past six months, I have written about private school tuition discounting, a practice that I hope does not continue the way tuition discounting has grown in higher education.
It appeared to me that the similarity between the car market and the private school market is simple:
- There is a limited market for expensive cars. Carmakers that want to increase sales must build lower-priced models.
- Only the wealthiest families can afford expensive private schools. Expensive private schools that want to increase enrollments may have to discount tuition to enable more families to send their children.
When I wrote about private school discounting, I mentioned that one of the reasons I believe private school tuition discounting is not as widespread asprivate college tuition discounting is that private school families do not have access to federal student loan programs. There is no ability to access low-cost, federally subsidized student loans.
FAFSA Rollout Disaster
Meanwhile, the hits keep coming related to the U.S. Department of Education’s launch of the new Free Application for Federal Student Aid (FAFSA).
The Biden Administration’s delay has been openly criticized by many. Yesterday, the House Higher Education subcommittee held hearings about the Biden Administration’s project management or lack thereof.
Congress ordered the Department to simplify the application as part of a law passed in 2020. Initially, the Department was given two years to complete the change but received a one-year extension in the spring of 2021.
The Vice Provost of Enrollment at the University of North Carolina at Chapel Hill testified that financial aid applications have been completed and reworked many times this year due to glitches in the FAFSA, which is not yet bug-free. As a result, many colleges have not been able to guarantee financial aid awards, a critical component for many students.
FAFSA submissions for the fall of 2024 are down 40 percent from submissions for the fall of 2023. Colleges are concerned that the botched rollout will result in fewer student enrollments. The CEO of the National College Attainment Networktestified that those who complete the FAFSA are 84 percent more likely to immediately enroll in college.
The night before the hearing, the Department of Education announced that up to 16 percent of the 7 million applications submitted this year will need to be corrected before the Department can proceed with processing those forms. That is in addition to approximately 30 percent of submissions affected by calculation and tax errors.
UNC’s Vice Provost testified that UNC has not been able to release a single financial aid offer to students because of the errors. The university estimates that approximately 70 percent of the submissions will have to be reprocessed or corrected.
Other witnesses at the House hearing testified that the Department’s debt relief initiatives had been a greater focus than ensuring that a quality FAFSA was in place at the time of the expected launch. They noted that the Department is already behind in developing the form for the 2025-2026 year, which is expected to launch on October 1.
Undergraduate Degree Earners Continue to Decline
Meanwhile, the National Student Clearinghouse issued its Undergraduate Degree Earners Report.
Highlights of the report indicate:
- Undergraduate degree earners declined for the second year in a row by 2.8% or 99,200 from a year ago.
- More students earned a certificate in the 2022-2023 year than any of the past 10 years. Growth year over year was 6.2% or 26,900.
- Bachelor’s degree earners declined to their lowest level since 2015-2016.
- The number of students earning associates’ degrees was the lowest in 10 years.
- Half of the growth in certificate earners was in the 18–20-year-old group.
Are We Approaching a $100,000 per Year College Cost of Attendance?
Inside Higher Ed’s Josh Moody reported last week that some believe undergraduate cost of attendance is approaching $100,000 per year.
Mr. Moody reported that Vanderbilt University recently provided a cost of attendance estimate to a first-year engineering student that “cited a sum of $98,426 for the 2024-2025 academic year once certain fees are added.”
Mr. Moody’s source for the Vanderbilt estimate was Julian Treves’s CTAS Higher Ed Business newsletter. Mr. Treves wrote that he expects six-figure costs of attendance (COA) to be the norm for highly selective colleges and universities over the next six years.
Mr. Treves noted that the six-figure cost of attendance ignores the fact that Vanderbilt generally awards a high percentage of financial aid to its students. In the analysis I performed over the summer looking at the Ivy Plus colleges’ tuition discounting and financial aid percentages, that group averaged a COA of $83,601 with a full-pay percentage of 38%.
Vanderbilt is not an Ivy Plus school but was included in the 66 elite private colleges and universities I analyzed. Its COA was $84,412 and its full-pay student percentage was 31%. The average full-pay percentage for those elite colleges and universities was 32%, lower than the Ivy Plus full-pay percentage.
I think it’s safe to conclude that the primary reason the full-pay percentage of students for these 78 elite colleges and universities was over 30% is that the average percentage of students admitted was less than 20% for the 66 elites and less than 10% for the 12 Ivy Plus schools. Some families are willing and able to pay anything for an elite diploma for their child.
These 78 elite colleges and universities maintain their exclusivity by not increasing their enrollments. On a combined basis, they educate 413,237 undergrads, an average of 5,298 per school. I suspect that most of them will be able to maintain a full-pay percentage of 30% or more, even with an annual cost of attendance over $100,000.
The Cost of Private Higher Education and the Car Market
When comparing the elite segment of private colleges and universities to the car market, the major difference is that car makers will sell their cars to anyone who can provide a check. The elite colleges and universities admit between 3.7% and 20% of their applicants, creating demand for their products despite the high cost.
Public colleges and universities educate more than half of all college students at a much lower cost of attendance for in-state students. In my analysis of major public universities, the average COA for in-state students was $31,225, and for out-of-state students was $53,589. Even at a lower COA, the average percentage of full-pay students was 18%.
The cost of private higher education clearly matters. Student loans help parents subsidize those costs.
New Biden Student Loan Forgiveness Plan Announced
On Monday, President Biden announced his latest plan to fulfill a campaign promise and forgive student loans. The Supreme Court threw out his first plan, and opponents are likely to challenge this one as well.
Biden’s latest plan estimates that more than 30 million Americans will receive some student loan interest and principal relief. Up to $20,000 in unpaid interest will be forgiven, a component that could benefit 25 million people and take effect this fall.
Critics state that the existing student loan cancellation programs are adequate and approved by Congress, something that Biden has chosen to avoid. Other critics, including me, have questioned why the Biden Administration would choose to focus on debt forgiveness without solving the cost of college problem that forces families to borrow money for college.
In my critique of Biden’s original plan, I also noted that people were forced to pay higher taxes to bail out the 15 percent of the population with these loans. Specifically, I referred to people who repaid their loans, chose to attend lower-cost colleges and trade schools, or didn’t attend college at all.
Increase Enrollments With Lower Cost Options
I have read at least one critic who suggests that the federal student loan program be eliminated in its entirety. Rick Hess writes that if the student loan programs were eliminated, it would steer students to more affordable schools. It would pressure some colleges to cut costs, and overpriced colleges may have to shut down.
Hess also wrote that more institutions would have to justify the value of their diplomas. He notes that the Biden administration has turned the student loan program into a “dysfunctional version of ‘free college,’ one that encourages cost inflation, rewards irresponsibility, and teaches that obligations aren’t obligatory.”
I witnessed first-hand how a mission of providing quality education at an affordable price increased enrollments at American Public University System from 2002 through 2020.
Most of our students served in the U.S. military.
Based on our leadership team’s experiences, we knew that enlisted servicemembers could not afford to pay out-of-pocket costs for a college education. Our tuition matched the Department of Education reimbursement rate. We had few fees, and the costs of textbooks were covered by a textbook grant.
The last time the Department of Defense increased the tuition reimbursement rate for active duty servicemembers using tuition assistance (TA) was October 1, 2001. That was the last date that APUS increased its tuition for active-duty servicemembers using TA.
As a result, active-duty servicemember enrollments increased from approximately 2,000 students to more than 60,000. Even though tuition was increased several times for non-active-duty students, it was still low enough for those students to number more than 30,000.
Western Governors University is another institution that increased its enrollment substantially by providing a long-term low-cost, online education and bucking the cost trend of public universities.
I believe Rick Hess’ recommendation has merit. At a minimum, I would eliminate ParentPlus loans and Grad Plus loans. Both programs have supported out-of-control inflationary costs at higher ed institutions. It’s time for the federal government to stop supporting unaffordable colleges and universities.
Colleges facing enrollment declines may have to follow the example of the EV makers cited in The Economist article and provide lower-cost options to attract more students. If not, those colleges will continue to face a bumpy ride.
Private independent schools facing enrollment declines may have to consider lowering tuition or offering tuition discounts. For schools fortunate to have a high percentage of full-pay families, tuition discounting may be a better idea than lowering tuition provided tuition discounting doesn’t exceed a small percentage of overall students. For most private schools, a bumpier ride is clearly ahead.
