Arnold Kling  

Profit Margins in Education

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Vance Fried writes,


Based upon the CELS and SHEEO studies, the real cost of undergraduate education could vary from $5,000 to $9,000 per year, depending on institutional characteristics.

The rest of tuition is a markup over cost. He estimates the profit margin as 60 percent. Some of the profits are used to subsidize other students, but most of the profits seem to go to professors and administrators.

I undertook a similar analysis of public school education where I live, and I also found a huge profit margin. This profit margin goes to support a bloated administrative staff, driven by union featherbedding.



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COMMENTS (5 to date)
stephen writes:

Someone has to pay for all of those vacations and sabbaticals.

Hasdrubal writes:

So, why do private institutions cost more than public institutions? What insulates private schools from competitive pressures? They aren't generally unionized.

I can see upper tier schools charging a premium to associate their name with your degree, but no-name schools shouldn't be able to.

JKB writes:

Sounds to me like students need collective bargaining rights. A student union that is more than a snack bar. Then they could better achieve an equitable portion of the returns from the operation of the university.

Hey, don't laugh. The GAO has a report out listing mangers, illegal aliens and independent contractors as groups who still don't have collective bargaining rights. I think they missed students.

PrometheeFeu writes:

Wait. How can profits go to professors? Isn't that cost?

Peter writes:

Hasdrubal,

There are two main things that insulate private schools from tuition lowering market forces. The first is the accreditation system, which severely limits new entry. The second is the special bankruptcy provision with regard to ALL student loans (both public and private loans).

The biggest problem of the two by far is the bankruptcy provision. It means that students are able to borrow nearly unlimited sums in student loans, because they are more or less completely non-bankruptable. Since the buyers of college education are therefore not liquidity constrained, the price is able to rise as high as the perceived marginal utility curve of the buyer, eliminating most consumer surplus. The system of student aid further eliminates consumer surplus, allowing schools near perfect price discrimination.

Aside from the bankruptcy code encouraging 18 year olds to ruin their lives for decades, the other main issue is the massive barrier to entry caused by accreditation and the prestige system, but this is getting quite long so I won't go into detail on how that works.

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