Next week President Obama will swing through four college towns on a bus tour, promoting ways to reduce higher education costs. The growing attention to universities’ soaring prices is pushing some private colleges to a tuition tipping point, according to Standard & Poor’s Rating Services. In a new report, S&P said costs have risen so much, “many of their customers can’t afford tuition without significant financial aid.” If some schools don’t keep their tuition under control, they’ll shoot themselves in the foot and face the need for more drastic cost-cutting, such as layoffs, and potential mergers or closures, S&P says.
S&P (MHFI), which rates the schools because they issue debt, describes a spiraling problem for colleges: As they raise tuition, more families need aid to afford school. Students take out more debt, but colleges also respond by offering more aid, which then increases the college’s costs. As we’ve reported before, colleges are increasingly directing their aid to wealthier families—who need it least—in a bid to increase revenue and raise their prestige (though it doesn’t necessarily fetch smarter students).
This won’t be as much of a problem at more competitive schools, which often don’t rely primarily on tuition to fund their programs. S&P has found that the credit rating of a school generally correlates to how competitive a college is, and the more competitive schools use grants, endowments, and gifts to offset costs. Schools rated AAA get about a quarter of their income from tuition, but less competitive schools with the lowest ratings depend on tuition to make up more than three-quarters of their revenue.
Schools in the West don’t need to offer as much financial aid because their tuition doesn’t cost as much, says S&P. “This is likely due to strong competition with public universities there, which offer significantly lower tuition levels for in-state students,” S&P wrote. “If students can attend a state university with similar or better-quality education than private university choices for a much lower cost, many families are encouraging this option.”
That competition may provide a window into a policy fix. There have already been calls for states to kick in more support for public colleges after years of declining state funds forced big tuition increases. (From 2008 to 2013, state support fell almost 11 percent, reports the Center for the Study of Education Policy at Illinois State University.) According to this new data, more state support may then have an added benefit of keeping private college costs in check.