THE BLOG
05/27/2016 01:29 pm ET Updated May 28, 2017

Is Higher Education Headed Toward Disaster?

I will be honest. I'm surprised nobody has shouted this already.

The latest news about higher education is dire. We might be headed for disaster. The "discount rate" has reached record levels for many institutions.

The cost of attending college has reached a ceiling. Tuition probably has pushed past the limit.

Policies vary widely. But for an increasing number of schools, the "discount rate" should be triggering alarms. It has become the means, at best a stop-gap, of "enrollment management."

Law schools have attracted attention recently. They constitute the segment of higher education that has had to confront these challenges most squarely due to the formerly exuberant beliefs as to the value of the Juris Doctor degree. It would be an understatement to say there has been a crash. They have suffered five years of decline and appear to have finally bottomed out.

But others face the same plight. Liberal arts colleges that are fine but not among the most well endowed are in a mess. That is the latest news from the trade press. It's been happening for some time without anyone fussing. (Comprehensive public research universities are, on the whole, likely better off due to their scale and state subventions, than described below. Specific units, such as their law schools, are not.)

The "discount rate" is a technical term known only to insiders until recently. It refers to the percentage that is taken off, in total, from the stated tuition, when the revenue is counted up.

There is a secret regarding law schools and liberal arts colleges, and what they charge; it is not concealed well. Here is the revelation: Many people, and now most at some institutions, do not pay the advertised sticker price for their degree. They pay much less. The insane trends move in opposite directions: the stated tuition continues upward for everyone, but due to discounting the real tuition trends downward for a select few. Other than foreigners, some schools have hardly any "full payers."

There has been, however, an overpowering change. It is not necessarily an improvement. At some schools, it is a total reversal of course. "Financial aid" meant for the poor flows to the rich.

In the past, the conventions were forthrightly redistributive. Admissions offices aspired toward "need-blind." The dream was to cover all need, and the capability to do that earned a school a reputation among the best.

A law school or liberal arts college would weigh heavily a person's financial need in awarding grants and scholarships. It boasted of its ideal: to enroll deserving persons who would not be able to attend, without support. The institution opened its doors; it offered opportunity.

For most places, the means of doing so was not through charitable contributions. Although they might have some endowments set up by patrons, the bulk of the funds required for this undertaking would come from classmates. In sum, the well-to-do students subsidized their less affluent peers. It was deemed a commendable cause. Society would progress thereby.

Of late, administrators have wanted to raise their school rank. Among the means of doing so is luring in more highly-credentialed admittees. What most observers are not aware of is that the acceptance rate for law schools, including those most exclusive, has escalated significantly since the recession, and the overwhelming majority of four-year colleges in the nation have always admitted the majority of their applicants. Thus the statistical profile of their matriculants is determined not by their decisions who to accept or reject, but by the aggregated choices of the former as among their options.

Accordingly, schools have adopted an altogether different strategy. They buy the top of their class.

Since test scores by and large correlate to family net worth, that means that, in general terms, the relatively impoverished students are subsidizing their relatively prosperous peers (leaving out those too wise to take loans that verge on predatory). The subsidy has been turned upside down. It is no wonder that critics have called this a "reverse Robin Hood" effect.

A cynic might point out that the generosity is not even, properly speaking, based on "merit." It relies, rather, on predictors of merit -- standardized test scores and grade point averages at the prior level of education, blended in a formula. (That is, a law school looks to LSAT and UGPA, undergraduate GPA.) An arrangement founded on bona fide merit would reward proven performance in school, not measurements prior to any exam being taken, any transcript being issued. (Such a law school would spend its cash to retain students after the first year. The reason they allocate toward recruitment is the rankings effect: incoming students count; continuing students do not.)

For that matter, most schools are situated such that they cannot recruit the absolute "best" students no matter how much they offer. Their hope is merely to land the students who are slightly superior to their average student. They end up handing our generous packages to students whom they would have turned down outright not long ago.

Ironically, schools have raced to the bottom. Some of them have ratcheted up the "discount rate," becoming dependent on the practice to fill up seats on campus. As they have done that, they have created a contest among themselves that most cannot play for much longer. They lack the resources.

Prospective students are savvy. Schools are bidding for them, not vice versa. Bargaining is common. Behavior -- calling the dean to see about her matching what a peer has put on the table -- that previously would have warranted admonishment has become "the new normal."

The consequence is that, for the unlucky schools betting cash they do not actually possess, they have to discount tuition at the "top" of their incoming class to bring a handful of students who otherwise would have preferred the next-best school in the hierarchy, even as they also discount tuition at the "bottom" of their incoming class to prevent the next-worst school from doing exactly that to them as well.

The predicament is a classic collective action problem. It is systemic. No individual school, much less leader, no matter how talented or charismatic, is capable of remedying it.

Each individual who acts rationally for her school contributes further to the cooperative misadventure. They believe they can address their immediate concerns of having enough students to make budget and moving upward in rankings, but their action, when replicated by others believing similarly, exacerbates the situation.

Stakeholders wish for more philanthropic largesse, alternative sources of revenue, or a chief executive officer who magically alleviates all anxieties. These sentiments are irresponsible. They avoid a set of structural flaws.

None of the foregoing is novel or even remarkable. It is the application of basic economics to an industry that would prefer not to respond to what every other business must contend with: competition within a marketplace. Institutions of higher education are not exempt from the rules that govern other ventures. Overall, there is more supply than demand.

A new category of consultant has appeared on the scene: they specialized in "enrollment management." These gurus purport to have the formula to fix everything. It's about branding as for any other commodities, "high touch" features to entice students, and, above all, tuition discounting.

At the very top and the very bottom of the higher education landscape as conventionally defined, there are no worries. Those are distinct categories in a stratified universe. The top continue to appeal to an order of magnitude more students than they could take in. The bottom are open admission anyway -- and that statement is more laudatory than derogatory, embracing as it does our ideals of inclusion and upward mobility. With global demand, the top will pull away; thanks to domestic demand, the bottom has boomed too.

Most of us are in the middle though. That leaves us with no choice. The public will not stand for annual double digit tuition hikes. People -- educated people themselves holding degrees -- doubt the utility of a JD or liberal arts BA.

Allow me a personal note in conclusion. Five years ago, I sounded an early alarm -- as those who issue warnings do, I will add that I was right. I said it was imperative for law schools to reduce their enrollment. (Perhaps showing lag time for people to notice these changes, it took an academic year before press coverage started in earnest about what we announced.) At the time, it was an opinion from the fringes of respectability -- what law school dean, I was asked, would dare say there were too many lawyers. Since then, most law schools, with varying degrees of voluntariness, have followed suit, while the applicant pool has decreased beyond that with only the tiniest rebound in the latest cycle.

All I am stating at this time follows directly from what I said before. The business model, at least for legal education and I hazard to hypothesize for liberal arts education (of which legal education is a culmination), is not sustainable. In concrete terms, the schools that are aggressive about tuition discounting do not have enough in their coffers to maintain the spending rate. For those that have resigned themselves to this tactic and can carry on indefinitely, they have compromised their culture -- they can scarcely chastise students who call themselves "consumers," since they have made that the case.

There is nothing remarkable in my proclamation. I am reading the numbers, that is all. If I am wrong, I will be glad. My colleagues have doubted not the accuracy of my description, but they are willing to double down on the prospect of a miraculous recovery.

Even if people rush forward in droves to plunk down a quarter million dollars on their diploma, I contend our students deserve better. Higher education must pursue revolutionary change. We have enjoyed great autonomy under the guise of academic freedom. But that will not protect us from fiscal realities.