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Colleges are too cheap (Fortune Classics, 1957)

April 17, 2011, 5:45 PM UTC

Editor’s Note: Every week, publishes favorite stories from the Fortune magazine archives. In the September 1957 issue, Fortune editor Herbert Solow explored the potential of a federal student loan system that could allow universities to increase tuition rates to support a ballooning college-going population and pay their faculty more than what he describes as “shamefully low pay” (Any of this sound familiar?). As high school students across the country make their college choices this month, many of the challenges Solow describes below still resonate, with several public university systems resorting to tuition hikes to absorb state budget cuts and student loan debt surpassing credit card debt for the first time last year, as recently reported by The New York Times.

By Herbert Solow

The mixed U.S. system of public and private higher education must, within a decade or so, greatly expand its resources and improve its methods, or a presently muffled suggestion of broad-scale federal intervention will become a roaring demand. A commission of the influential National Education Association has affirmed that “increased federal aid seems essential.” And Congress has before it a number of bills to expand Washington’s role through, for example, vast programs of scholarships or student loans. President Eisenhower’s Committee on Education Beyond the High School recently declared that Washington should have no permanent economic role in the system — that is, “not yet.” Federal action should be limited to the “residual,” said the President’s Committee. But this will be the case only if the traditional system can cope with emerging requirements. To do so, it will need a revolution in operations and financing.

Requirements are prodigious and growing. Annually there is a leap in the percentage of Americans who want a higher education. Moreover, there has been the well-known birthrate explosion. Only two years ago President Nathan M. Pusey of Harvard somewhat breathlessly reported that he expected an enrollment on U.S. campuses of five million by 1970 (Fortune, September, 1955). But already so many young Americans are heading toward campus admissions offices that the estimate of 1970 enrollment now tops six million — about double today’s enrollment.

As the President’s Committee puts it, the higher-education system’s resources are strained, its quality is jeopardized, and its plans are so inadequate that it is “in no shape to meet the challenge” of 1970. To provide twice as much quality education and operate on the basis of the resources that now appear likely to be available in 1970, the system must sharply increase the efficiency of non-teaching operations (housekeeping, administration, etc.). With the present limited facilities for producing college teachers, it is impossible to double today’s faculty of 250,000 by 1970 without a collapse of quality. So teachers will have to handle more students while maintaining teaching quality. And in any case, for what educators call “the oncoming tidal wave of students,” vast increases in funds are indispensable.

Discussion of ways and means is subject to an important limitation — lack of reliable key statistics. There is risk in any sweeping statement about the highly diverse U.S. system, with its 1,800-odd universities, technology institutes, colleges, and junior colleges, its $8 billion plant, its unbalanced $3 billion annual budget for instruction, and its nearly $2 billion annual budget for more or less self-supporting items, such as dormitories and contract research projects. The campuses –about 500 of which have fewer than 250 students each and a dozen of which have 20,000 or more students each — are public and private, metropolitan and semi-rural, church-run and lay-run, general and specialized, coeducational and segregated, excellent and mediocre. Little is true about all of them-except that they need more money.

This article starts with two assumptions:

1. Of late the share of total enrollment enjoyed by private institutions has fallen from 50.3% (average for 1947- 51) to 42.9% (1956). It is assumed that a continuation of this trend would weaken the role of private institutions in maintaining standards for the entire system of higher education, and that it is desirable to find ways and means for the substantial expansion of the private schools.

2. Higher education has demonstrated its economic value to the individual. On the other hand, the social need for people with higher education, however great in an atomic and automatic age, is finite; In selecting students, tests of motivation, including charging a fee, are therefore relevant; not everybody has to go to college. The important question about fees is not whether, but how much.

The hunt for dollars

The fees that students paid for their instruction in fiscal 1957 were on the average at least double what they were in 1940. But such fees, totaling about $1 billion, still covered only one-third of the costs of the instruction. The major financial problem, how to make up the difference, becomes more and more aggravated as the student body expands. Can it be solved by expansion of sources of revenue other than tuition fees? Let us look at those sources.

Endowments, concentrated in private institutions, aren’t worth over $3 billion; they have been largely shifted from bonds and the like (which, for example, constituted 82% of Harvard’s investments in 1928) to common stocks (which now account for nearly 60% of Harvard’s investments). The gain in yield, however, still hasn’t kept pace with rising costs. Whereas Harvard’s endowment yield once covered 42% of expenses, it now covers only 27. Princeton’s avowed need for gifts has risen from 4 to 24% of its current budget. Some 800 institutions have no endowments. State legislatures have been appropriating ever larger sums for the campuses they sponsor (12 cents of the Michigan tax dollar, for exan1ple, now goes to support state institutions of higher education as compared to 8.5 cents in 1954). But state universities still lack the funds needed for the job that lies ahead.

Last year non-corporate foundations (Ford, Rockefeller, etc.) broke a record for giving as a result of a $210 million Ford Foundation grant to the endowment funds of 630 institutions. (The principal of the Ford grant, however, cannot be touched until after 10 years.) Beyond this it is impossible to give reliable figures on foundation giving to higher education for any year later than 1954, when foundations gave $50 million. The total last year was undoubtedly higher, perhaps by 50%, exclusive of the Ford grant.

Passing the hat

Every institution, in addition, passes the hat. Professional money-raising consultants like John Price Jones Co. and Kersting, Brown & Co. are busier than ever on behalf of campus clients. The American Alumni Council and the American College Public Relations Association and their members beat the drums incessantly. Last year, annual alumni drives yielded about $47 million (alumni also made special gifts of $65 million) as against $3 million in all in 1938. Business corporations and their foundations were spurred on to contribute as never before, especially by the Council for Financial Aid to Education, led by Irving Olds, Frank W. Abrams, and Alfred P. Sloan Jr. And while the council labored, 39 recently organized regional associations of colleges and universities knocked steadily and insistently on corporation doors. Through the associations, corporations could give to batched beneficiaries that have their own prearranged formulas for sharing proceeds. Corporations gave about $110 million last year, as against $24 million in 1948.

Thanks to all these sources, U.S. colleges have kept the sheriff away. But the absolute size of the gap between tuition fees and costs now threatens to grow massively. So do long-neglected capital needs. According to an estimate based on a broad survey made in 1954, there would be required 10 ten years, in addition to income from established sources, annual new income of $60.8 million for capital expansion and operations. Unless traditional practices are strikingly changed, the 1970 budget for instruction alone, with the student body doubled, will be twice the present figure — in other words, somewhere around $6 billion. What to do?

In recent canvasses of potential new sources of funds a radical idea keeps cropping up — the idea of charging students what their instruction costs. Such a change from traditional policy might endanger democratic education and deprive campuses of much fine talent-unless the change were linked to the expansion of financial aid to needy students. Even now about 200,000 of the most able high-school graduates annually renounce higher education, often for financial reasons. So, while such innovations as higher fees are debated, there is increased emphasis on getting more revenue from other sources.

Presumably the ceiling on alumni giving has not been reached. At present only 20% of alumni respond to solicitation, so there is a large untapped source. Yale’s annual take from alumni has risen from $509,000 in 1949 to $1,737,000, an increase of 240%; Yale is now aiming at $2 million a year. Almost every institution will intensify its alumni drives. While the economy expands, corporations will increase their giving. Last year corporations made tax-deductible philanthropic contributions of all kinds to the amount of almost $550 million, or 1.26% of their profit before taxes (as against the 5% that the income-tax law encourages them to give). Perhaps they will never give 5%, but educators hope that as more and more corporations adopt philanthropic policies for a variety of business reasons, the share going to higher education may top $200 million.

Trade unions have begun contributing, though mostly in the form of earmarked scholarships. Churches are seeking more money for campuses under their sponsorship. Soon, too, as a result of a pioneering promotional campaign now being run by the Advertising Council, and follow-up drives envisioned by alumni and other organizations, the general public may be asked for annual gifts. Legislatures will be pressed for bigger appropriations, although the state universities will be in vigorous competition with demands for highways, hospitals, and welfare services.

The federal government may help by paying full costs of research services that it obtains from universities, which, in many cases, the government does not now do. Washington can help in other “residual” ways: by making further easy loans on income-producing facilities like dormitories; by extending to lecture-hall and laboratory construction the matching grants-in-aid arrangement now available to hospitals; by revising the income-tax laws to intensify encouragement of individual giving. These, at any rate, are among the suggestions made by the President’s Committee.

Upgrading operations

Colleges may be able to affect some economies. An instrument of growing importance in improving campus housekeeping operations is the management survey. Yale cut operating costs by $400,000 a year on the basis of recommendations made in 1950 by Cresap, McCormick & Paget, the leading campus management consultant. This firm and others have since surveyed about 150 institutions, and an analysis of 50 cases shows that each survey paid for itself in operational savings, through improved budgeting, centralized accounting, application of machine techniques to records, reorganizing dormitory service, establishing maintenance standards, converting to offset printing, installing automatic telephone equipment, improving purchasing, and improved use of plant space.

Most plant space is used wastefully, especially in afternoon and evening hours, on Saturdays, and in the summer. One way of using it more intensively would be to divide the academic year into four quarters, instead of two semesters, including the summer months, which are usually a down period. In fact, the four-quarter idea has been advanced as one way of improving educational methods and raising quality, quite apart from the economies involved in better use of plant. Clarence H. Faust, formerly a dean at the University of Chicago and now both president of the Fund for the Advancement of Education and vice president in charge of education for the Ford Foundation, has outlined a plan that would give students an assignment to study independently off the campus for one-quarter of each year. This would increase the number a given plant could handle.

Would the system detract from the quality of education? Dr. Faust believes not. “The pressure of numbers may be the occasion for important improvements in college education,” he says. Dr. Faust rejects the old assumption that the only way to learn is in a group, taking a formal course. Many educators agree that U.S. college students show inadequate initiative because they are conditioned in high school to study only specific assignments, and are brought up “in the lock step of class lectures, recitations, deadlines for papers and reports, and course examinations.” Dr. Faust would reduce student-teacher contact. This could be done by having students spend several months working on their own, after a month or so of lectures that would identify the nature of problems involved in a given subject and would indicate how “a sharp, sensitive, well-disciplined mind” goes to work on the problems. A related reform would be to reduce the highly inflated number of courses offered. Together, such reforms would dilute the present average twelve-to-one student-teacher ratio, and so conserve faculty labor.

Perhaps the most radical pedagogical suggestion is the use of television, which the Fund for the Advancement of Education has been pushing assiduously. TV can effectively present not only uniquely talented lecturers to students anywhere, but also a wide range of audio-visual materials, including costly equipment, art originals, operational techniques in surgery, engineering, etc. Three years of experiment at Pennsylvania State showed that in many subjects TV students somewhat surpassed those taught conventionally.

The great giveaway

But the U.S. higher-education budget will never be balanced by savings on housekeeping and teaching costs. And since charity — generous as it is — has fallen short, has its limits, and is an unpredictable source, serious consideration is being given to the controversial idea of charging students the full cost of instruction. That students get a great deal for nothing is not generally appreciated. When, by a unique, bold decision, one eastern private college raised its tuition fee to substantially 100% of the cost of teaching, it simultaneously notified parents that acceptable students could get grants-in-aid (discounts, in effect) if their families could not pay in full. One father thereupon entered his daughter in a neighboring college, haughtily declaring that he wanted no charity. But the neighbor’s tuition charge, which Daddy proudly paid “in full,” was almost $400 under cost.

U.S. higher education is, in fact, an enormous charity. Though board and lodging are usually charged for at cost, an insignificant number — possibly none — of the three million students, even at the most expensive institutions, pay the full cost of their instruction proper (at the exceptional college cited above, costs have since overtaken fees once again). All get a standard discount, its size depending on the local cost level, the institution’s wealth, and how eager the institution is to attract talented students who may lack the cash to pay full costs. Campus cost accounting is still largely a primitive art, so that figures must be accepted with caution, but it is probable that the private institutions’ standard discounts average about $500 a year, those of state institutions about $800.

Moreover, the many worthy students who find that the discounted tuition fee is still too high for them seek and often get an extra discount in the way of a grant or scholarship. The business of giving scholarships was once more or less hit or miss. An increasing number of institutions are turning to a central body, College Scholarship Service, for help in determining which students should get aid and how much. This ensures a fairer system of scholarship awards, but it by no means decreases the worries of the institutions as the 1970 hordes approach. Somebody, after all, must finance the discounts, which, on the basis of present practices, could top $4 billion by 1970.

Alma professor

The people who chiefly finance college discounts are the teachers. The college teachers of the U.S., says the President’s Committee, “are subsidizing the education of students, and in some cases the luxuries of their families, by an amount which is more than double the grand total of alumni gifts, corporate gifts, and endowment income of all colleges and universities combined. This is tantamount to the largest scholarship program in world history.” The teachers make this contribution, not always cheerfully, by working for shamefully low pay.

At Brown University, for example, where the pay scale is above the average, assistant professors get less than the $6,000 offered by industry to many of Brown’s engineering students as starting pay. State institutions, sometimes by politicking behind the interference of victorious football teams, achieve better average salary levels than private institutions. Yet a full professor’s salary at the average large state university in 1954 was only $7,000, less than that of a locomotive engineer. More than a score of institutions pay full professors less than $3,000. Half of all faculty ranks earn below $5,600. There was, in fact, a drop in both the absolute and relative pay status of college teachers between 1904 and 1954. Between 1940 and 1956 college teachers’ purchasing power rose — but only 12%, while that of industrial labor rose 64%, that of doctors 96%. Had professors’ salaries held their own, top men at leading institutions would be getting over $15,000 today. But even at Harvard, richest of all the institutions, the average pay of full professors is only $13,000.

The rising faculty bill

In the view of the President’s Committee, institutions will have to boost pay by 100 to 125% to hold and attract first-rate talent. What will this cost? Well, let us assume that professorial productivity will be increased by one-half, raising the student-teacher ratio to 18-to-1 and thus, incidentally, further justifying better pay. Even then 134% of the present faculty (or a total of 335,000) would be required in 1970 to handle the doubled student body. With the average salary around $11,000 after the projected raise, the 1970 faculty might cost two and a half times what the faculty costs today, or close to $4 billion. Were other factors unchanged, this would mean an addition of $500 million to the projected $6-billion instructional budget. And where would it come from?

One possible source would be tuition fees, if raised to realistic levels. The question of raising fees is under lively discussion on most privately controlled campuses, and during 1957 over 65% of all land-grant colleges and state universities favored some raise. If all institutions set tuition fees at the level of true costs, six million students in 1970 might provide $6.5 billion in revenue, enough to cover the projected faculty bill and all other direct costs of instruction (such as use of classrooms, equipment, etc.).

Such a drastic change in financing — or any major fraction thereof — would have to be put into effect on a wide front. Unless public institutions raised their fees substantially, few private institutions would dare to; the private schools could not permit much widening of the present average gap of $500 between their stated fees and those of their public competitors, lest they lose many talented students. Even among private institutions, any substantial fee raise would probably have to be undertaken simultaneously by all the competing institutions in any given group (“groups” are, for example, large universities, technology institutes, New England colleges, etc.).

Raising tuition fees to match costs, unless there were compensating aid to desirable, needy applicants, would tend to jeopardize democracy in education and to turn campuses into clubs of rich and not always talented students. But if tuition boosts were followed by boosts in special discounts to the talented needy, much of the revenue gain would be canceled out. The current stated tuition fee at Rensselaer Polytechnic Institute is $1,200, a rise of $200 over last year; but one-third of the increment will be swallowed up by the increased student aid that R.P.I. feels it must provide in order to maintain the caliber of its student body.

Credit as aid

Of late, support has begun to mount for one plan of student aid that might provide a partial solution to this problem. This is to introduce installment paying and credit into higher education on an order of magnitude never tried before. Students who wanted to pay cash would, of course, be free to do so, but what is being considered now is a loan fund that eventually could take care of everyone, if everyone wanted to use it.

Chairman Devereux C. Josephs of the President’s Committee, who was an investment banker, then president of the Carnegie Corporation of New York, and is now chairman of New York Life Insurance Co., finds “obvious advantages to all concerned in borrowing toward an education.” Josephs argues: “If all students capable of winning admission to an institution could have access to loans, irrespective of capacity to win scholarships, pressure would be removed when most appropriate and responsibility and independence promoted. ” The committee itself has suggested that private foundations do something about “creating new regional or national mechanisms for supplying credit to students through their colleges at low interest and on flexible repayment terms.”

Who will borrow?

There might well be many lenders and borrowers. College training today is quite another commodity from that dispensed in early U.S. colleges, which were set up primarily to produce preachers and teachers, whom society, then as now, esteemed but underpaid. Today a college education is an investment that adds an average of $100,000 to graduates’ lifetime earnings.

Retroactive scholarships could be provided to cover educational debts of those who become teachers, preachers, or members of other poorly paid professions. Princeton University has some scholarships of this type now, and some states with programs of teacher-training tuition loans forgive the debt in return for teaching service after graduation. Women, too, might present a special problem since they seem convinced that men would not be anxious to marry debt-encumbered college graduates. Yet many women now get to college with the aim of a gainful job at least for a time, during which they could liquidate part of their debt. (In the Belgian Congo, the relatively few African women who get a primary education are the object of keen rivalry among educated African men.)

Will students in general borrow money for higher education? According to the U.S. Office of Education they now raise only 1.5% of their funds by borrowing, and it is also true that some student loan funds now theoretically available go begging. But these facts may mean little. As long as discounts in tuition are available, a sort of Gresham’s law operates against students’ taking loan money. Also, some loan money is so hedged about with requirements as to place of residence, personal habits (non-smoking), age, course of study, creed, parental membership in an organization, emergency nature of the need, etc., that only a few students can qualify. Some loan funds have a ceiling of $100, require repayment in a few months, or exact over 6% interest. Many institutions (in New York State over 40%) have no loan funds at all.

The growing loan idea

But when colleges have substantial loan funds, make them broadly available at low interest and for long terms, and promote their use, borrowing becomes more popular. Here are some cases in point.

In 1930 friends of the Massachusetts Institute of Technology put up $1,450,000 to start a loan program. It has since grown 80% through its own operations. Requiring neither collateral nor a co-signer, M.I.T. will lend up to $4,400 to cover tuition charges for four years. Interest was cut in 1949 from 2 to 1%, which has been adequate to cover losses and expenses. Payments are scheduled at the rate of $50 semi-annually, beginning six months after finishing studies. Since the start, M.I.T. has lent about $4,150,000. Only $14,700 has been written off and maturities now past due come to only $26,000. Thirty percent of all loans have been repaid ahead of due dates. Last year M.I.T. lent over $450,000 to 700 out of its 5,800 students, gave only $370,000 in scholarships.

Harvard Business School, a two-year graduate institution, has largely abolished extra discounts. Any needy student can get a $2,500 loan, repayable six and a half years after graduation at 4.5% interest that begins accruing after graduation. Further aid is available on proof of inability to get family help. This, called an “advance in aid,” bears no interest but carries a moral obligation to repay. Last year, of $560,000 provided in student aid, $350,000 was in loans, $135,000 in advances, only $75,000 in scholarships.

In professional schools, of course, the student’s eventual income is in relatively plainer sight than in a liberal arts college, but the loan idea has also worked well for liberal arts undergraduates. Harvard College offers an example. In 1948-49 Harvard gave nearly $500,000 in extra discounts, lent only $10,000 on a long-term basis. No freshmen could borrow, others could borrow only up to $400. Interest was set at 4.5%, accruing immediately. Today, freshmen are eligible along with others for loans at 3% that begins accruing after graduation and completion of military service, and the ceiling has been raised to $1,800 (45% of the four years’ stated tuition charges). Repayment is required at the rate of $10 monthly after graduation and completion of military service. In 1956-57 the college, while giving over $1 million in scholarships, lent about $225,000. In short, in eight years scholarships have doubled in amount, loans have gone up over 2,000%.

HELP in Massachusetts

Thus loans can be made attractive and, as their popularity grows, new funds are becoming available. Last year the Massachusetts legislature, observing a rise in student aid demand, created the Massachusetts Higher Education Assistance Corporation, a private body authorized to lend money to students or to approved educational institutions, and to receive tax-deductible contributions from banks, railroads, utilities, and other corporations. Massachusetts also legislated limited adulthood for any minor who wants to borrow for higher education and meets certain formal requirements. By July 1, MHEAC had received contributions of $91,000, mostly from business corporations. MHEAC has not made direct loans but under its Higher Education Loan Plan (HELP) it has undertaken to guarantee 80% of loans made by commercial banks to eligible borrowers, up to 10 times the corporation’s capital. The banks will lend unsecured loans of up to $1,500 to a student, with simple interest at a lower rate and with longer repayment periods than commercial banks ordinarily require for personal loans. The interest charge while the student is in school is 0.5% above whatever the Boston prime rate on unsecured commercial paper may be. The student agrees to pay up six months after graduation, but the bank agrees to extend the time on request, at 4.5% interest discounted.

During its first four months operation, the Massachusetts corporation guaranteed loans of more than $110,000 made by 68 banks to 283 students. New York State, early this year, adopted a similar measure, and a bill introduced into Congress by New York’s Senator Jacob Javits would authorize the Secretary of Health, Education and Welfare to grant states $100,000 annually to set up and run HELP corporations. The Javits bill would also create a federal HELP program, provide free insurance for up to $750 million of student loans, and grant lenders the difference between student interest rates and those prevailing in the open market.

A number of businessmen have offered ideas on how to organize massive credit for higher education. Their common plea is for foundations or others to set up a broad loan fund. Some specify an initial capital of about $50 million. Mr. Josephs, whose view is in formed by his experiences in insurance and philanthropy, and as chairman of the President’s Committee, has made so me suggestions: “Borrowing should be limited to a portion of the total cost of education; no interest should be charged before graduation and rates should be gentle thereafter; repayment schedules should be flexible and readiness to modify them when appropriate should be announced. A relationship with the borrower’s college should be established so that it or the alumni association could help maintain the flow of repayments (were repayments to drop seriously at a particular college, further credit could be denied its students). The loan fund should be guided by practical, public-spirited men and administered professionally. Should some such plan become popular, it might be self-supporting, though providing little, if any, return on the philanthropically contributed capital. Once there is a record of experience, notes could be rediscounted and thus the loan money available be multiplied. Were such a plan widely used, employers would undoubtedly come around to aiding employees with repayment commitments.”

Some business judgments

In recent years Fortune has referred to the views of other advocates of massive credit for higher education. One such, Ricardo A. Mestres, treasurer of Princeton, found educators cool to his slogan, “Study now, pay later,” but largely on grounds of feasibility rather than principle. Another, Ernest van den Haag, a former businessman now teaching economics and sociology at New York University, last year expanded his ideas into a book, Education as an Industry. He contends that a system of higher education based on credit liberal enough to cover all tuition and living expenses would tend to increase educational opportunity and also to equalize it. He suggests starting a loan scheme in professional schools where “the effect of education on alumni income is most uniform, obvious, and extensive.”

Van den Haag would have the colleges lend to or, as he sees it, invest in students after raising capital by selling bonds, or simply endorse students’ notes and rediscount them. He argues the colleges would then “have an incentive to select for investment just about as many students as will be able to repay no more, no less. Selecting more would be risking loss of the investment. Selecting less would mean loss of investment opportunity…”

An early promoter of a loan plan was Sydney M. Roth, a Chicago mass-marketing consultant who helped to establish cans as acceptable beer containers. Roth thinks that many people are against the notion of borrowing for education for about the same poor reason bottle-minded beer drinkers were against the can: they hadn’t tried it. He sees human earning power as a promising field for insurance companies and other investors of capital. Edmund C. Mayo, president of Gorham Manufacturing Co. of Providence, has proposed a philanthropically sparked mechanism, perhaps to be called the College Education Acceptance Corporation (the reference to the expansionist effect of automobile acceptance corporations on that industry is evident). A. Vere Shaw, a New York investment counselor, has made a similar proposal, which he hopes would enable colleges to “withdraw from constant fund-raising campaigns and confine their activity to education.”

That, no doubt, is to hope for too much. But a loan system that would make higher tuition fees possible would cause a substantial change in the economics of higher education. And something will have to be changed if the system is not to be submerged by “the oncoming tidal wave of students,” with a resulting general cry for federal rescue.

Also from Fortune Classic:
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The decline and fall of business ethics
The Life of a $725,000 Scab