STOP THE HIGHER EDUCATION BUBBLE FROM BURSTING MESSILY!!! REDUCE YOUR COST PER CAPITA TO INTERNATIONAL STUDENTS.

Onboard the Thai flight from Sydney to Bangkok, alone and daytime… Watched two movies… cleared a few pending emails and then chanced upon an article in THE ECONOMIST, August 4th issue titled THE COLLEGE COST CALAMITY. I wish I had not read it as it bothered me. Bothered me not because it talked of  “Higher Education Bubble” and quotes Glenn Reynold, the author of the book by the same name, that it would not just burst but will burst messily. Bothered me because parts of the article reflected my own thoughts.

In gist, the article talks of declining funding, increasing tuition and weaker return to investment on degrees at big universities that cost a bomb. It refers to the fact that some of the Universities have such high costs in running them and with the advent of technology that can deliver the same deal at a fraction of cost that it is actually not making sense to study at those high costs.

The article gives the example of University of Chicago that was set up from the Rockefeller funds….

Universities have been spending like students in a bar who think that Rockefeller will pick up the tab. In the past two years the University of Chicago has built a spiffy new library (where the books are cleverly retrieved by robots), a new arts centre and a ten-storey hospital building. And it has opened a campus in Beijing.

It goes on to say that average cost of college per student has risen by three times the rate of inflation since 1983. The cost of tuition alone has soared from 23% of the median annual earnings in 2001 to 38% in 2010. Such increases plainly cannot continue.

University of Chicago is world leader in the teaching of Economics and my basic Economics tells me that such rising costs of tuition will make Universities worldwide in lesser demand and there will be higher supply. Hence this to an economist should mean lower costs as market equilibrium should dominate. The theory ends here. The Universities are known to raise their fees every year even with declining student interest. And then they fuel the theory of the bubble bursting messily.

Let me pull this debate in the Australian and British context. Both these countries have experienced declines in student interest from Indian subcontinent. While the visa regulations and post study work has been identified as reasons, I believe that a major factor is the fact that the cost of education to an Indian to study at these very institutions has increased by a good 50% over two years. This along with the hype on security issues, visa changes and immigration changes have shaken the confidence of the student market even though there are genuine students who want to gain a qualification by travelling overseas.

The 50% increase that I talk of is in Indian Rupee terms and is due to an increase in tuition and also due to dollar’s appreciation against Indian Rupee. A$ which used to be Rs 40 two years ago is trading at Rs 58 this day and so the same cost in A$ without an increase in tuition means an increase of 40% in overall costs in Indian Rupees. The same applies to  US$ and some other currencies. Now add a modest 5% increase in tuition fees each year for last two years and we arrive at a rough but fairly accurate estimate of an increase of 50% in the cost of overseas education for a student from the region over the two years.

Now let us add some more factors.

  • 75% of the students funded their overseas dream from education loans from Indian banks. The upper limit for the education loan has not been changed for last 10 years and so while the same loan in 2001 could cover the full cost of education, today it cannot cover even half of the total costs, assuming that bulk of the students are looking for a 2 year PG degree.
  • Some students looked at getting some of the loan investment returned or cover some of the costs through post study work option that existed for years. The removal of the same by UK this year means that this option is just not there. Its true the Australia is introducing the Post Study Work but lets see how it turns out at the end.
  • The Economist might be talking in the US context; I would say that the situation is far worse in the British and Australian perspective and one of the Sydney based Australian Universities too has caused itself significant financial damage by investing in a similar kind of robotic library on its campus in an age when everything is going online and books are more of eBooks. British and Australian institutions have long treated students as clients or customers and so it is high time, they bring economics rationale of cutting costs and lowering fees into their scheme of things when the demand is lagging and supply is in excess. 

So what is the way to get the wheels turned back and make the destinations attractive again.

  1. My understanding of economics says that the cost to the student has to come down. The forex rates are not in their hands but the costs are. How can that be done? Lower the costs on the campuses. Go ahead and bring back slightly larger classrooms and small tutorials even though some may say that it compromises on attention. Embrace Technology even more in teaching and “Khan Academy” model even in the Universities. By lowering costs, we can drop the tuition costs immediately by 20% to offset the demand fall. The Government can also attempt at reducing the gap between International fees and Domestic fees for the same programs by increasing the domestic fees in highly resource intensive programs even further or encourage online or distance education for the domestic populace further for those who cannot afford the increase as it is not really fair to subsidise the cost to a domestic student from the three times higher fees charged to the international student.
  2. Encourage teaching or tutorials of undergrads by researching higher degree students who cost less and at the same time it cuts cost to the student undertaking the undergraduate study and the one who is into research. It also reduces the need for scholarships and replaces that with assistantship or tutorships.
  3. The scholarships are important but we need more bursaries than few scholarships.
  4. Some Universities get tempted to first try and cut the education agents out as they see that as a cost element. This is like cutting out marketing cost and assuming that the Universities will market themselves. This will be a huge mistake and will lead to their advantages not getting communicated and the students not getting handheld through the processes. They also need to remember that with lower budgetary support, bodies such as British Council and AEI have almost given up on any counselling that they offered to a student at one time and have finally realized that their role should be seen as assisting the education counselors and agents than be projected as a replacement. Yes, here too there is a ground for some cost cutting. The number of brochures and prospectuses that are being printed and widely shipped to agents can simply be reduced to 10% of the current strength. I am indeed surprised that institutions still rely on the printed brochures and they ask their agents, most will inform that their counselors are mostly referring to the Universities’ internet site and often the brochures only occupy storage space and then disposed off at the end of the year. Most indeed get wasted. In the online era, the agent can hold only a small number and rest can be referred to e-resource. Focused marketing on the ground will help too. Official education fairs such as the British Council run fair or the AAERI-Austrade run fair should be given a preference and hence overall cutting on the number of events that are participated in.
  5. Universities need to stop believing that they can teach everything by themselves and need to focus on only a handful of their strength areas in the international space. Regional Universities need remain well directed too. In someway, the Indian education model has the cost advantage. In India, sometimes 50 teaching institutions come under one University. This means that there is common resource in syllabus setting; exam management and all such related costs and the colleges only do the teaching. Maybe it is time to move towards a similar system again.

I agree that it doesnot make sense for an International students to spend $100,000 over two years to study Teacher Training or Education, Animal Rights, Environment or any such discipline if they are not able to work in that destination country for a few years to recover the investment. If they are expected to return to their home country immediately on completion, the cost benefit and return of investment doesnot work out. Once again, speaking in economics term. Post Study Work options does help in managing the return of investment aspect of the international education decision taking. If a country is able to offer pathways to migration, it should actively build in internships and facilitate post study work options for a few years. The part time work option and post study work option do go a long with in cutting overall investment into the studies by the international student. And the government should always always offer the student concessions in transport and other local benefits to internationals too and not limit them to the domestic students. Fair Go needed indeed.

So all the experts and gurus, lets stop the burst of the bubble and even if it has to burst, it should not be too messy. We can contain the damage. Stop the increasing cost per capita to the international student. Make it once again attractive financially as a proposition and trust me, the sector will wake up. The lower cost to a student will not mean lower revenue to the University since the increased volume will take care of that. It will then act as a catalyst to more employment and hence turn back the industry. It can be done.

9 Comments

  1. Ravi, you forgot about the VET sector which has a huge demand in India and the costs are also affordable by our students. The Aus. govt.should atleast encourage students to go for TAFE colleges which offer many courses starting from Front office management to AC and refrigeration mechanics to Automotive to saloon management, which can get them jobs anywhere in the world and they can start getting a return on their investment immediately. But, unfortunately I didn’t see any visas issued in the last 2 years for these courses.

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    1. Venu, this blog was not on VET or the need to promote quality VET. It was more so to talk of the issue of pricing of products to clients (students) being not in line with the market demand and supply concepts. the demand is falling, supply is high but the costs keep going up. By the way, it is expected that the SVP will be extended to some of the TAFE providers this year.

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      1. I meant, when there is a product available which is cheaper and which has demand and where there are suppliers also, then why not also promote it alongside universities. Anyway good to know that VET is getting streamlined this year.

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  2. “The bubble is definitely not fully inflated.”
    Some very valid points Ravi with some suggestions of how to go forward. Another solution-if International students and agents really want to decrease costs by $7500-$10000 per year they should go to Australian Universities outside of major cities, like Southern Cross Uni-Gold Coast, Lismore and Coffs Harbour.
    Rent at least $100 less, living costs less, tuition fees less and job prospects often higher with less competition . All Australian University degrees are recognised as the same level. Don Whitford, Regional Manager, South Asia.

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    1. Valid Point. However Don, there is a technical glitch. The Australian Government’s advise seems to be that the cost of living to students choosing to study in regional campuses is no different to those choosing to live in Sydney or Melbourne. Baffling as it may sound, all international students are to demonstrate the same fixed living costs and it doesnot vary. when it should actually vary.

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  3. The fellows managing Australian universities have no clue. Running universities sitting inside a well. Looks like never been out of Australia! They think by putting the cost up they get better brand name. Moreover the economics of increasing the price by CPI every year will not stack up in certain countries. Inflation and economics………something to ponder……one day it will all come to an end. It has come, dollar is very high, visa regulation is taught, tuition fee is high, no return on investment, no confident from student community and government is there to screwing it up.
    Worth doing a research to know if students are getting value on higher university fees compared to last few years?
    Some universities opted to have a campus in Asian countries to overcome the problem and some end up giving special students scholarship (which I call discount) to overcome the increase in tuition fee.
    Regional universities think that they can capiatlize on main stream universities strategy to increase in price. Time will tell if they are able to attract students..
    Let them live in HOPES!
    Fellows industry in screwed up… time to kiss goodbye and look for alternate options.

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    1. Interesting take… I agree that Australia seems to be taking decisions in isolation… at times especially with regards to tuition costs to internationals. Aussie Masters are 2 years and when compared to British Masters for 1 year, the costs in Indian Rupees is so so high alongwith the tuition.

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  4. Very Interesting blog Ravi. Just sharing a few articles:

    1. The USA debt grew by $ 11 trillion http://www.bloomberg.com/news/2012-08-08/blink-u-s-debt-just-grew-by-11-trillion.html

    2. The USA student loan reaches $1 trillion http://www.bloomberg.com/news/2012-03-22/student-loan-debt-reaches-record-1-trillion-u-s-report-says.html

    3. English student debt unprecedented http://www.bloomberg.com/news/2012-04-22/england-student-debt-unprecedented-as-government-shifts-funding.html

    Ravi I will go a step ahead and say:

    • Universities will never be able to reduce cost or increase class size. The system will not allow at all.

    • Government across the globe find is very expensive to give ‘grants’ to the Education providers. Universities will eventually need to stand on its own feet.

    • Universities will need to make their careers department more responsible and active. The Careers department also needs to travel with the international staff and need to play a bigger role. This will increase the pull factor and increase revenues.

    • Agents and Universities need to conduct ‘Careers fair’ in their prime markets. There is no other way out !!!!!

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    1. Rahul, excellent comments… I agree that the Universities will find it very difficult to reduce the fees. However they can stop increasing it for a while and in the past, UK had introduced wide ranging GBP 1000-1500 bursaries across Universities which were basically another way of reducing the tuition fees. That needs to be tried out again. Living costs requirements can be easily altered in a way that the visa office requires lower amount from those choosing to study at regional or smaller locations. There can be significant difference in living costs. There are several other similar ways that can help… introduce internships within institutions too.

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