Is There a Tuition Bubble? Macroeconomics and Independent ... · 2017-18 $25,375 $25,625 $25,875 $26,125 $26,375 ... Initial enrollment is dependent upon the present/future economic

Is There a Tuition Bubble? Macroeconomics and Independent Schools

John Lewis, The Gunston School Greg Hagin, CCS

March 9, 2018

Stop me...

College ●  $15,000 ●  $20,000 ●  $25,000 ●  $30,000 ●  $32,500 ●  $35,000 ●  $37,500 ●  $40,000 ●  $45,000 ●  $50,000

Indep. Day School ●  $15,000 ●  $20,000 ●  $25,000 ●  $30,000 ●  $32,500 ●  $35,000 ●  $37,500 ●  $40,000 ●  $45,000 ●  $50,000

The Rule of 72, and Intertemporal Tuition Design:

What should be your tuition in the year 2030?

Year 1.5% 2.5% 3.5% 4.5% 5.5%

2016-17 $25,000 $25,000 $25,000 $25,000 $25,000

2017-18 $25,375 $25,625 $25,875 $26,125 $26,375

2018-19 $25,756 $26,266 $26,781 $27,301 $27,826

2019-20 $26,142 $26,922 $27,718 $28,529 $29,356

2020-21 $26,534 $27,595 $28,688 $29,813 $30,971

2021-22 $26,932 $28,285 $29,692 $31,155 $32,674

2022-23 $27,336 $28,992 $30,731 $32,557 $34,471

2023-24 $27,746 $29,717 $31,807 $34,022 $36,367

2024-25 $28,162 $30,460 $32,920 $35,553 $38,367

2025-26 $28,585 $31,222 $34,072 $37,152 $40,477

2026-27 $29,014 $32,002 $35,265 $38,824 $42,704

2027-28 $29,449 $32,802 $36,499 $40,571 $45,052

2028-29 $29,890 $33,622 $37,777 $42,397 $47,530

2029-30 $30,339 $34,463 $39,099 $44,305 $50,144

Year 1.50% 2.50% 3.50% 4.50% 5.50%

2016-17 $30,000 $30,000 $30,000 $30,000 $30,000

2017-18 $30,450 $30,750 $31,050 $31,350 $31,650

2018-19 $30,907 $31,519 $32,137 $32,761 $33,391

2019-20 $31,370 $32,307 $33,262 $34,235 $35,227

2020-21 $31,841 $33,114 $34,426 $35,776 $37,165

2021-22 $32,319 $33,942 $35,631 $37,385 $39,209

2022-23 $32,803 $34,791 $36,878 $39,068 $41,365

2023-24 $33,295 $35,661 $38,168 $40,826 $43,640

2024-25 $33,795 $36,552 $39,504 $42,663 $46,041

2025-26 $34,302 $37,466 $40,887 $44,583 $48,573

2026-27 $34,816 $38,403 $42,318 $46,589 $51,244

2027-28 $35,338 $39,363 $43,799 $48,686 $54,063

2028-29 $35,869 $40,347 $45,332 $50,876 $57,036

2029-30 $36,407 $41,355 $46,919 $53,166 $60,173

Year 1.50% 2.50% 3.50% 4.50% 5.50%

2016-17 $40,000 $40,000 $40,000 $40,000 $40,000

2017-18 $40,600 $41,000 $41,400 $41,800 $42,200

2018-19 $41,209 $42,025 $42,849 $43,681 $44,521

2019-20 $41,827 $43,076 $44,349 $45,647 $46,970

2020-21 $42,455 $44,153 $45,901 $47,701 $49,553

2021-22 $43,091 $45,256 $47,507 $49,847 $52,278

2022-23 $43,738 $46,388 $49,170 $52,090 $55,154

2023-24 $44,394 $47,547 $50,891 $54,434 $58,187

2024-25 $45,060 $48,736 $52,672 $56,884 $61,387

2025-26 $45,736 $49,955 $54,516 $59,444 $64,764

2026-27 $46,422 $51,203 $56,424 $62,119 $68,326

2027-28 $47,118 $52,483 $58,399 $64,914 $72,084

2028-29 $47,825 $53,796 $60,443 $67,835 $76,048

2029-30 $48,542 $55,140 $62,558 $70,888 $80,231

Introduction

John Lewis, Head of School, The Gunston School, 2008-Present

Greg Hagin, Managing Director, Community Counseling Services (CCS), former Trustee of The Gunston School

Two broad questions we hope to address...

●  Is there a “tuition bubble”?

●  What are the broader macro-economic drivers that impact independent schools?

Macroeconomics and our schools ●  Admissions and Retention

○  Initial enrollment is dependent upon the present/future economic circumstances of our families

●  Tuition Growth/Affordability: ○  Is dependent upon the rate of economic growth in

general, and among our families ●  Philanthropy:

○  Is dependent upon wealth/disposable income ●  Wages:

○  A majority of any school’s costs ●  “Materials” costs:

○  In certain areas (energy), changes can have a big impact

●  Interest rates: ○  For current debt service, or future borrowing

The U.S. Economy: a perspective

How we got here....

2010: The Gunston School--“little margin for error”

SO, IS THERE A TUITION BUBBLE?

OUR PROPOSITION:

RESOLVED: A school’s annual tuition pricing decision process is a high-stakes, high-impact macroeconomic activity.

Early working “Theory of Tuition”

●  The need to appropriately align net/sticker price.

●  Pursue aggressive net tuition revenue strategy to enhance demand and revenue (with some help from international students)

●  Restrain tuition “sticker” growth at or below the rate of inflation, to re-calibrate PAVS location

●  Enhance other elements of the program: philanthropy, facilities, summer/auxiliary, marketing, and academic profile, to align with tuition price

Looking back, 8-years of tuition strategy:

Correlation or Causation?

Tuition history TGS

TUITION TGS

INCREASE HEPI* CPI-U** AIMS

Median 2008-2009 $20,700 5.60% 2.80% 2.60% 2009-2010 $21,730 5.00% 5.00% 3.70% 2010-2011 $21,730 0% 2.30% 1.40% 3.70% 2011-2012 $21,730 0% 0.90% 1.00% 3.80% 2012-2013 $21,950 1.00% 2.30% 2.00% 4.00% 2013-2014 $22,390 2.00% 1.70% 2.90% 3.50% 2014-2015 $22,900 2.30% 1.60% 1.70% 3.50% 2015-2016 $23,500 2.60% 3.00% 1.60% 3.60% 2016-2017 $23,980 2.00% 2.10% 0.70% 3.50% 2017-2018 $24,460 2.00% 1.80% 0.70% 3.00%

Growth since 2010 $2,730 11.90% 15.70% 12.00% 28.60%

*HEPI=HIgher Education Price Index; **CPI-U=Consumer Price Index-Urban Consumers

Flooding the aid zone...30, 35, 40, 45, 50

Economics 101: lower the net price, increase demand

Squeezing the sponge...

A long-term competitive sticker price strategy...

8 years later: some takeaways...

Takeaway 1:

An “obscene” tuition price is a problem

Jacobellis v. Ohio (1964): What is the definition of hard-core pornography?

“I know it when I see it.” -Justice Potter Stewart

County Median Family

Income Gunston Tuition % of median

Anne Arundel, MD $96,483 $25,000 25.91%

Queen Anne's, MD $80,143 $25,000 31.19%

Talbot, MD $58,228 $25,000 42.93%

Appoquinimink, DE $96,128 $25,000 26.01%

Kent County, MD $58,147 $25,000 42.99%

Gunston Average $77,826 $25,000 32.12%

NAIS Avg. $56,516 $24,527 43.40%

DC/VA/MD Avg 31.30%

PA/NJ/DE 34.30%

% of median family income/tuition

Four reasons why we believe obscene tuitions are a problem

●  Prices detached from reality are detached from reality

●  Prices detached from reality scare people away

●  Prices detached from reality create cynicism ●  Obscenely high prices create a “Marie

Antoinette problem”

Takeaway 2:

The market sets the price for our schools, not vice versa

Meet “The Bubbles”: here we come...

We have… ●  School debt ●  Housing debt ●  Hard-won bubble

experience ●  No pension ●  Trillions of inherited

public debt ●  Educational consumer

savvy, with information ●  A decent income ●  Two good lookin’ kids!

We’ll be applying for “need-based aid”, and you might give it to us, because the school “needs” us.

To our face, you’ll call it “merit aid”, but behind our back, you’ll say we’re a “no-need aid” family

Tuition sticker price growth is out of control, and The Bubbles have figured us (and colleges) out

We’re only looking at the bottom line: Not a pop, but a slow deflation/stagnation...

We’re bringing our shovel: The financial aid gold rush is on...

Independent School Trends Tuition Trends in Independent Day Schools, Peabody College and Vanderbilt University: https://www.nais.org/Articles/Documents/Member/TuitionTrends_Final.pdf

A problem of our own creation...

Takeaway 3:

We ignore Behavioral Economics at our peril...

Bubbles are a result of “obvious mispricing”

-Dr. Robert Shiller Irrational Exuberance

The Anchoring effect: But the other schools have tuitions of $40K and are raising their tuition by 3%!

Bubbles are a “subtle psychosocial phenomenon”:

Errors of human judgment can infect even the smartest people, thanks to overconfidence, lack of attention to details, and excessive trust in the judgments of others, stemming from a failure to understand that others are not making independent judgments but are themselves following still others—the blind leading the blind.

“Independent schools seem to serve a market niche that does not seem to experience enrollment declines as price increases.”

...YET

Interpretation: Since we’ve always been able to raise prices without enrollment impact, we will always be able to.

Hyperbolic discounting

2025?

WHEN WILL THE BUBBLE FINISH DEFLATING?

Takeaway 4:

Inflation/Tuition alignment should be taken more seriously

Tuition Trends in Independent Day Schools, Peabody College and Vanderbilt University: https://www.nais.org/Articles/Documents/Member/TuitionTrends_Final.pdf

Tuition and Inflation: Can’t, or Won’t?

Finally, don’t worry, be happy: Education is increasingly valuable

MACROECONOMIC DRIVERS: THE BIG 15

Inflation, Stagnation, or Deflation?

Key Resource: WSJ’s The Daily Shot

https://blogs.wsj.com/dailyshot/

1. GDP Growth

Total Giving as a Percentage of GDP

52 Source: Giving USA Foundation (Giving USA 2017)

2. Unemployment Rate

3. Consumer Confidence

4. CPI Inflation

Giving Over Time

57

TOTAL GIVING, 1976-2016 (IN BILLIONS OF DOLLARS)

Source: Giving USA Foundation (Giving USA 2017)

A longer term low inflation cycle?

5. Major stock market indexes

S&P 500

Total Giving vs S&P 500

61

(IN BILLIONS OF DOLLARS)


6. Wage Growth

7. Quality of Labor Indexes

8. Interest Rates

9. Generational Demographics

They’re frugal, they’re educated, they’re community-oriented...

Unique drivers that impact independent schools..

10. Education Inflation

11. Household Debt

12. Health Care/Medical Costs

13. Energy Costs

14. Home Prices (localized)

15. Student Debt

80

Americans Gave $390.1 Billion in 2016!*

*Greater than the corporate tax revenue collected by the federal government.

72% / $281.86B Individuals

15% / $59.28B Foundations

8% / $30.36B Bequests

5% / $18.55B Corporations


Overall Distribution Remains Steady

81

$122.9B (32%) Religion

$59.8B (15%) Education

$46.8B (12%) Human & Social Services

$40.6B (10%) Foundations

$33.1B (8%) Health

$29.9B (8%) Public Society

$18.2B (5%) Arts, Culture & Humanities

$22.0B (6%) International Affairs

$11.1B (3%) Environmental & Animal Welfare


Helpful resources

●  WSJ’s “Daily Shot” blog ●  FRED: Federal Reserve Economic Data (St.

Louis) ●  Chronicle of Higher Education ●  Georgetown’s Center for Education and the

Workforce ●  Tuition Trends in Independent Day Schools:

NAIS ●  The Rising Cost of College: Tuition, Financial

Aid, and Price Discrimination: St. Louis Fed