A Rolls-Royce For-Profit University?

Richard Vedder

For several years, I have predicted that someone would try to begin an elite, high-quality for-profit university, a school that would be qualitatively extremely good but would operate on a for-profit basis. Now I read that some heavy hitters (e.g., former Treasury Secretary and Harvard president Larry Summers) are actively planning such an institution. Unfortunately, I understand that this effort is directed towards online learning, and while I think having quality online instruction is truly a worthy goal, I am wondering if the next step is possible: for-profit, extremely high-quality, residential colleges.

Why might such an institution succeed, provided it is well-capitalized and the investors accept the fact they will have to wait a few years to reap gains?

1. The number of relatively bright, hard-working, and moderately affluent kids wanting to get a superior education exceeds the number of slots available at the elite institutions and, in the long run, that situation will worsen.

2. Not-for-profit institutions have a huge gap between the sticker price and net-tuition revenues received, and it would be possible for a proprietary institution to have a near no-discount policy, allowing a competitive sticker price but higher net-tuition revenues than received by existing schools. A liberal-arts college with a $40,000 sticker price is lucky if it averages $25,000 in revenue per student; a for-profit could charge $38,000, have nominal discounting, yielding maybe $35,000 in per-student revenue. If per-student costs are $30,000, the enterprise is profitable.

3. Traditional universities, and even liberal-arts colleges, devote large amounts of resources to noninstructional activities, something an elite for-profit could conceivably reduce. Administrative and research costs, for example, are high. To be sure, some of the elite nature of great schools comes from their research prowess, but there are very good elite liberal-arts colleges with little sponsored federal research and that have only a smattering of solid researchers amongst an army of dedicated teachers. A for-profit school could entice first-rate teachers with high salaries but correspondingly higher teacher loads with very modest research expectations. And, if it helps recruit students, it could hire a few big-name academics with low teaching loads.

Ask a professor: would you rather have a 2-2 teaching load (in class six hours a week) and make $90,000 a year or a 3-3 load (in class nine hours a week) and make a $110,000 a year. I bet most would take the latter alternative—and the cost per course would fall from $22,500 to $18,333, or by over 18 percent. And to those who say it is impossible to teach nine hours a week and even keep up on the literature in one’s field, I say bull—all it means is that a professor has to be efficient with her time, do some research in the summer, etc., but it is doable (I had a similar load for years while also being highly productive in a research sense).

4. The culture of traditional universities is highly inefficient—buildings empty most of the time, tenured professors teaching super-specialized classes to small numbers, decision making bogged down by committees, alumni interference, etc. For-profits can reduce those problems, for example, by renting not owning their physical facilities.

5. Elite status and prestige comes from accepting very, very bright students and turning down less good ones. A for-profit institution aiming at taking the best and brightest has to resist the temptation to take everyone. Expansion might come from starting other new schools, not mindlessly expanding old ones.

It does take time to gather prestige. I can off hand think of only two schools started after 1945 that have garnered a lot of prestige—Claremont McKenna College and Brandeis University, both founded over 60 years ago. For-profit institutions don’t have that long to wait. However, adroit marketing in the Twitter/Facebook age could dramatically accelerate the process of gathering prestige.

6. Costs can be seriously lowered by restricting the number of majors and the degree of specialization, ending a proliferation of courses not essential at the undergraduate level in acquiring a liberal education accompanied by a somewhat more extensive knowledge of a single discipline.

7. A significant amount of work (perhaps 20 percent) could be done via interactive distance learning using superstar teachers or researchers from other institutions (the apparent approach of the initiative Larry Summers is involved in), adding to the marketing of the school as a place of superior learning.

To be sure, there would have to be superior amenities as well—nice housing and recreational facilities. Again, a lot of that could be outsourced to private providers. Is it doable? I think as higher education costs rise and more kids are denied access to the traditional high-quality private (or even top public) schools, it becomes more feasible, in spite of tax and subsidy policies that discourage this form of innovation.

This article originally appeared on the Chronicle of Higher Education's Innovations blog on April 18, 2012.

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