Why College Costs So Much AN INSIDE LOOK AT HOW ONE SMALL COLLEGE SETS TUITION. HALF ART, HALF SCIENCE, THE PROCESS ISN'T WHAT YOU'D EXPECT.
By Amy Dockser Marcus

(MONEY Magazine) – The hour-plus drive from my home in Boston to the tiny town of Henniker, N.H. stretches monotonously until just past the old mill town of Manchester, where the landscape suddenly changes. The trees become thicker and the rivers crisscrossing the highway are frozen solid. Soon the snow-capped top of the Pat's Peak ski resort announces that you're close to your destination.

Henniker is the home of New England College, a small liberal arts school attended by some 700 full-time students. As I drove into town for the first time in December, my eyes were drawn to the banks of the Contoocook River, which Henniker's residents sailed down 200 years ago to gain access to the wider world. I'd come to this idyllic place in anticipation of what's become a kind of ritual at colleges across the country: the annual announcement of tuition increases for the coming year. In March, NEC would send a letter to parents informing them that come September, the cost of a year's tuition will be $19,690, a 3.5% increase from the previous year. That's tuition only; room and board, health programs and other services are extra.

Truth be told, the number is in line with what comparable colleges charge. And a 3.5% jump isn't as large as the national averages of 7.7% at four-year public colleges and 5.5% at private ones. But 3.5% is still about twice the rate of inflation. At that pace, tuition would nearly double in the time it takes a newborn to get to college. At the public school average of 7.7%, it would double in just nine years. Having recently written a series of articles about the economics of college education, I'd seen these projections strike confusion, fear and even anger into the hearts of normally composed parents. As the parent of two young children, I'd felt these things myself.

Like everyone else, I've heard explanations for skyrocketing college costs. Faculty salaries and health-care, library and lab expenses are going up, while competition among schools requires more spending on expansion, recruiting and scholarships. At the same time, state and federal educational funding has declined. But these factors never quite explained to my satisfaction why tuition is so expensive or what accounts for the wide range of prices. I was visiting Henniker to get an up-close look at how one college actually makes its financial decisions: how it sets tuition, what it spends its money on and whether it's making any real effort to control costs.

THE TUITION TABOO

I'd also come here, frankly, because NEC was the only college I could find willing to open its books to me. No doubt this was a calculated decision on the part of Ellen Hurwitz, the school's ambitious president. Though a Russian history specialist by training, Hurwitz greeted me in her office amid bookshelves teeming with volumes about the business of running a college. Hurwitz spent much of the '90s at the helm of Albright College in Reading, Pa. Her mandate since assuming her post at NEC in 1999 has been to raise its profile, reputation and enrollment, and she knows that the attention--even the scrutiny--of a national magazine can't hurt.

Hurwitz doesn't offer so many details about the school's finances to everyone. The letter she was preparing to send to parents in March makes little attempt to break down the reasons for the 3.5% tuition increase. I asked her why that was--after all, it seemed to me that parents would be less exasperated by rising costs if they could understand them. Years ago, she told me, college presidents would routinely lay out the factors behind the latest rise in tuition. Almost nobody does it anymore--the tuition game has grown far too complicated. How, for example, do you explain that the price is as dependent on a kind of strategic gamesmanship as on hard-nosed cost-based accounting?

Tuition, it turns out, doesn't cover the cost to NEC of providing a year's worth of education. If that were the goal, next year's figure would go up another 6.5%, to about $21,000. "We've intentionally kept our price relatively low within our competitor group in order to be attractive," Hurwitz explained to me. Rivals like the University of Hartford or Roger Williams University, in Bristol, R.I., for example, will charge slightly more than $20,000 next school year. The hope, of course, is that by undercutting its rivals, NEC will attract enough additional students to offset the losses over time. In the short run, the gap needs to be filled through fund raising and other supplementary revenue sources. But Hurwitz feels that explaining her pricing strategy would be cold comfort to tuition-paying parents. "We are so challenged to be competitive and price-sensitive that we don't want to say our pricing merely touches on the actual cost," she told me. Nobody, she added, wants to tell parents that "tuition doesn't pay the bills."

Institutions across the board are getting more aggressive with strategic pricing. West Virginia's Bethany College will soon offer what amounts to a wholesale discount, having slashed tuition for next year by 42%, from $20,650 to $12,000-- partly to help parents hurt by the region's struggling economy but also to set the school apart from competitors. Other colleges are employing more subtle strategies: freezing prices, allowing students to lock in tuition for four years or promising to peg increases to the rate of inflation. Even elite schools like Harvard and Williams--which could charge almost anything and still fill their classes--use price to manipulate "yield," which is the percentage of students admitted who attend. Harvard officials told me they aim for a price that holds yield at 78% or higher across family income groups, rich and poor.

But the demand curve at less prestigious schools like New England College isn't nearly as predictable. Factor in NEC's puny $5 million endowment--the Harvards and Williamses of this world have billion-dollar endowments to fall back on if enrollment falls short of expectations--and you begin to see what a dangerous game Hurwitz plays every March when she sets tuition for the next year. If the number causes NEC to lose even a few students on the margin to its competitors, the financial results can be disastrous. As Kathleen Dawley, president of the Boston-area educational consulting firm Maguire Associates, told me, at the majority of colleges in this country, "10 students more or 10 students less can make the difference between a budget working or not working."

HOLES IN THE ASTROTURF

If tuition at New England College isn't strictly a function of costs--in fact, isn't even meant to cover them--why was it going up 3.5%? To answer that, and for a close look at how NEC spends its money, I went in January to see Vincent Massaro, the school's vice president of finance and administration.

"Running a college is like running a small city," Massaro told me, his hands fanning over budget projections and cost studies piled on the table. It was a hectic time for Massaro, just a month before a February meeting at which he'd have to convince the school's trustees to approve a tuition increase in time for the March announcement. Like a student cramming for exams, he'd all but locked himself in the office.

Massaro described the complex of services for which the college is responsible--not just education but also mundane matters like security, postal delivery, maintenance and food. Even the atmospheric details that make this place conducive to learning--the white clapboard buildings where the students attend class, the covered bridge that you pass on the way to the dining hall, the new street lamps that throw off a creamy glow as daylight fades--end up as a line in the college's budget. "Sometimes," Massaro insisted, "it's easy to forget that every single thing costs money."

How much money? New England College's total projected expenses for the 2002-03 school year are $14.9 million. As at most colleges, the biggest chunk of that--$8.9 million, or 60% of the budget--will go to salaries and benefits for the 367 faculty, administration and staff members. Food services, utilities and maintenance on the school's 34 buildings will add another $1.7 million. And NEC will have to make $467,000 in interest payments on bonds and other, smaller debts. (For a more detailed breakdown, see below.)

None of these expenses trouble Massaro, however. Instead, he says, "it's the unexpected costs, the emergencies." Every year, it's something else. The AstroTurf in the field house grew so shabby last year that the staff felt it had become a liability risk. Cost of resurfacing: $90,000. Then the school's health insurance premiums rose 29%, far more than had been budgeted for. But the administration feared hurting staff morale at a time when the college was turning itself around. "We decided not to pass on any part of that cost," Massaro said. The additional--and unexpected--cost: $110,000.

Meanwhile, the sources of money that keep this small city functioning are all too few. NEC brings in $3.8 million in revenue, or over a quarter of next year's operating budget, by providing room and board to students. The school rents its facilities for conferences and summer programs, bringing in another $605,000. Hurwitz has successfully increased alumni contributions, and fundraising is expected to generate $700,000 next year. The $5 million endowment, meanwhile, is projected to throw off around $345,000 in investment income.

But, as Massaro showed me, none of these sources of revenue come close to tuition, which at $8.2 million will contribute a whopping 55% of the $14.9 million operating budget. The college's very existence depends on how much it earns from tuition. Sure, if the number is set too high there's a risk of losing students to competitors. But if it's too low, there won't be enough money to pay for the programs, services and amenities that attract students there in the first place. You can't suddenly admit another five students in the middle of the year to plug unexpected cash drains, so it pays to play it a little safe. Thus, an increase in tuition--but a modest one.

For his part, Massaro yearns for an environment in which a modest tuition hike won't risk upsetting this precarious balance, sending too many students to a rival school and landing his budget in the red. As he put it: "What I need for a little peace of mind after all these expenses is critical mass."

THE COST OF AMBITION

Ellen Hurwitz and I walked through a light blanket of snow to see the centerpiece of her campaign to build that critical mass. After stopping to admire the recently restored covered bridge, we reached the heart of the campus and our destination: the Center for Educational Innovation, which opened last fall at a cost of $2 million, paid for through a bond issue. From the outside, the two-story white clapboard building blends perfectly into this rustic New England campus. But inside, everything is sleek and modern. There are banks of Macintosh computers; classrooms feature computer hookups at every desk and "smart boards," which let students download everything instructors write on them.

The building's construction marks a turning point for New England College. Founded in 1946, the school was launched on the educational needs of servicemen returning from the war. Enrollment steadily rose over the next two decades until, like virtually every private college in America, NEC was hit hard in the 1970s and 1980s by a demographic shift--a decline in the number of high school graduates. As competition for students intensified, NEC began losing out to more prestigious schools that had more money to spend on recruiting and on aid packages.

Now New England College has more than 700 full-time students for the first time in a decade. This is partly due to some savvy--and expensive--marketing directed at students. One marketing study the school commissioned suggested that New England College promote its location as a place where students can not only get a great education but also enjoy an extended season of winter sports. So NEC pays $40,000 a year to Pat's Peak, the local ski resort, for season passes for all students and faculty. It also introduced a new women's ice hockey program this year, which meant an up-front investment of $150,000 for coaches' salaries and locker rooms, plus an ongoing commitment of about $100,000 a year. To get the word out on all this, NEC spent another $193,000 buying 150,000 names of high school students around the country and sending them direct mail.

But it's the new $2 million building, above all else, that Hurwitz uses to sell the New England College story. The architectural drawings have accompanied her for years whenever she's traveled to meet with donors, parents or students. Another set was posted in the entrance of the main administration building. The building is both an engine and a reflection of the changes at NEC.

It is also a constant reminder of the huge cost of ambition. "This building has to be a revenue generator," Hurwitz explained. Capital improvements will, she hopes, attract more students; but in the short term they need to carry some of their own weight. NEC rents the conference rooms to local companies for corporate retreats and training sessions. Hurwitz also showed me a walkway connecting the building to the library next door. The path will be lined with engraved commemorative bricks; donors can have their names added for about $125 a brick. So far, 300 have been sold. Despite such efforts, the school will pay $467,000 in interest next year, partly to finance this building--an expense that, of course, is figured into the cost of tuition.

Squeezing out extra revenue makes sense; but why, I asked Hurwitz, doesn't NEC also look to the other side of its balance sheet? Why not, say, trim the 60% of the budget that goes to staff salaries and benefits? Because, she says, the school's 14-to-1 student-to-faculty ratio is a key selling point and essential to the "hands-on transformational learning" that NEC offers.

Of course, NEC is hardly the only school that asks parents to fund the college "arms race," as it's come to be called. When South Carolina's state-funded Clemson University announced a $750-per-semester tuition hike for the 2001-02 year, president James F. Barker stated in an open letter to parents that the increase was not just to make up the shortfall from state budget cutbacks but also to "support our goal of becoming one of the nation's top 20 public universities." The same goes even for the most selective universities in the country. Officials at Harvard University--a school rich enough that it could make tuition free without diminishing the size of its endowment--acknowledged to me that one reason it doesn't cut tuition is that the move would undermine the school's ambitious plans for growth and enhancements. (See "Why Isn't Harvard Free?" on page 122.)

At New England College, the Center for Educational Innovation is only the beginning. There are quiet plans to add a new theater complex and gymnasium down the line. Also, the school wants to renovate the student residential buildings. And every time Hurwitz dreams, there is a price.

SUBLIME FARE

On my last visit to Henniker, I returned to the new building to observe a class that's part of the school's new master of fine arts program. The school eagerly embraced the idea of offering a graduate writing degree, starting with poetry. Designed by New Jersey's current poet laureate and run by published and award-winning writers, the program was seen as a way to make the school stand out in a crowded marketplace and entice students with the cachet of a quality writing program and the potential to take graduate-level courses. "It adds value to the school's reputation and level of discourse," Hurwitz told me. The 10 students enrolled in the program had done public readings on campus the day before. "Sublime fare," Hurwitz called it.

Watching as five students sat around a long table discussing their work, I thought back to my meeting with Massaro, when he outlined the cost structure of the new program. On one side of the ledger are 10 students, each paying $12,000 a year in tuition (some with the help of loans). On the other, you have the salaries and benefits of the program's faculty, the $10,000 cost of running year-round promotional ads, $5,000 for brochures, $1,000 to purchase mailing lists of prospective students, $7,400 for postage, printing and telephone calls, and a handful of other miscellaneous expenses. The bottom line: This year, the program will run a $25,000 operating loss.

All this translates into some hard choices. For students and their parents, a writing program is a sign of the lively intellectual atmosphere, maybe even a valued part of a traditional liberal arts education. That's not enough to ensure its survival. Hurwitz says that she'd be reluctant to cut the program even if it does not turn a net profit next year. On the other hand, Massaro told me he vetoed an earlier proposal for the writing program that would have resulted in a $75,000 operating loss.

As I left that day, I remembered the stack of newspaper clippings on Massaro's desk about the recent announcement that Notre Dame College, just down Interstate 93 in Manchester, N.H., is closing its doors due to rising costs and declining enrollment. Such is the danger in working close to the margin.

$19,690. Would parents struggling with the high cost of tuition feel any better knowing the pressures, controversies and dangers involved in arriving at such a number? Hard to say. But Hurwitz, Massaro and NEC are hoping--and betting--that their number speaks for itself.