— Rich Sherman, Editor

Should higher education be run like a business? Not quite, according to some presenters at a conference on the future of higher education held at the Chicago Fed on Nov. 2, 2005.  The conference was sponsored by the bank, the Committee on Institutional Cooperation, and the Midwestern Higher Education Compact, and brought together more than 100 academic, business, and government leaders.

One flaw with the business model is that it ignores the difference between the real price tag and what students pay.  At the University of Illinois, students pay $8,000 to 10,000 each in tuition, though the actual cost is $25,000. But where  a business may see a need to close a "financially unattractive operation," a public university sees a need to contribute to society's future by educating promising students.

Private universities do charge more in tuition and are prospering, but can't raise tuition indefinitely without losing market share. A recourse for some schools is to limit the number of academic disciplines, offer fewer amenities, reduce the physical size of the campus, or even redefine themselves as online colleges — not likely options for public universities.  

Public universities can safely say that a business model is not the answer to all of their problems, but they can't stop there.  Traditional models of higher education finance and service delivery are under stress, real costs exceed tuition costs, and higher state funding is not forthcoming.

The key problem, according to conference panelists, is that the perception of higher education as a public good has eroded and universities need to do a better job of communicating their value to the public. The relationship between education, productivity, and economic growth has never been clearer, but how widely is this known?

Michael Moskow, Chicago Fed President and CEO, noted that restoring the social compact would require making universities more transparent in their operation, showing how they meet their obligations to education, research, and public outreach.  Institutions must show that they are well run fiscally, but must also show that tuition is not a barrier to talented students, regardless of income.

The public often views higher education as a private good with benefits accruing to the individual student in the form of higher future wages and quality of life, and universities need to challenge this view. According to Lou Anna Simon, president of Michigan State University, higher education must restore public trust that it provides access in an inclusive fashion and must make the benefits of basic, applied, and commercial research readily apparent.

While focusing on the future of higher education in relation to economic growth, the conference noted not only the value that universities offer a knowledge economy, but also their responsibility in shaping the public good.  Better business practices, higher productivity, and greater transparency will be needed, but the future of public higher education may depend on recognizing these improvements as building blocks in restoring the social compact, not ends in themselves.

Read the Chicago Fed Letter.