Thursday, July 21, 2011

How to price higher education and ensure access

Higher education costs have tended to soar in many parts of the world. In the elite private universities of the US, fees have reached staggering levels not only in the professional courses, such as law, medicine and management, but in undergraduate courses as well. The Economist noted recently that fees at American universities have risen five times as fast as inflation over the past 30 years.

In the UK, the government last year allowed universities to almost triple their fees with effect from September 2012. In India, there is anecdotal evidence of fees having risen sharply in professional courses. In non-professional courses, government institutions still charge only modest fees. However, in professional courses, where private colleges dominate, the total fees, including capitation charges, can be exorbitant. How to price higher education and how to ensure access are among the important policy challenges facing the country. But, first, we need to understand what is causing prices to rise so fast in the first place.

In higher education, we have three choices. One, we can have a government-dominated system where education is subsidised. Two, we can allow private universities and colleges to come up with the freedom to charge whatever the market can bear. Three, we can allow private institutions freer entry but regulate fees and make provisions for subsidising needy students.

In non-professional courses, we still have the first model. In professional education, we have attempted to move towards the third model but have ended up closer to the second one. There is regulation of fees in some areas but this only covers the official fee. The official fee is often only a small component of the overall fee, with a large component being collected under the table.

Several arguments are made for privatisation of higher education and market-driven fees. Investment in higher education has high payoffs and can, therefore, be financed by loans. Needy students can be taken care of through scholarships or interest subsidies. Subsidised education provided by the government imposes huge fiscal costs, which, in turn, come in the way of both creation of fresh capacity and quality. Competition in higher education will help moderate fee levels.

Every one of these propositions is questionable. In India, the student is not an independent entity. He is part of a family unit for which the student loan is one of several loan obligations. An education loan undoubtedly adds to the burden of the family. Funding of scholarships is woefully inadequate. Merely letting fees rise does not lead on to superior quality - quality is poor at most private professional colleges despite the huge fees charged. It is also not true that competition helps moderate fees.


The phenomenon of soaring costs in higher education has been studied. The main explanation, it turns out, is simple enough: institutions keep raising fees because they can get away with it. The demand for higher education keeps growing briskly even in the developed world. Institutions of higher education operate in a sellers' market, so they lack the incentive to cut costs, improve efficiency or introduce new technologies.

We must accept, therefore, that where higher education is left to the private sector, fees will escalate. That is why the US has a strong network of state universities (some of which are of very high quality) alongside its renowned private universities. In the US, universities are keen to sustain investment in infrastructure and faculty as there is a correlation between investment per student and the university ranking. At least some of the fee increase can thus be ascribed to the pursuit of quality.

That does not hold for India. Most institutions here are simply extracting rents from a scarce product. Higher fees in India merely reflect the commercialisation of education. B-schools are a case in point. The older IIMs [Indian Institutes of Management] have raised their fees substantially in recent years. This, in turn, has triggered large increases in fees at B-schools that do not provide comparable quality. The Anil Kakodkar Committee has proposed that the annual fee for the IITs' [Indian Institutes of Technology] undergraduate programme be increased from Rs. 50,000 to Rs. 200,000-250,000. If this happens, it is bound to cause fees at lesser engineering colleges to rise.

We should not be surprised at the absence of any link between fee and quality in higher education in the country. The UK too is struggling to establish such a link. The government last year allowed fees to rise from £3,375 to a maximum of £9,000 with effect from September 2012. The idea was that universities would raise fees in keeping with their quality. To its dismay, the government finds that all universities, irrespective of their quality, have veered towards the maximum.

Germany is one country which has sought to buck the trend towards commercialisation of higher education. Many German states have recently opted for free university education. Germany is faulted for not being able to match the excellence of the US in higher education. And yet German education is good enough to produce high quality manufacturing and to power one of Europe's strongest economies.

The German model holds a lesson for India. For us, access to higher education should be the priority. We have enough experience by now as to the limits to using regulation to ensure access. So, we need to seriously rethink the issue of public provision of higher education.

This article is written by Prof. T.T. Ram Mohan of Indian Institute of Management, Ahmedabad.

Source: The Economic Times (Online Edition), July 21, 2011
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