A Rolls-Royce For-Profit University?

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.

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