By Nicki Tenazas
Economists like to campaign for a free market approach to almost anything. We believe that barring any market failure, an economically efficient outcome may be achieved if individual actors are left to pursue their own self-interests. This concept also covers Higher Education Institutions (HEIs): more than just being a place of learning, these are also economic entities that need profits to survive. Market theory states that the demand and supply for the services of HEIs will determine the appropriate price of the education they offer. Simply put, these provide education and the students pay for it, and so on. Corrective mechanisms are also available: if prices are too high, enrolment will be low and force HEIs to lower fees; if prices are too low, HEIs will be forced to raise fees to continue operations.
“…changing circumstances mandate that we shift the focus of higher education policy away from how to enable more students to afford higher education to how we can make a quality postsecondary education affordable.” For this related article, check: How Disruptive Innovation Can Deliver Quality and Affordability to Postsecondary Education.
However, as the recent global financial crisis showed, unrestrained self-interest disregards morality and may lead to very dangerous consequences. If school fees are allowed to increase indiscriminately, a socially unacceptable outcome (read: unemployment, social unrest, etc.) may come about. Also, it may be possible that the market correction mechanism for higher education does not work effectively: even if tuition fees increase excessively, there is significant inertia in transferring to other schools, which in turn, arises from social pressures felt by students and the accompanying transaction costs of such a move. Usually, only students in very dire circumstances are forced to downgrade, and when they do, they don’t always move from a Class A school to a Class B or C school; it is possible that the dire circumstances that influence them to change schools in the first place can only allow them to go to Class D or E schools. Everybody else not facing such a predicament will prefer to stick it out in their current school, resulting in additional debt for the families supporting them. Still, both preceding situations might be better than completely dropping out of college, which could be the worst possible outcome.
It is in this environment that government intervention is needed. Even without an official “market failure” justification, government needs to step in to make sure that even the poorest Filipino can afford quality tertiary education while not disturbing the effectively functioning aspects of the market. It may be plausible that if tuition fees are allowed to increase on demand for an extended period of time, the market might eventually correct itself; however, the journey from the current state to that future state will be painful economically and socially for the country. This concept paper, therefore, hopes to propose a possibly optimal long-term solution to the sub-optimal situation the country is currently facing.
The above was a reaction to tuition fee hikes at the Polytechnic University of the Philippines (PUP) in March 2010.
Possible Determinants of Tuition Fee Increases
Due to the arbitrary nature of the regulatory environment governing the HEIs, the following are some of the theoretically-possible determinants of tuition fee increases:
- Inflation rate (including the perception of management regarding the rise of prices)
- Financial health of individual HEIs
- Regulatory mood of CHED
- Negotiating mood of the public
There are many other possible determinants of tuition fee increases. However, data for many of these variables are not readily available. What is readily available is the trend of inflation and increases over the past decade:
Simple correlation analysis of the general data produces some interesting insights:
- The highest correlation between inflation and increases is only 25%. This is intuitive because the prevailing procedures for applying for increases is highly subjective and highly susceptible to many other external factors.
- The preceding year’s inflation rate in the region where HEIs belong correlates to the increases by 24%. This is also intuitive because last year’s inflation rate in the region have all been experienced first-hand by both HEIs and students, and are still fresh in their minds during fee increase negotiations.
- A business strategy of HEIs is delaying increases depending on many factors. The emerging trend is a “patience interval” of three years before implementing increases. Some HEIs react immediately to inflation while some wait as long as five years before implementing increases. For example, the average of regional inflation in 2002 and 2003 will correlate the strongest to fee hikes in 2004. The 2002-2003 figures may also manifest themselves in 2003, but in a weaker sense because 2003 figures will not be complete by the time 2003 fee increases are applied. This shows that HEIs are aware of their specific demand elasticity and try to prolong increases as much as possible to minimize the loss of enrolment.
- National inflation figures also factor into tuition fee increases. This is because even if regional inflation is relatively lower than national averages, widespread media coverage of national inflation influences individual perception of the increase in prices in their locality.
- What is interesting is the sign (+/-) of the results of the simple correlation simulation: all values are negative. Initially, this should mean that there is an inverse relationship between inflation and fee hikes. However, this might also mean that HEIs are wary that raising fees too much at a time when all other commodities are increasing might push students over the edge and force them to drop out of school or transfer to cheaper ones.
All the analysis done was very basic and thus the results should be taken with skepticism. However, the following are some useful recommendations moving forward:
- Study the issue further and look for additional data sources to improve the explanatory power of the analysis
- Disaggregate available data further and apply more sophisticated econometric analysis
- Consider the standing proposal to minimize arbitrariness of current fee increase procedures to make it more equitable and predictable____________________________________________________________
The most important assumption of this proposal is the effectiveness of the Commission on Higher Education’s system of recognizing Centers of Development and Centers of Excellence. It is important that all stakeholders accept the credibility of CODs and COEs so that the design of this proposal will become effective. If such assumption is being contested due to political (or other) reasons, it is in the best interest of CHED to address these concerns immediately.
The second assumption is the credibility of independent accrediting bodies both locally and abroad. These institutions should be accepted as supplementary vanguards of quality, such that attaining accreditation from them will generally improve the reputation of the HEIs. Again, if the soundness of this assumption is being questioned, it is best that CHED and other branches of government address the issue properly.
The last assumption (which is more of a limitation, actually) is that Autonomous/Deregulated HEIs do not present nor face significant issues with fees. As such, they are excluded from the majority of the proposal, but they remain under the relevant influence of CHED as provided in existing laws and policies.
The proposal consists of three parts, all of which are not new to education sector insiders. However, it is hoped that the proposal aligns many incentives to produce the best policy possible. The three parts of the proposal are:
- Use regional inflation rates as the baseline for individual tuition fee increases
- Allow for adjustments based on performance
- Reserve special discretion for exceptional cases
Part 1: Inflation as best starting point
Ideally, tuition fee increases should be guided by the following equation:
Πpy-1 ≥ TFIipy
where: Πpy-1 = official provincial inflation rate last year and
TFIipy = allowed tuition fee increase rate of school i in province p this year
However, (1) provincial inflation rates are not always readily available and (2) schools operate under a fiscal year from June-May and not the traditional calendar year. Therefore, some adjustments are needed:
Πry-1 ≥ TFIiry
where: Πry-1 = average regional inflation rate from Q2-Q4 last year and Q1 this year and
TFIiry = allowed tuition fee increase rate of school i in region r for the coming fiscal year
The equation simply states that at the very least, tuition fee increases should not be higher than the relevant geographical inflation figures. This is because part of the HEIs’ investments are already sunk costs, which are no longer subject to inflationary pressures. Only overhead expenses are subject to inflationary pressures and even so, wages still tend to be sticky in the short-term. An HEI does not automatically raise the salary of a professor who had 35 students last semester but will now have 50 students this semester. The increase in class size will still be accommodated and the professor will adjust the teaching strategy (and effort) accordingly.
For the sake of simplicity, it is proposed that the starting point for tuition fee increase negotiations begin at Πxr-1 = TFIiry. Doing so provides three advantages:
- The public has a credible and understandable benchmark for the increase
- The HEIs theoretically still have room for profit, as only part of their cost items have become inflated and
- It allows for the effectiveness of the second part of the proposal
Part 2: Sticks and Carrots
The first part of the proposal ensures an acceptable starting point for discussions on tuition fee increases. The second part injects the proposal with performance incentives to give CHED an additional tool for quality assurance.
HEIs can have adjustments in their tuition fee hikes according to the following schedule:
This is where the first two assumptions mentioned earlier become important. Since the process of becoming CODs and COEs already includes assessment of the overall operations of the HEI, and one should at least maintain comparable standards in order to maintain accreditation in the long term, the COD and COE status is taken as a comprehensive proxy indicator of quality. If an HEI can maintain these CHED-conferred credentials, it should mean that they have provided the appropriate academic standard for that year and deserves an incentive to their tuition fee increase.
The same logic applies to external accreditation bodies. If HEIs successfully go through the additional and voluntary effort of getting accredited by other bodies, it should also mean that these HEIs have further improved their quality and deserve further incentives. This works because even if external accreditation bodies consider COD or COE status in their criteria for evaluation, CHED does not consider external accreditation in conferring COD or COE status. Of course, it should go without saying that HEIs should get CHED accreditation first before qualifying for the incentive from additional external bodies.
Lastly, CHED should reserve the right to penalize poor performing HEIs. Currently, the definition of “Poor” is still debatable. It is important that CHED comes up with clear guidelines, as well as the corresponding deductions, if ever this proposal is adopted. It is also important to note here that CHED should only have the power to decide on the DEDUCTIONS in the tuition fee increase of poorly performing schools. It will give them the choice of becoming lenient or strict but it will not allow rent-seeking behavior that comes with discretion on the ADDITIONS to the fee hikes.
Part 3: Discretion for Flexibility
The first two parts of the proposal hope to cover the majority of HEIs under CHED’s supervision. However, it is certain that some “special” cases will plead their exemption to the proposed policy. Therefore, the third part aims to give CHED some flexibility in dealing with such cases.
CHED currently approves fee hikes on a case-by-case basis, subject to certain requirements. This practice can continue for HEIs that meet any one of the following conditions:
- No tuition fee hike for past (consecutive) three fiscal years on a voluntary basis (sanctioned tuition fee freezes are not counted in the number of years)
- Not a recipient of this “special case provision” for the past (consecutive) six fiscal years
- Other circumstances that can be defined later through the proposed process outlined below
In all of these cases, a ceiling of 2Πry-1 + y (where y is the sum of all earned incentives according to the table above) should be strictly implemented. A one-time tuition fee hike of at least twice the rate of inflation should be enough to support HEIs in “special” circumstances. At the same time, such special rates (1) should not be high enough and (2) should not be frequently accessible, to attract HEIs into qualifying as “special” cases.
CHED can add to the list of “special” cases but only after obtaining approval from both Education Committees of the House of Representatives and the Senate through special resolutions. The said committees should also be the ones to remove certain previously approved “special” cases, using the same document, if any concerned citizen presents evidence showing the negative consequences of such inclusions to the “special” cases list. Separate simple majority votes in both Houses of Congress should be enough to add or remove any “special” case.
The proposal, if adopted in full, will provide the following benefits to the following groups of stakeholders:
Other indirect benefits include: (1) less opposition to fee hikes from students, leading to lesser politicization of the issue; (2) improved budgeting for educational expenses by households because ballpark fee increases can now be estimated and planned for; (3) improved public credibility of CHED because it helps facilitate the removal of rent-seeking behavior; and (4) eventual closing of poor performing HEIs and possible further growth of high-performing ones will help bring about rationalization of the sector without any forced closure of HEIs by government.
As with any proposal, many criticisms are expected if this concept paper becomes public. The following are some of the major ones, and further explanations why the said criticisms are incorrect, or at the very least, can be disregarded:
- Setting a minimum level of fee increases will encourage other HEIs, who usually do not ask for high fee hikes, to maximize their requests for increases: This is totally possible but then the HEIs will do so at their own risk. This proposal provides them with the flexibility of strategizing how much to actually charge despite the provided ceilings, which are public information. HEIs will now consider their respective demand elasticities in deciding rate hikes, because there will now be incentive for them to NOT maximize the allowable fee increase for marketing purposes. Two predominantly IT schools who have been competing nationwide for the last 20 years have used the “No tuition fee increase” slogan to their advantage.
- The figures used as incentives seem arbitrary; there is no scientific basis for selecting 1 or 2 or x percentage points as the official figures for additional increases. This is correct and if ever the proposal shall be considered, it is important that CHED comes up with a simulation of the resulting formula so that the appropriate magnitude of incentives can be ascertained. The figures proposed here are used for simplicity and to illustrate the hierarchy of incentives among different stakeholders.
- Some student sectors will still say that increases are too high: Unfortunately, nobody can please the militants. If they had their way, tuition should just be FREE nationwide. However, what they purposely overlook is that tertiary education is NOT (yet) a basic right recognized worldwide. Even in the Philippine Constitution, tertiary education is not included in the Bill of Rights. Even so, CHED has provided various scholarship and student assistance programs for disadvantaged but deserving students. It might be better (and more productive) for militants to advocate the improvement and expansion of these services, rather than try to prevent fee hikes altogether.
- Some HEIs will still say that the increases are too low: Unfortunately, these institutions are profit maximizing entities and their desire for profits will not cease. However, given that fee increases are always politically charged affairs in the Philippines, a modest and generally socially acceptable increase is definitely better than no increase at all. The challenge for them now is to become more efficient so that they can maximize the financial flexibility given to them. If they decide to maximize increases and shirk on quality just to squeeze out more profits, their enrollment figures will definitely decrease and might lead to their ruin. The proposal is designed in such a way that it is in the HEIs’ best interest to continuously improve and earn additional rate increases in the process.
- CHED might resist the decrease in their powers to dictate certain aspects of the issue: CHED officials might not like that they don’t have the power to give additional rate increases, or that they need an “Act of Congress” to add to the list of “special” cases. However, for the proposal to be credible, CHED should take the lead in seeking compromises with all stakeholders. This will also prove that they are acting in the best interests of the Filipino people.
- This proposal only covers tuition fee increases; HEIs have other fees that have significant effect on the overall costs of tertiary education. Indeed, other fees continue to be a gray area in this discussion. On one hand, it provides vital boosts to the revenue stream of HEIs; on the other hand, this practice is sometimes open to abuse. As such, there are two possible courses of action available: (1) if this proposal is generally found to have merit, the inflation rate ceiling could easily be applied to TOTAL fee increases per semester for one fiscal year or (2) CHED can design a new policy solely dedicated to other fees charged by HEIs.
There is no perfect solution to the tuition fee issue of the country. Many experts can pick this proposal apart and come up with many reasons why it will not work. However, this should just be viewed as a humble suggestion from a concerned citizen. If parts of the proposal will be proven to have merit and eventually be adopted, the author would be very grateful. However, if this eventually gets scrapped, the least the author could hope for is that the proposal would help open a more rational discussion of the issue which could eventually lead to a socially acceptable solution to the country’s long-running debate on tuition fee increases.