By Harmesh Bhambra ‘16
Inflation is seen as a normal condition of a modern economy, such that the absence of inflation, or deflation, is generally greeted by investor fear.
This paradigm continues within the Booth bubble. The announcement on April 27th that tuition fees would rise in 2015-16 by 4.00% and 2.05% for first-and second-year full-time MBA students respectively was met with insouciance. The real significance of these rises, however, depends on the causes and consequences. How are input costs changing? How does Booth compare to other schools? Are increases commensurate with the value for students?
Booth tuition has increased at about 5% per annum since 2006, in line with peer programs. Indeed, the process for setting fees can be seen as nothing more than a bland benchmarking exercise. Data on competitor schools are gathered in January and February, and the final tuition numbers end up matching the market. In fact, Booth’s accounting team looks at the total cost of attendance across peer schools to perform this benchmarking. For example, headline tuition at Harvard is much lower, offset by higher program fees. There is a view that based on current rates, Booth is good value, with first-year tuition being second lowest out of the sample of seven peer schools.
However, tuition is becoming less important in funding activities at Booth. At the beginning of the millennium, more than 70% of the school’s revenue depended on tuition; now it is below 60% This trend has been driven by the conscious effort of the Dean’s office to improve donations. According to Booth’s Accounting and Budget department, it is likely that other revenue streams, such as the Gleacher Center conference business, subsidize the full-time program, although there are no concrete numbers on cross-subsidization.
Much to the relief of prospective MBA students, the rate of tuition inflation has trended down over the past few years. Dean Stacey Kole, Deputy Dean for the full-time MBA program, mentions that this trend has followed naturally from the 2008-09 financial crisis. The reduction in tuition inflation has happened even though there have been increases in targeted investments, such as the 15% per annum increase in the value of scholarships. Further, the Booth administration has tried to make second-year tuition more predictable; second-year tuition increases have settled at around 2% each year.
It is hard to ignore the vast levels of wealth that the school has accrued as part of the tuition discussion. The school's endowment reached $710M in 2013-14, a 30% increase since 2010-11. However, the reality is that much of this endowment is earmarked, such as to endowed chairs and research centers. As a result, there is little opportunity of drawing down the “seedcorn”, as Dean Kole puts it, for the purposes of making tuition more affordable.
There is a school of thought, advocated by Booth marketing professors, that pricing should be intimately linked to value. And while full-time median starting salaries have increased by 20% since 2009 and tuition by 25% Dean Kole firmly believes that the value to students of the Booth MBA is increasing in an “absolute and relative sense”. Dean Kole highlights the Forbes MBA rankings: it takes 3.7 years for a Booth MBA to pay back tuition and the total 5-year gain is $92,600, second only to Stanford, which sends a higher proportion of students into private equity and venture capital. Further, Booth has risen in these rankings over the past few years. This success can be attributed to the value employers place on the “Booth skill-set”, according to Dean Kole.
So as with our economy, inflation really matters when it diverges dramatically from our perceptions, which are formed by experience. As long as the Booth MBA keeps delivering close to expectations students will keep paying the higher fees every year, however much to their chagrin.
Harmesh is News Editor for Chicago Business
ChiBus would like to thank Ron Gemkow '84, Executive Director of Facilities and Operations, who provided much of the data for this article and who will be retiring from Booth later this year.