The need to regulate annual private school fee hike

There is a growing debate on the private school fee in recent days, which I had predicted long ago. With rising aspirations of parents and with government schools not being able to meet that demand, the reliance on private schools increases. Earlier, only those who had enough disposable income were sending their children to private schools. Now, even parents who are living on shoe string monthly budgets, are also sending their kids to private schools, and their number is increasing. When this number reaches a critical mass, concerns on school fee hikes are bound to arise.

The debate on regulating school fee hike is often phrased in binary - people who think that government shouldn't regulate fee and treat it like any other commodity, and those who argue that private schools bay for people's blood and are to be strictly regulated. As always, truth is somewhere in between.

I have expressed my views on private schools several times earlier on this blog and in my book - we should allow for-profit schools and definitely reduce infrastructure requirements. That being said, we should also be aware of the special context of education and need to differentiate it with other usual goods for the following reasons.

1. Education has a sociological significance; I wrote about this earlier. In short, it means that education also has a role to build citizens and social capital, not just teach them academic knowledge. Therefore, schools shouldn't be allowed to deliberately let the socio-economic fissures appear in schools, due to their policies. For example, schools shouldn't charge differential fee, giving differential treatment to children, the way it's done in trains and aeroplanes, where AC coach people get better facilities compared to sleeper class. Such policies let socio-economic fissures manifest in the school and has implications for child's education. Refer my earlier post for detailed arguments.

2. Schools can't be allowed to make significant fee hikes within an year because of the market imperfections and impact on household budgets. This needs explanation.

The fundamental question is - how is school fee different from price of any other product? It's different in two important ways:

1. The transaction costs are high: Unlike other goods, where one can choose a different good, if the price of a particular good is hiked, it isn't easy in case of schools. It's because there are huge costs associated with shifting schools. These costs are both monetary and non monetary - efforts to search and find school in the vicinity, the emotional state of child and so on.

One can always argue that parents can easily change, there are lots of private schools, the schools won't dare to increase fee if they fear losing students and so on. But, the fact that some (many?) schools are daring to do this reflects the imperfections in the market that disprove this line of reasoning.

2. Impact on household budgets: This is a very important  aspect that's highly under-appreciated. Unlike people in corporate sector, most people's incomes don't see significant increase every year. 95% of India is self employed whose YoY income growth is not high. Added to that, a significant section of people sending their kids to private schools have tight budgets, without disposable income that can act as buffer for annual hikes.

In that context, if a school fee is suddenly hiked, let's say, 30% for next year, it will have a devastating effect on household budgets. Often this comes with months notice, making it hard for parents, especially considering the high transaction costs in shifting schools. This is equivalent to holding parents hostage, nothing less than charging high money for patient in emergency, cashing on the situation.

Hence, we need at least some form of predictability of fee so that parents can plan it better, ideally for next 3 years. Schools should be treated like universities where the fee of the degree is declared upfront and isn't changed in between the period of the course, so that students aren't held hostage.

Given this situation, there's a need to regulate the annual private school fee hikes. The regulation should be on the following principles.

1. The regulation should be on annual fee hike and not overall fee. Capping school fee is a regressive step, as I argued earlier.

2. There should be a predictability in fee and sufficient notice.  It means that schools should declare fee for next 3 years beforehand and intimate fee hike 1 year earlier. Just to clarify, it doesn't mean that the fee should be same for next 3 years. It can increase but just that the increase should be specified for next 3 years. This gives enough stability and predictability to parents.

If this is not dealt sensibly and left unregulated for long, the situation might intensify and only give justification for government to take blunt and harsh steps like overall cap etc. It's better to avoid that situation and start course correction now itself.

PS: Anurag Behar has a good article in Livemint on this issue, that nudged me to publish this draft that I had written long ago. The number "3" in the 3 year upfront declaration of fee is taken form his article, as I felt that this is a reasonable number.

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