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Is college finally too expensive for its own good?

There was stunning news for the students and faculty at Virginia's Sweet Briar College yesterday: the 114-year-old school is shutting down this summer. The reason? The all women's college can't meet expenses in the face of dwindling enrollment. That's despite the fact that Sweet Briar has a $94 million endowment and a tuition, room and board price tag in excess of $47,000 per year.

To be fair, Sweet Briar's non-coed status was the primary source of its financial undoing. Fewer and fewer women are attracted to single-sex institutions. The number of women's colleges in the U.S. is down to about 40 from 230 just 50 years ago. But the pricey tuition certainly didn't help. And this story should serve as a warning to all the non-top 25 elite schools who insist on charging Ivy League-like tuition, and then trying to ease the pain with Rube Goldberg-like financial aid process.

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In the late 1970s and early 1980s, many schools about the same size and with the same selectivity of Sweet Briar started experimenting with something called the "Chivas Regal Effect." That's when you boost the price of something dramatically in hopes of convincing consumers that the item is a luxury well worth the expense. American colleges were uniquely positioned to profit from this maneuver, thanks to a federally-backed student loan program and repeated political and cultural messages promoting the essential nature of a college degree to succeed.

And for nearly five decades the strategy has worked not just for private schools, but state schools who were able to boost their tuition because of a general rise in the market price for a college education. There has simply been very little reason for colleges not to raise tuition year after year. First, there a good number of eligible consumers who are able to pay via student loans. And second, schools can deflect criticism by claiming to have generous financial aid packages. They do that by jacking up tuition and "discounting" that increased price with assistance that doesn't actually cover those increases over time. Thus, a school like Sweet Briar with about 7000 students can increase its tuition by $10,000 per year per student over a 5-year period, offer each student $2,500 in financial aid and then boast that it's increased financial aid by $1.75 million! Nice work if you can get it, no?

Well, you may not be able to get that work for much longer. The Sweet Briar story will not be isolated to single-sex colleges if the next generation of applicants come from homes where their parents are still paying back their own college loans; a distinct possibility when you look at eye-popping debt load the average Millennial is carrying.

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University of California, Berkeley attend an "open university" strike in Nov. 15, 2011 in Berkeley, Calif.
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University of California, Berkeley attend an "open university" strike in Nov. 15, 2011 in Berkeley, Calif.

State schools are facing challenges from another financial front. State residents are beginning to demand more places in their home state schools even as more state schools try to cash in by enrolling higher tuition paying out of state students. This has come to a head in California, where the UC system has ratcheted up out of state enrollment in recent years to improve the bottom line. But that's raised the ire of native Californians who are finding it harder to get into their own local schools. UC Chancellor Janet Napolitano tried to engineer a bit of an odd compromise yesterday as she announced she would cap out of state enrollment at the two most popular UC schools, Berkeley and UCLA. But she's keeping the doors open at the other UC schools while freezing in-state enrollment system-wide. Something tells me this won't make too many people happy.

Berkeley and UCLA will always be hot schools for applicants across the country. But the other UC schools and smaller institutions like Sweet Briar won't be unless they start to re-examine their business models. As college cost expert Naomi Schaefer Riley has warned for years, schools need to start cutting costs by forcing more tenured faculty to actually teach classes, scale back their endless building booms, and give students a better value. Cutting tuition, not just playing the financial aid shell game, should also be a big part of that equation.

Sweet Briar is just one small part of a bubble that's bursting before our eyes. Let's hope the people who run higher education in this country learn a lesson from it.

Commentary by Jake Novak, supervising producer of "Power Lunch." Follow him on Twitter @jakejakeny.