Episode 14

 Why Does College Cost So Much?  Putting It All Together.

Why does it cost so much to go to college?  We have spent 13 episodes looking at various causes for the outrageous tuition sticker price charged.  Today, we will begin to put it all together and in the final episode, we will propose policies to relieve the financial burden.  I am Larry Bernstein and welcome to Charging U.

“The dominant goals of institutions are educational excellence, prestige, and influence.”  “In quest of excellence, prestige, and influence, there is virtually no limit to the amount of money an institution could spend for seemingly fruitful educational needs.” “Each institution raises all the money it can.” “Each institution spends all it raises.” “The cumulative effect of the preceding four laws is toward ever increasing expenditure.”Howard Bowen, Economist and College President

It is no secret that the rapidly rising cost of a college education has been a burden to large numbers of Americans. It has caused families to deplete their savings and work more. It has forced many to assume major debt at a very young age, before they fully understand the consequences of borrowing money and before even beginning to earn an income to pay off the principal and interest. They are then forced to delay life events such as marriage, starting a family, buying a home, starting a business, making major purchases, or donating to charity. These personal decisions collectively result in social and economic consequences for the larger community and nation.  Still, many people are willing to commit to trying to obtain a college degree in the hopes of improving their standard of living. On the other hand, an increasingly large number are put off by the exorbitant cost or the expectation that the return on investment will not be sufficient, especially if they do not graduate. Given the current cost of college, for many, that may be a very rational decision.

The American system of higher education may seem disjointed because it was not planned.  It evolved piecemeal over more than three centuries in response to various societal, political, and economic forces unique to our country.  This has resulted in an hierarchical system which provides a diverse array of choices.

We have noted that the main reason for price increases at private and public four year colleges and universities may be different. Flagship public colleges are a hybrid between public colleges and private research universities.  Their problems, behaviors, and responses are a mixture of those from both categories.

Private institutions charge each individual student “whatever the market will bear" that is, the most that the particular student and family are willing to pay in order to attend that college. So while there is a published sticker price, each applicant’s unique personal abilities, desires, and economic situation are considered and compared to data possessed by enrollment management companies hired by the admissions offices to come up with a “Goldilocks price” that is not so high as to drive away the applicant, but not so low as to forgo collecting as much of the money the student and family are willing to pay to attend that college. 

The meteoric rise of the stock market over the last three decades has fueled an increase in the wealth of investors.  This, along with the relatively increased income of the top 5-10% of Americans and tax benefits from college savings plans and the American Opportunity Tax Credit have provided a group of Americans with more disposable income which they choose to spend improving the educational status of their children.  Those students are also able to travel anywhere in the country to attend the university with the best reputation that accepts them.  Since the expansion of seats at prestigious colleges and universities has not kept up with population growth, demand has greatly exceeded supply.  In our free market, the result has been an increase in price at those schools.  In order not to appear to be of lesser quality or in an attempt to raise quality, peer institutions raise their tuitions as well, resulting in tuition increases across the broad system of higher education.  But modestly increasing the number of seats at prestigious universities will not have a significant impact on overall accessibility because total capacity at those institutions is only a small fraction of the whole system of higher education, about 1.5%.  At best, the current infrastructure at highly selective colleges only allows them to increase enrollment a small amount, so increasing the percentage of total students that they enroll from 1.5% to 1.6% or even 2% will not produce much of an impact.  In addition, demand for those seats by the wealthy, both in the US and abroad, will still greatly exceed supply, so price will not drop.

A sharp decrease in state appropriations in the 1990s and early 2000s is a major contributor to the increase in public college tuition. The individual public colleges have been forced to raise tuition to make up for the shortfall.  They are also recruiting more out-of-state residents who can pay more than in-state residents.  But they have raised charges much more than the reduction in state appropriations, so the reduced funding does not explain the whole story.  

While the main cause of high tuition is different at public and private colleges, numerous factors which raise cost are common to both groups. 

Government financial aid and easy access to subsidized loans has made more money available to students. This is known by private colleges and they seek to extract at least a portion of these funds for themselves.  Some public institutions are beginning to do the same.

Because there is no objective data on the value of an education and degree from a specific college, there is no way to know its worth, and therefore, no way to quantify what price is reasonable to pay. All we have now are rankings based on an institution’s wealth, prestige, and research output. People filling out the surveys of the ranking organizations are asked to rate over 2,000 colleges.  I can’t even accurately rank just the basketball teams of 68 schools for my March Madness bracket.  How can they rate the overall quality of 2,000 multi departmental institutions with which they have no contact?  There are no widely available objective measures of quality,  knowledge gained, or skills acquired by students at each college.  

I don’t think I explained well in the seventh episode why Baumol Cost Disease or Service Disease and the effect of professors’ compensation exerts only a mild effect on price increases. Higher education is a labor intensive industry and personnel costs are a large expense.  It has not changed significantly the way it delivers its product.  The structure of lectures, seminars, and labs remains as it has been for many years. There has been no meaningful improvement in efficiency.  In other areas of the economy, when there is increased efficiency, workers can produce more in a given amount of time and be paid more without prices also going up.  But, even service workers who don’t show increased productivity still get pay raises.  If service workers were the only people in the workforce, the overall inflation rate would be very high because pay is going up without an increase in productivity.  But there are many areas where there is improved efficiency so overall price increases due to wages are moderated.  The total compensation of professors has increased a little faster than inflation and this should result in a bump in college costs.  But, with the manyfold rise in the number and pay of administrators and non teaching personnel at colleges, the share of personnel costs or percent of wages attributed to faculty is much lower than it had been in the past so the effect of faculty pay on college costs is not as large. On the other hand, the more rapidly rising number and compensation of  non teaching service personnel at colleges do contribute a significant amount to tuition rising much faster than inflation.  So Baumol Cost disease does hit colleges, it’s just that the share attributed to faculty is not that high.  However, the preceding argument assumes stable teaching loads of professors.  In fact, loads have dropped dramatically over the years so there is decreased teaching productivity and that IS a major contributor to rising costs. Colleges attempt to offset this by the use of lower compensated adjunct faculty. The degree to which this mitigates the cost of decreased productivity varies by the degree to which each institution uses adjunct faculty.

Other than the two dozen schools with very profitable football teams, college sports operate deeply in the red and it is up to students to pay hundreds or thousands of dollars each year to subsidize them. Due to Title IX, there has been a growth in women's sports, none of which financially supports itself.  Additional external financial support is required.  This may come from the football team, the students, or other institutional money, but institutional money given to athletics is money taken away from other areas or fees which did not need to be charged in the first place.

Luxurious amenities are conspicuous and not necessary.  They are controversial and generate ill will from both insiders and outsiders, but the amount that they cost each student is relatively low. That cost is not as high as many of the other buildings, services, programs, and personnel added in recent years.

Like almost all other institutions in our society, colleges must pay for a service which did not exist two generations ago: information technology. This is expensive, on the order of at least $1000 per student per year,  but it is a necessary new cost which has been added. 

A large cadre of administrators is necessary for the successful functioning of a large, complex corporation such as a college or university.  But the number of college administrators has grown much faster than the number of instructors or the number of students. A small part is related to the increased number of tasks which now fall on the college, including reporting associated with the receipt of federal funds for financial aid and research. There are more personnel needed to oversee compliance with additional regulations such as those related to Title IX.  

Colleges now provide other services, such as mental health support, that they did not provide in the past, or at least not to the same degree.  There is an expectation that the college will be more helpful in career counseling and job placement. Colleges also address personal and societal issues and this has led to very large numbers of non teaching administrators and non teaching personnel being added to the payroll.  Spending is often done without a cost-benefit analysis or regard to assessing its effectiveness.  All of this places additional financial strain on the college.  The more services the college provides, the more dependent it is on revenue, the more likely it is to charge more,  and the more it will favor those who can give it more money. 

Research is one of the primary missions of a university.  The federal government, corporations, and private foundations have been pouring billions of dollars each year into research in areas of national, commercial, and societal interest.  Universities have been building an infrastructure to accommodate these contracts.  In addition, the amount of their own money that universities have contributed over the last more than sixty years to sponsored research has grown more than twice as fast as inflation during that period.  When one compounds that difference over decades, the result is a expense which rises much, much, much greater than wages or the overall cost of living.  Perhaps even more costly has been the time away from instruction that professors have been granted to perform unsponsored research.  

Despite all the resources spent on research, universities have shed little light on the effectiveness of their expenditures on student abilities and what factors are important in creating a successful learning environment.  There are almost no publicly available data to indicate the quality of the graduates produced.  

The endowments of some universities resemble the Gross Domestic Product of a small nation; however, only 4% to 5% of an endowment will be spent in any one year and those funds can only be put toward the purpose specified by the donors. They cannot be used to lower tuition across the board.  Wealthier schools can use their endowment to provide some financial aid to a select few, but the public colleges, which enroll the greatest number of needy students, do not have this resource and cannot offer those students a break on tuition.

The late senator Everett Dirksen, referring to the federal budget, is reported to have said, “a billion here and a billion there and pretty soon you're talking real money.”  Well, with respect to per student college fees and expenditures, $125 here, $30 there, and $1000 there multiplied by four years or five years or six years and you're talking real money- enough to dissuade people from going to college or to make them go deeper into debt and alter life plans in order to pay for it.

But holding the line on tuition and fees can be done if the will is there.  Purdue University did not raise tuition or fees in the 10 years of Mitch Daniels’ presidency there.  It was accomplished by increasing outside revenues and instituting cost-cutting measures.   The state of Indiana did not increase appropriations to the school. The intercollegiate athletic program is completely self-financed.  Purdue increased enrollment perhaps at the expense of other institutions, but the system should reward the cost-conscious over the inefficient.  

The interests of boards of trustees, administrators, and faculty members do not always align with those of the students they are meant to serve.  Trustees and administrators are charged with preserving an institution which has been in existence for a century or many centuries, while the student is simply passing through for four or five or six years.  Trustees and administrators aim to generate as much income as possible.  They do not have shareholders to distribute excess funds so they maximize their image by spending large sums of money on research, infrastructure, and athletics for marginal gains in status. They can also use some of that revenue to swell their endowment.  Faculty members are induced to seek time and funds to do research. These behaviors add significantly to the cost of higher education while adding little to teaching or the acquisition of skills by undergraduates.

Each group is acting rationally based on the incentives presented to it. Each is looking to get the best deal it can for itself. There is nothing wrong with that.  That is how Adam Smith envisioned capitalism.  Individuals have bills to pay.  Colleges and universities are big businesses competing to improve their status.  But then those groups shouldn’t claim to be looking out for others.  The high cost of higher education impedes social mobility.  American colleges and universities have it in their power to improve accessibility and affordability, but fail to do so.  They are fair game for public scrutiny and criticism.  

Thank you for listening to Charging U.  In this episode we reviewed the reasons for the ever-increasing cost of attending college.  How do we improve the situation?  In the next episode, we will discuss recommendations to change the incentives which influence the actions of colleges and universities.  I hope you will listen and send your feedback to larry@chargingupodcast.com  Until then, be well and be safe.