Ugly Truths about Runaway College Tuition
By Richard Vedder
Around the nation, parents of college students are grumbling as they write ever-bigger tuition checks. As a college professor, I have been amazed for years by the unbusinesslike nature of universities, their inefficiencies, and their utter lack of accountability for the resources entrusted to them.
Here are ten major sources of today's runaway college tuition costs:
1) Over the past two decades, while the price of clothing has risen 20 percent, food 81 percent, and medical care a whopping 191 percent--college tuition has gone up by 289 percent, according to the Bureau of Labor Statistics. College tuition costs have risen more than any major component of the Consumer Price Index, with the single exception of tobacco, (which has gone up as a consequence of deliberate public policy). It took two months' income for the typical family to pay annual tuition when I entered Northwestern University in 1958; today's family has to devote half its annual earnings.
Colleges and universities are increasingly like hospitals and doctors--they depend largely, directly or indirectly, on third parties for payment of their bills. When the government gives a tuition tax credit, it indirectly pays a portion of student tuition bills. When the governmnet subsidizes low-interest student loans, it increases the demand for higher education at existing tuition levels.
As any Economics 101 student should know, an increase in demand leads to higher prices, as well as, in this case, more kids going to college. Both higher enrollments and higher tuition fees increase the revenues of universities. The third-party payment of bills make the customers less sensitive to price--allowing the universities to raise prices dramatically without adverse enrollment effects.
Indeed, it is possible that we have exceeded the optimal amount of college participation as a society. The unlimited increase in the proportion of kids who attend college means putting students in an academic setting with limited preparation, deficient cognitive endowments, and, often, lack of dedication and maturity. The fact that 40 percent of college students do not graduate within six years may suggest that we have actually over-invested in higher education in the first place.
Ultimately, the major problem is a decline in productivity, particularly relative to the economy as a whole. While widget makers and typists and steel makers deliver more of their goods or services for each hour of work over time, that is not true in higher education. It takes more workers to educate a single student than it did a generation ago.
2) Government support for higher education is justified mainly on the basis of alleged large positive spillover effects, or what economists call "positive externalities"--the assumption that universities benefit everyone, not just those attending, by giving us better public policies from having a well-informed electorate of college graduates. Public support is also justified as part of the American egalitarian tradition of promoting economic opportunity for all.
Yet the empirical evidence does not support these arguments. Michigan, with extremely high state support of higher education, has grown more slowly than Illinois with far less support. Low-support South Dakota has outdistanced North Dakota, a state with high university funding. New Hampshire, with very modest taxpayer support of higher education, has outperformed Vermont, which funds universities far more generously. The alleged positive spillover effects are simply not found in the evidence. Indeed, as Milton Friedman has said, there may be a better case to tax rather than subsidize universities.
3) Modern universities de-emphasize instruction, particularly of undergraduates, pouring more resources into re-search, fast-growing administrative bureaucracies, higher pay for employees, subsidies for sports, and other non-instructional activities. In the 1976-77 school year, American universities employed three administrative and re-search support personnel for every 100 students; today they employ nearly six. In 1929, for every dollar American universities spent on instruction, they spent 19 cents on administration; by the mid 1990s, they spent 48 cents.
4) There is no "bottom line" in higher education. Did Stanford have a good or bad year in 2003? Who knows? Universities beg for public and private funds, supposedly to enhance instruction, but tend to use those funds largely for other purposes, including making life more remunerative and pleasant for their employees. Government data suggest that only 21 cents of each new dollar state universities have obtained over the past 20 years actually went to instructional purposes.
5) Salaries for university employees have risen significantly, despite overall falling productivity. It appears that at least some of the increase in public money for higher education has been a redistribution of income from the general taxpaying public to university staff.
6) Since the lack of a bottom line in most higher education is quite unlike the for-profit market environment in which American business operates, universities are often indifferent, even hostile, to efficiency-enhancing moves such as substituting machines for labor, reducing staff, or ending low-enrollment programs. Entrenched faculty and administrators have considerable power, and they often veto cost-saving reforms. In most good universities, many of the truly important decisions are made by committees, and university presidents have far less power to transform organizations than do most corporate CEOs.
The case for privatizing state universities and expanding direct student funding seems strong. Colorado, under the leadership of Governor Bill Owens, took a step in that direction, approving a state-wide voucher system, to begin next year, that will allow some low-income students to choose from a few private schools as well as state institutions.
7) Alternatives to traditional higher education are growing in importance as the mainline non-profit universities become more expensive. Aside from attending low-cost community colleges, some are foregoing college altogether to become privately trained, such as becoming an Oracle- or Microsoft-certified computer technician.
Even more important is the growth of for-profit and on-line education. DeVry University is thriving [see TAE J/A 2003, "The Most Important University You've Never Heard Of"]. The University of Phoenix has over 200,000 students, is growing exponentially, and has a market value of around $15 billion, reflecting a belief widely held in financial markets that for-profit universities have an ex-tremely robust future. Wall Street predicts continued growth in higher-education market share by these new for-profit institutions.
Change in traditional higher education will come, even if the government does nothing, as the growth of for-profit institutions indicate. The University of Phoenix's total per student operating cost is about one third of those of a traditional state university. Schools like Phoenix have vastly fewer non-teaching employees, no elaborate student services, no athletic teams, no libraries, research activities, or cultural programs. They do one thing, teach, and if consumer satisfaction is any guide, do it reasonably well. These schools have concentrated on non-traditional adult learners, but they may start to encroach on the markets dominated by state universities and even some private institutions.
8) Facing stagnant state and federal subsidies, slowly growing private donations, and a loss of market share, some traditional universities may reluctantly attempt to hold tuition down through some internal cost-saving reforms, such as slashing administrative staffs, increasing teaching loads, abolishing tenure, cutting athletics subsidies, ending costly low-enrollment graduate programs, and privatizing or contracting out non-instructional activities like food and lodging. Some changes may be forced onto schools by legislative mandates, though it is not likely they will be very effective. (A few years ago, the Ohio state legislature, frustrated by what it perceived to be waste on the part of universities, mandated a 10 percent higher teaching load for faculty. What does that mean? Should 50-minute classes be 55 minutes? Should we give more assignments requiring faculty grading? When in doubt about a mandate from above: Ignore it. Which is what my university largely did.)
9) Instead of subsidies to universities, states can provide vouchers or scholarships to the students themselves. This would lead to increased consumer power and competition, and would likely reduce some of the egregious problems of the current system, including institutional neglect of the primary clients--undergraduate students.
10) Vouchers could be made both progressive and performance-based. Progressive means that the vouchers would vary inversely with family income, giving more to the poor than to the rich. This is an idea first advocated for primary and secondary education by former education secretary Robert Reich, but it seems appropriate for higher education as well. Why should lower-income taxpayers subsidize the children of affluent families?
Performance-based means that vouchers are tied directly to student academic performance--those who do well would get more than those who do poorly. Under the current system, government subsidies to universities make no distinctions about student academic performance--assistance is typically the same whether all students receive straight "A"s, or are on the verge of flunking out.
Cutting assistance off after four years would help deal with the problem of the mediocre student who spends more time partying than studying, all at taxpayer expense. Those failing to graduate could even be required to repay vouchers.
Under current arrangements, both universities and the involved student typically benefit from lingering around campuses for a fifth or even sixth year, with a bit of instruction interspersed between the parties to maintain appearances.
Universities are marvelous places, and our society is better for their presence. But the continued increase in the burden on Americans from their inefficient operation is not sustainable, either economically or politically.
Richard Vedder, economics professor at Ohio State University, is author of Going Broke by Degree.
