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    Why College Costs So Much, Part 1

    Mitt Romney recently told an aspiring college student that if he had trouble affording college, he should just shop around for the best price, which proves that Romney has no idea how college prices work:

    “Don’t just go to one that has the highest price. Go to one that has a little lower price where you can get a good education. And hopefully you’ll find that."

    Romney also made sure to point out that the student should get no government assistance of any kind to go to college, which proves that Romney has no idea how America's post-war prosperity worked.

    Meanwhile, the White House is holding another meeting about college affordability and productivity. The phrase "productivity" suggests that the White House already has a solution in mind, which is that colleges have to become more "productive" and "accountable." You can find this idea echoed by the economist Robert Frank. The idea is that college teaching is antiquated and therefore unproductive and inefficient, and needs to be transformed, through technmology and neoliberal management, to become more productive.

    This is a superficially convincing idea. Tuition keeps going up because faculty pay keeps going up. Sounds totally logical, until you look at the numbers. But the numbers don't bear this out at all.

    The price of college tuition has vastly outpaced inflation over the past few decades, growing almost three times as fast as the inflation rate. The average pay for full-time faculty, on the other hand, tends to do slightly better and occasionally slightly worse than inflation. So for faculty pay to be the main driver of these cost increases, the number of faculty on campuses would nearly have to triple. This is not what has happened, however. As I've mentioned before, colleges everywhere have been reducing the number of permanent faculty (the kind with salaries) and shifting the teaching burden to a small army of ill-paid "part-timers," who often string together gigs at three or four different schools each semester.  The inflation in college costs are not primarily being driven by the cost of paying teacher's salaries.

    The real story, as Catherine Rampell recently pointed out is that public education is no longer publicly funded.:

    But at least at public colleges and universities — which enroll three out of every four American college students — the main cause of tuition growth has been huge state funding cuts.

    While the Baby Boomers were in college, state governments picked up the majority of the educational tab for students in state schools. Now they pay a very small amount of those school's budget; even at some flagship schools, the state's percentage of the budget is now sometimes 10% or lower. This has been done by massively off-loading the expense onto students, even while putting less money into their education. This is why University of California students now pay three or four times the tuition that they paid in 2000-2001. This is why, when you factor in financial aid policies, Harvard is now cheaper than Cal State, even for families with six-figure incomes. If that's shocking, it should be. But that fact isn't a freaky exception. It's an illustration of how things work these days.

    This is actually the story of American education over the past thirty years. Public education has been privatized. It is the main story.  Everything else is a sideshow or a smoke screen.

    The price of college has skyrocketed at the state schools that 75% of students actually go to because their government funds have been taken away. Period. And that's more than 75% of the problem.

    What about the other 25% of colleges, the private schools whose tuition continues to skyrocket? It's a complicated question, but here's a beginning.

    The first thing that you will notice about college prices is that there is relatively little differentiation between them. Most private schools charge very similar tuitions, although they each vary a bit from year to year. If you checked prices for all the private universities in Boston, you would find that the tuition at Harvard and MIT was pretty much the same as the tuition at Boston College, Boston University, Tufts, Northeastern, and what have you. (Apologies to the 63 fine institutions of higher learning I've left out.)  Similarly, private schools that have only local reputations and generally weaker programs than Tufts, Northeastern, BU, etc., also charge the same sticker price as Tufts, BU, or Harvard. What to make of this?

    First of all, it suggests that the private schools exert a limited kind of market discipline on each other's prices. No one sets their tuition price too high above the competitors'. But similarly, very few private schools make any serious effort to undercut each other with sticker-price tuition. No school is going to ask 15% or 20% more in tuition than other private schools do, and no one decides to slash tuition by 15% to scoop up more students. (The reasons for this behavior require a second post.) Imagine that all luxury cars, Porsches and Jaguars and whatnot, sell for equivalent prices. Now imagine that mid-level cars, the Ford Tauruses for example, sell for basically the same price as the Jaguars, or even for $200 more.

    Second, it becomes very clear that tuition prices do not respond to demand for a particular school. Harvard has its 7 or 8% admissions rate, or whatever shocking percentage it's fallen to, but charges the same tuition as other area schools for which there is much less demand. In fact, many of the schools which are in less demand might ask more in tuition, in any given year, than the most in-demand schools do. Harvard might decide that with demand from prospective students so high, it could jack up its top tuition price by 50%, or 100%, and still have more than enough good applicants. But (for perfectly sensible economic reasons) it does not.

    In fact, the real cost of attending the wealthiest and most famous colleges, the ones usually in most demand, is actually lower than the price of going to less prestigious schools with smaller endowments and saner rates of admission. College tuition, especially at the powerhouse schools, is famously on a sliding scale based on the student's ability to pay and the depth of the school's pockets. Not only does Harvard keep its top sticker-price tuition the same as the sticker-price for its academic neighbors, but it discounts that tuition more deeply, and for more students, than its local competitors do. Harvard is the same price as BU or Tufts for the very richest students, and for most of its students it is actually far cheaper than BU or Tufts or similar schools. This is because private colleges' economic strategy revolves around producing successful alumni and raising funds from them, rather than around making money off tuition per se. Imagine that Jaguars and Ford Tauruses have the same sticker price, and the Jaguar dealers actually make customers better deals than Ford dealers so that in practice the Jaguars are cheaper than the Fords. That's the basic situation.

    (If you're keeping track, Mitt Romney's "shop around" advice is ridiculous because there is no serious price competition in the market, and also because the only significantly cheaper option, public education, is no longer cheap.)

    Now, the private colleges do restrain the growth of each other's tuition prices to a limited degree. But that restraint is not enough to keep tuition prices from rising much faster than inflation. The reason for this is that since World War II, the real check upon price growth at private universities has been the low price and high quality of public education.

    Harvard will never raise its tuition much higher than that of the schools it deems competitors (Yale, Princeton, Stanford, etc.), but is content to rise at the same speed that they do. Other private colleges are likewise happy to raise rates at the same pace as other private schools. The only real price discipline has come from the existence of a much cheaper high-quality option. When the Universities of California, Michigan, Indiana, etc., were educating students for something like a quarter of the tuition at private institutions, or less, there was a genuine downward pressure restraining the prices of private schools. You could get a much, much cheaper education at a public school than a private one. In many states, the subsidized public education was well-funded and genuinely very good: "Ivy-League education at one-tenth the price." The Universities of California and Michigan are world-famous for reasons. So for private schools the question of tuition rates wasn't just what the private competitors were charging, but what premium students and their parents would pay for the superior prestige and perceived quality of a private college education.

    Now that lower-priced alternative is not much lower-priced, and its price rises faster every year. Meanwhile, because shifting the economic burden onto students still doesn't make up for all the lost state revenue, even the premier state schools have to keep cutting back on the resources that they put into educating students. It used to be that the Jaguars and Fords were priced the same, but you could get a perfectly nice Volkswagen Jetta for a much lower price, and that Jetta would run reliably and well. It might even perform better, over time, than the Ford, and be less expensive to keep up than the Jag. The Jaguar had better ratings in car magazines and was more likely to impress people, of course, and Jag dealers could charge a premium for those things. But that premium was added to the low baseline market price that the Jettas set for good underlying quality.

    There are still plenty of Jettas in the educational market, but they now cost 75% or 80% of what a Jaguar costs. And they no longer always come with a warranty. That obviously does not lower the demand for Jaguars or Fords. Now that the Jaguar and Ford schools' cheap, reliable competitors are no longer especially cheap or reliable, it's natural that the Jaguar and Ford prices rise at a faster rate.

    In 1972, Ivy League schools competed with each other, but also with excellent and extremely cheap state universities. An Ivy League education was only marginally superior to the Cal or Michigan education, but Cal and Michigan charged a fraction of Ivy tuition. Today, Cal and Michigan are only marginally cheaper than the Ivies, and are forced to provide significantly diminished educational quality. The natural result is that the Ivy League prices go up, and the prices of less famous private colleges are effectively pegged to the Ivies' prices.

    There are other issues that require a second post, but public support for higher education didn't just make college affordable for the 75% of America's college students who went to public schools. It also indirectly subsidized students at private universities, by placing market curbs on what private schools could charge. This will not be brought up at high-level policy meetings. But it's the truth.


    This is an important post.

    I just hit Wiki to make a point:

    Born 1961

    Following high school, Obama moved to Los Angeles in 1979 to attend Occidental College.

    Later in 1981, he transferred to Columbia University in New York City, where he majored in political science with a specialty in international relations[26] and graduated with a Bachelor of Arts in 1983.

    He worked for a year at the Business International Corporation,[27] then at the New York Public Interest Research Group.

    In late 1988, Obama entered Harvard Law School

    So a Black Man does not even get into law school until he is 26 or 27 years of age.

    Most of us do not ever get to Harvard or Yale or whatever.

    My point is that if I were advising a young person concerning college; if you are short on money go ahead and get into a community college (as our president has advised) but be prepared.

    Study hard and get A's.

    You will find that you are watching lectures on computer and texts that are much too expensive for what they deliver but there are other links in the college computer system.

    I audited such a class a few years ago up here in nowhere.

    There is this computer room but if you have your own laptop there are ways to get into the system.

    Once that is accomplished, there are great universities all over this country who would love to have you with partial scholarships at least.

    And a lot of these 'junior colleges' now go to full term; you can receive a four year degree like my son did in accounting.

    I cannot refrain from offering this advice; the web has so many sources for us the lost tribe in their jammies who were given the opportunity to attend these great universities for very little. Although you must recall that we were paid a buck an hour to work 30 hours a week in order to survive the term.

    I just find Barack's experience enlightening. He combined a shrewd work ethic with a scholastic ethic that essentially put him behind his peers some five years.

    You can still pick a strategic road to success.

    Now, a life path into physics or chemistry or whatever might seem to be much more difficult.

    But there are options.

    Getting back to the system; it sucks.

    Where is all this educational money going?

    Why should some schmuck like me pay a hundred grand to get a Humanities Degree?

    This is nuts.

    And my generation might have had to carry a $4500 debt following graduation from a noted law school. But now that figure is looking more like $150,000. This is ridiculous and it has little to do with government.

    Somehow universities figured out how to use billions upon billions of dollars with no pro bono even acknowledged.

    Tenured professors get money for nothing and their sex for free, I guess!

    Well, I only sleep with my spouse, and I think if I offered to pay her she'd be offended.

    I'm not sure I follow how you're using the Obama example to recommend community college, because Obama never went to one.

    He starts at a private college, Occidental, and then transfers to another private university, Columbia. There's a significant difference in prestige between those schools (because Occidental is a good school, but Columbia is a school with an international reputation). But the price difference is small. In 2010-11, according to U.S. News, tuition plus room and board was around $54,000 at Occidental and about $56,000 at Columbia. (And Columbia has deeper pockets for financial aid.)

    If I were advising a student today, I'd probably say, "Get into Yale if you can. It's a lot cheaper."

    All right, as usual my message is less than cogent.

    Occidental should not be charging these kind of fees.

    The college system is broken.

    Besides, you should eat and sleep in your mama's basement or a nothing apartment and go to a local college near you.

    There is something wrong with the system!

    College should not cost this much!

    And a government that loans those without money hundreds of thousands of dollars is stupid!

    and your Tommy Hilfiger t-shirt only costs $3 to manufacture too. Gee, Dick, it's not about the cost of production anymore--it's what the market can bear. College is big business these days and there's lots of money to be made. Just like with health care, the main thing is to break the goverment monopoly so that private companies can make the profit. What's good for business is good for America!


    You make a good point (as usual) in your satiric splendor that I have actually thought about.

    There are parallels between Health Care inflation and educational inflation.

    No doubt about it and both these phenomena are draining our state and national coffers.

    This is bugging me more than ever now.

    So a teacher of the 11th grade who might receive $45,000 a year after going through a 4 or 5 year program is supposed to pay back 100 thousand bucks and then a Wisc fascist is elected as governor is adamant about cutting benefits and refusing to increase salaries via a COLA!

    What a bunch a crap!

    The government is wrong, the educational system is wrong and the finances are wrong.;

    the end

    I have spent years planning for my oldest grandson's education. Florida has a prepaid program but it now reflects the high cost of tuition and has become expensive also. The local high schools offer dual enrollment with the local community college. The county public school system pays for it. Kids that are willing to work at it can graduate with a semester or 2 of college credits at the community college. For urban kids this helps a great deal because the can get back and forth on public transportation. It also gets them in the system. After that they have to navigate through grants and scholarships. This is a very good blog. The reality has always been, it takes the whole village to educate it's children. If we want to leave this country in good hands in the future then we have a moral obligation to give back the help we got. I am looking forward to your next post on this subject.

    So if Harvard is a Jaguar, I'm assuming that Yale is like a Lexus. Now, I just need to know what Texas A&M is so that I can pimp ol' Rick Perry real good! Ha!

    A Harvard education is like a Jaguar in that it's no more useful than a mid-range sedan, but people are impressed.

    OK but the important thing is what is Texas A&M?  It's gotta be like an orange 83 Chevy half ton pickup or somethin...

    Thanks for this series, doc. Your treatment of the dynamic between state and private tuitions is particularly interesting and original.

    One quibble on the data. With regard to public schools, you jump from "it's not the faculty" to "it's the budget cuts," but there are other cost factors besides faculty pay. According to the Delta Cost Project, spending per student at state research universities rose almost 20 percent between 1998 and 2008, easily outpacing inflation. As you observe, the biggest growth did not come from instruction costs, which increased 10 percent. It came from research costs, which increased 23 percent.

    That said, tuition at state research universities rose much faster than costs per student--about 50 percent over the same period--so your point that loss of revenue accounts for the majority of tuition increases at state universities still holds.

    One other major factor that you don't address is population growth. A big reason that competition for top colleges has become so intense is the baby boomlet that came of age over the past ten years. The increased supply of students would have allowed private schools to attract plenty of talent even if the price competition from state schools had not diminished.

    Finally, I don't know how much data is out there, but it would be interesting to correlate the data with more granularity over a longer period. Tuition has been rising rapidly since the 80s. When the did the state cuts begin? Do tuition increases (public and private) correlate closely with periods of large budget cuts?

    Anyway, interesting stuff. I look forward to the next installment.

    Thanks, G.

    Your quibble is gladly acknowledged. I'm struggling for a balance between the data and manageable length; sometimes I err in one direction or the other, sometimes I manage to err in both at once.

    I do find that most arguments about why college costs so damn much tend to zero in one particular factor that the writer particularly dislikes (too many rock-climbing walls and espresso bars for students! too many administrators! too many faculty doing research on stuff that sounds nerdy!) and tries to make that the whole cause. But obviously, none of those factors triple a budget. The state budget cuts are the largest factor, just in terms of arithmetic, so that's where I went with installment #1.

    And I don't have all the data I want, so that I have to give an impressionistic rather than scientific answer to your last question. The state budgets do begin to be cut in the 1980s, with the beginning of the no-big-government Reagan era, and that is one of the factors driving tuition increases over the past 30 years.

    The 1980s is also when we see the rise of national college rankings, like the US News & World Report Rankings, to prominence, and the explosion in hyper-competitive admissions, with kids applying to many more schools and admissions rates dropping like cannonballs off the Tower of Pisa. Those are important factors driving costs (as distinct from market price), and deserve at least one post of their own. But I would point out the the hyper-competitive admissions race was well underway back in the 1980s, in the midst of a baby bust generation applying to schools. So the increased number of applicants over the last ten years isn't the sole or necessarily the main driver of that problem. Selective colleges could get pickier and pickier about the students they took even when the overall number of students was at a low ebb.

    Fair point about the baby bust. Moreover, I suppose that private colleges aren't trying recruit some minimum threshold of talent; they're trying to recruit the best candidates they can get. So now matter how large or small the applicant pool, private schools will still feed the need to compete with state schools.

    Yes. The point that they are not competing for sufficient students, but for the best possible students (meaning the students that they expect to provide the most long-term value to the school), is near the heart of the problem.

    This is another reason that Romney's "shop around" advice is unsound. To a surprising degree it is the colleges and not the students who are doing the shopping.

    hey Genghis  & Doc

    Having worked in Admission for years as a Data manager/analyst for both private Universities and Public, some with endowments some without.

    The problem I found at the smaller Private colleges I worked for was their over-reliance on middle and upper middle class families who had access to loans and would select those students above the student whose parent was financially unstable. 

    I realize the larger schools you are talking about have huge endowments and can help students who are economically disadvantaged. However, most people don't attend large schools but they attend small private colleges or the state system. I can't tell you how many times I've seen economically disadvantaged students in particular rejected out of hand. Can't qualify for a loan, you can't come here, that was the mantra.

    State Colleges and Universities have a different mission, they are required to educate everyone who qualifies. But they lack large endowments and are now playing catch up.

    In the 60's and 70's attending college in California was cheap, as little as 60.00 per semester. Schools then were fully funded through big property taxes and when Prop 13 came to fruition suddenly in colleges in CA were on the line, tuition began to rise as a result of that particular Proposition. And then came Reagan as President and the mantra of cutting taxes all the time for everything. Then budgets began to shrink at a quick rate, as no state constitution in the Union has a requirement to fund completely education above k-12.

    And here in Washington people went crazy with Initiatives like Prop 13, and slowly, no quickly actually tuition began to rise exponentially like I documented in my blog.

    I think in large part the rising cost is directly related to the slashing of taxes across the boar, prop 13 is the perfect example and much has been written about the effect it had on public education in California.

    Financial Aid is what keeps smaller private colleges running, and that pool of money has also been shrinking since the 1980's, with some of the biggest cuts made to Pell and Perkins. Both of those programs are absolutely necessary to fund an economically disadvantaged student through a college education. Those used to cover tuition and books now they simply pay for a small portion of tuition and books.

    In many admission offices they look specifically for students who are going to be able to come up with the funding necessary to complete the program, and although SAT scores are taken into account, so is financial status. It is a vicious circle, of course many of those students test higher as they have had many advantages. Students now rely heavily on parents, parental college loans, Stafford and now private loans and come out with 60,000 - 120,000 in debt for a damn four year program. Sheesh, how do you unbury yourself from that kind of debt?  Don't think we don't see everything, because with the FAFSA we see it all.

    Money talks, and it speaks loudly during the admission process.

    These are excellent points, and well taken. Yes, only the richest schools can do without the kids whose parents can pay full tuition one way or another. And actually, the Harvards and Yales only become rich enough to not worry about ability to pay fairly recently ... sometime after 1960.

    And absolutely, the way college expenses are structured now tends to reinforce existing class structures and restrict upward mobility, whereas from 1945 to circa 1980 higher education promoted upward mobility.

    And I will add this, there has been much research into the relationship between the rising cost of higher education and the Randian property tax revolt 1976 -  present.

    Two excellent papers to peruse are:

    State-Financed Property Tax Relief
    Fred C. White
    American Journal of Agricultural Economics , Vol. 61, No. 3 (Aug., 1979), pp. 409-419

    Published by: Oxford University PressExternal Link on behalf of the Agricultural & Applied Economics Association

    In the first White attempts to create and analytical model to evaluate the potential impacts of alternative approaches to property tax relief. I think what White is saying in his paper is that from what state expenditures will property tax relief originate. It was an important question in 1979, and we are seeing some of the outcome which is the cost of post secondary education where property taxes shared by one and all were the solid tax base for funding state programs including education at all levels.
    The federal government doesn't really fund higher ed, they provide financial aid opportunities for students by funding Pell Grants, Perkins loans, and subsidizing Stafford Loans, it is the role of the state to provide and fund education.
    Prop. 13, Prop. 13, Prop. 13, Prop. 13 aargh
    State Higher Education Spending and the Tax Revolt
    Robert B. Archibald and David H. Feldman
    The Journal of Higher Education , Vol. 77, No. 4 (Jul. - Aug., 2006), pp. 618-644
    Archibald and Feldman in this piece simply reiterate that it is the individual state(s) responsibility to fun education how they see fit. And with tight budgets this is what happens.  They directly state that even though the public supports funding higher ed, from the late 1970's until now, tax reform has sacrificed higher ed. They used data spanning from 1961 - 2001. It is a solid study.
    People have made the connection. It is a tough sell to get the general public to listen rationally to efforts to raise property taxes, in that sense Republicans won the ideological war.  We are privatizing everything, and that was their goal.
    (I do not believe either paper is available on-line)

    Good Post. I don't have a lot of time, but I am looking forward to your series. 

    I am curious what you think about the advent of the IBR? It seems to me to open the door to eventual full federal financing via student loans.  I expect student loans continue to grow even more quickly then tuition, and much of it will never be paid back (which is fine with me, but I despise the financial middlemen who are taking their 6.8%).


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