College costs/prices

In his famous book on capitalism, Max Weber warned that our modern world would increasingly be driven by endless attempts at measurement, accountability, efficiency, and control. These efforts would trap us, he cautioned, in an "iron cage" of rationality that precluded other ways of assessing value and setting policy – like intuition, tradition, imagination, values and personal meaning.

In this spirit of measurement and accountability, the U.S. Department of Education is bringing unprecedented scrutiny to the increasing cost of higher education, which has exceeded the CPI (Consumer Price Index) annually for most of the last 20 years. The Bush Administration’s "Spellings Commission" report argues that higher education suffers from "inadequate attention to cost measurement and cost management" and that "new performance benchmarks should be designed to measure and improve productivity and efficiency." The report's recommendations were carried out in the 2008 Higher Education Act, when Congress required the Education Department to develop metrics to rank and assess universities and colleges based on costs and financial aid, and to provide a variety of other consumer information.

But how much is too much to pay for a college education? Can American higher education be more accountable, transparent, and forthcoming with telling measures of value without withering in Weber’s iron cage of bureaucratic oversight? Can we avoid the trap of soulless accountability without retreating into the cloistered mysteries of the educational process and professional expertise?

At the Education Department’s College Affordability and Transparency Center, created by Congressional mandate, "consumers" can now compare side-by-side the most expensive and least expensive institutions. When looking at private four-year nonprofit institutions, the likely suspects show up at the top of the list – highly selective liberal arts colleges – Bates, Middlebury, Sarah Lawrence, Vassar, Colgate, Wesleyan. A more accurate measure of what people actually pay for college is net price, which takes into account that most public and private colleges "discount" their tuition price through grants and scholarships, both merit and need-based. If you look at net prices (average tuition minus average scholarship), a very different list emerges. Surprisingly, 8 of the top 10 highest net-price schools are art schools (fine art, design, theater, dance) or music conservatories. In fact, almost every major private art school in America is listed in the top 5 percent of most expensive colleges in the United States.

Using a narrow interpretation of net price, the Education Department site might lead consumers to reasonably conclude that art schools are inefficient, poorly managed, unable to control costs and a bad deal for students and parents, especially given the widespread belief that most artists are, starving, depressed, and dissatisfied with their career choice. Are such conclusions warranted?

First, why are art schools so expensive? It is not because they pay their faculty too much; art professors are the lowest-paid teachers in the academy. It is not because of expensive athletic facilities or huge administrative staffs. Instead, the high costs are directly associated with the quality of their teaching mission. Music performance, dance, painting, design and most other arts are still typically taught through intensive, often one-to-one mentoring, which makes for very low student-teacher ratios and high costs.

These programs are often facility- and equipment-intensive with students learning, literally, ancient techniques — Baroque performance practice or intaglio print making — as well as becoming familiar with emerging technologies and media at the center of the growing creative economy, from digital recording, to animation, to film, to 3-D prototyping machines. Finally, many art schools are purposefully located in urban centers where students have access to a dense network of artists and arts organizations, internships, job opportunities and performance and presentation venues, all of which drive operating costs. So, price and consumer cost are directly associated with the quality of the educational experience. Perhaps art schools are priced just right for the education they deliver.

Obviously, net price does not provide everything one needs to know or consider in terms of institutional management. Moreover, it says nothing about educational value. Return on investment implicates many factors that must be taken into account when estimating the cost and benefits of higher education.

And art schools, in spite of their high costs, may yet prove a good value, according to recent findings from the Strategic National Arts Alumni Project (SNAAP). SNAAP is an ongoing effort to collect information from art school graduates. Data from over 13,000 graduates across more than 150 different institutions reveals that arts alumni are largely satisfied with their education and believe their training prepared them well for future work. Ninety percent of those surveyed in 2010 said their overall experience in art school was good or excellent and 76 percent would attend the same institution again if given the choice.

Given the intensive mentoring and training and the low student-teacher ratios, we were not surprised to find that 89 percent of students were satisfied with their classroom instruction. Across this large variety of participating schools, 57 percent of graduates reported that they have worked as "professional artists." That number rose to 74 percent when cross-referenced with those who expressed an ambition to work as a professional artist. A very large percentage, more than half, are finding work teaching the arts. Moreover, attending art school in an urban environment, although costly, turns out to be a good strategic decision for many. More than a quarter of graduates end up staying and working as artists in the same city where they went to school; 31 percent report developing important networks with professional artists off campus while they were in school; and many report participating in an off-campus internship. Not surprisingly, art school graduates are not among the highest earners. Petroleum engineers do much better. But the unemployment rate for art school graduates is about the same as for other holders of bachelor's degrees, they’re not all waiting tables, and, importantly, they report relatively high career satisfaction.

These data suggest that most art school graduates report a great deal of value from their educational experience. On the flip side, SNAAP data also reveal that debt is a serious deterrent for arts graduates who may end up pursuing non-arts careers because of their debt load. Art schools may find it difficult to cut costs dramatically, but they should do whatever possible to devote more resources to reduce student debt and increase need-based financial aid in order to ameliorate the debilitating effects of student debt on career opportunities.

To better understand the value proposition of a college education and to provide a more nuanced understanding of the relationship between cost, quality, mission, and outcomes, we need more fine-grained data sources like SNAAP. Simple-minded rankings and metrics might make good sound bites, but they will not inform policies and practices that will enhance educational value.

To be sure, arts schools cannot be and should not be excused from being held accountable to their constituents. Rather, they need to present the data that show their approach to education is distinctive; an approach that emphasizes critical feedback, mentoring and relationship building, creativity and risk-taking, and resilience in the face of failure. These outcomes cannot be captured in net price indexes.

While tools like SNAAP are not perfect, they can help institutions, policy makers and higher education consumers to dig much deeper into questions of value. Thoughtful, fine-grained data gathering can provide critical information — both quantitative and qualitative — on a range of outcomes, from how well an institution prepares students for satisfying jobs to how well it develops essential skills and nurtures important lifelong networks. Accountability measures should in the end advance the highest purpose of giving wing to student aspirations, not drive higher education into a bureaucratic iron cage.

According to Peter Thiel, the founder of PayPal and sponsor of fellowships that pay entrepreneurial minded students to drop out of college, higher education is the next bubble that will burst in the U.S. economy. The Economist's Schumpeter blog summarizes his argument this way: "tuition costs are too high, debts loads are too onerous, and there is mounting evidence that the rewards are over-rated. Add to this the fact that politicians are doing everything they can to expand the supply of higher education … much as they did everything that they could to expand the supply of 'affordable' housing, and it is hard to see how we can escape disaster."

Bubble talk of this sort -- and Thiel is hardly alone in his theory -- is a great example of abusing the evidence to support a hyperventilated hypothesis. This may sell magazines, but it does not make for good public policy.

Any meaningful discussion of an economic bubble has to start with a definition. Here’s a good one from Charles Kindleberger in the New Palgrave Dictionary of Economics:

A bubble may be defined loosely as a sharp rise in price of an asset or a range of assets in a continuous process, with the initial rise generating expectations of further rises and attracting new buyers – generally speculators interested in profits from trading in the asset rather than its use or earnings capacity. The rise is usually followed by a reversal of expectations and a sharp decline in price often resulting in financial crisis. (Volume 1 page 281)

College training, of course, is not an asset that can be sold off to gullible investors like a rare tulip bulb or a Florida townhouse. The monetary value of education accrues over a lifetime of potentially higher earnings. But let’s dig deeper and look past this minor overselling of the bubble analogy.

In any bubble story, rising demand supposedly fuels an upward price spiral. Yet rising demand for college-level training does not lead to higher cost per student. Most colleges can add 5 percent to their enrollment without adding any more than 5 percent to their costs. For many smaller colleges, with excess capacity in facilities or faculty members, if they doubled in size their cost per student actually would fall. These small colleges choose to remain small because they are convinced that increasing their size would depersonalize the campus in ways that decrease the quality of the whole college experience.

The idea that rising demand pushes up price is rooted in a belief that the number of seats available at colleges and universities is relatively static. But the supply of places in higher education is rather elastic. In 1970, 8 million students were enrolled in two thousand American colleges and universities. Today, over 18 million are enrolled in roughly 4,300 institutions. There has been a veritable explosion of places at for-profit and nonprofit institutions alike. To take one example from the traditional non-profit sector, the University of Central Florida has mushroomed from a startup in 1968 to the second largest university in the nation.

The number of places at Stanford and Princeton Universities may be inelastic, but if the bubble story is about the elite institutions that serve a tiny fraction of the college-going population then it is of little policy relevance.

If rising demand isn’t the driver of college tuition, what is? There are three reasons why the cost of providing a college education has gone up so much since 1980, and all of them reflect broad economic forces buffeting the entire U.S. economy. First, the costs of employing a highly educated workforce have risen substantially over the past 30 years. This has affected all industries that use a lot of highly educated labor.

Next, the productivity of that highly educated labor has not increased in most personal service industries, and this includes higher education. Universities have not figured out how to double class sizes without negatively affecting quality, and new approaches like distance learning have not yet provided any magic bullet. Lastly, the costs of keeping a college education up to date have increased as new technology filters into the workplace students enter once they leave the ivied halls.

Tuition has risen for two additional reasons besides changes in cost. First, for public universities, states have reprioritized spending away from higher education. Rather than raising taxes, over time state legislatures have allowed tuition increases that shift more of the burden of the college bill onto families.

And lastly, public and private universities alike have pushed up the list price paid by the most affluent families so that they can discount the bill for other students. Tuition discounting can help the least affluent attend pricy institutions, but it is also a tool colleges and universities use to craft the freshman class in other ways. A lot of this discounting is a merit aid arms race that does not create access to college for students who otherwise could not afford to attend.

The bubble analogy simply does not work, and higher education is not the next housing bust. Still, what can we make of Thiel’s three contentions? Does his indictment of higher education stick?

First, tuition costs are too high – compared to what? List-price tuition has indeed risen rapidly over the last 30 years. But the data in the College Board’s Trends in College Pricing show that the average net tuition and fees, accounting for grants and tuition tax credits, actually has declined recently at both public and private institutions. The net tuition picture is not as clear as many people think it is.

Second, debt loads are too onerous – compared to what? Again a College Board study is instructive. In Education Pays 2010 the College Board demonstrates that a typical student with a B.A. will have enough cumulative earnings by age 33 to catch up with a typical high school graduate even if the college graduate had to borrow and pay back every dollar spent on tuition and fees. After age 33 the college graduate out earns the high school graduate by a significant margin.

The third claim is that the rewards of earning a college degree are overrated. Again, compared to what? The median real earnings of individuals aged 25-40 with a B.A. or higher have indeed shown only scant increases in recent years. But the median real earnings of those with less than a B.A. have fallen significantly over the same time period. As a result, the college wage premium has continued to rise.

Bubble talk also includes the claim that a college education no longer is a guarantee of success. But a college education never has been a guarantee of financial success. Some high school graduates will out earn even the high flyers of the college-educated population, while some college grads will fail even to match the median earnings of the group that earned only a high school diploma.

Using census data from the March Current Population Survey, we can calculate the percentage of college graduates who earned less than the median income of high school graduates. In 1980, 28 percent of college graduates between the ages of 25 and 40 earned less than the median income of people in the same age range whose education stopped with a high school degree. By 2010, that number had fallen to less than 18 percent. Even today a college degree is no guarantee of financial success, but over the last 30 years, earning that degree has become a progressively better bet.

Peter Thiel doesn't just talk about a higher education bubble. He has put up some of his own money to demonstrate that college isn't the right investment. He has selected 24 people from a pool of 400 applicants to receive $100,000 over two years if they agree to opt out of college to focus on their entrepreneurial ambitions instead. There is little doubt that most of these individuals will succeed. After all, Thiel’s group is a more selective bunch than Harvard’s entering freshman class.

What we will learn from their success is that talented and motivated people are likely to succeed. We won’t learn a thing about the value of college training to the average person. We won’t even learn whether this talented 24 would have accomplished more, or lived more satisfying lives, had they remained in college. On average most of us are average, and the data show that college is a very good investment for the average person.

Since 1981, the list price tuition and fees charged by American four-year colleges and universities (public and private together) has risen at an annual rate of 7.1 percent. Room and board has gone up 5.3 percent per year. Overall inflation has averaged only 3.2 percent. These differences have fueled an increasingly acrimonious public debate over the causes and consequences of the rising cost of college attendance.

At some risk of oversimplification, most of those who write on higher education start from the proposition that the causes of rising college cost are to be found by examining higher education with a fine-toothed comb. What they find isn’t pretty. They see dysfunctional universities in an increasingly dysfunctional higher education system. From there, the descent into apocalyptic rhetoric is easy. As a recent editorial in the Economist says, “America’s universities lost their way badly in the era of easy money. If they do not find it again, they may go the way of GM.”

The strands of thought that indict higher education are quite varied, but many rest upon the notion that public money has indeed been too easy to obtain. In simple supply and demand terms, federal financial aid increases demand, and this pushes up price. William Bennett, while serving as President Reagan’s education secretary, famously titled an op-ed “Our Greedy Colleges” and linked federal largesse with tuition hikes. Easy money also supposedly fuels prestige competitions among colleges and universities as they compete for rungs on the ratings ladder.

Another strand of the dysfunction narrative focuses on the gold plating of the college experience. In this view, colleges spend far too much money on lifestyle amenities. The criticisms fall on things as diverse as career advising centers, psychological counseling, and plush exercise rooms. Room and board is a lightning rod since it is itemized on the bill. The gold plating argument often contains a strong aesthetic revulsion over "country club" colleges coupled with a wistful nostalgia about a supposedly simpler and more Spartan past.

Lax workplace culture at colleges and universities offers yet another fat target. Tenure is a common punching bag. In different tellings of the story, the faculty either does not work hard enough, or alternatively works too hard on the wrong things – research at the expense of teaching. Faculty governance often is fingered as a problem since it supposedly allows the professoriate to dictate the terms of its own employment. These workplace culture arguments often are augmented by politicized attacks on the type of research done by many professors in the humanities and social sciences.

Lastly, statistics indicating that administrators and support staff have grown as a percentage of the higher education workforce supposedly offer even more evidence of rising inefficiency. Over the past 20 years, as enrollment has grown by 40 percent, the number of support-staff members on campuses has doubled. This is often taken as prima facie evidence of bloat and inefficiency.

On the other side are those who pine for a lost past of generous government support, especially from the states, that enabled public universities to offer high-quality programs at very low tuition. In this view, public policy over the past 30 years has forced up tuition and threatened both the mission and the quality of our great public institutions. Many a newspaper editorial has chastised state legislatures for their shortsightedness, as though good arguments about the social importance of higher education somehow will help today’s political leaders to learn from past mistakes.

All of these arguments place the higher education system at the center of the universe worth examining. Holding up a magnifying glass to the industry can indeed yield a wealth of detailed information, but without context that information is partial, and it can be quite misleading. The college-centric view of the world all too often lends itself to an easy politicization of complex issues. Before we jump on the apocalyptic bandwagon, there is mileage in placing the higher education industry firmly within the industrial structure of the American economy and within the economic history of the past century.

In our book, titled Why Does College Cost So Much?, we attempt to supply this context. Instead of using a magnifying glass, we take an aerial view of the industry. In the view from above, the most important drivers of college cost are the technological forces that have reshaped the entire American economy.

Our technology story is a tripod with three strong independent legs. First, higher education is a service industry. From 1947 to 2009 the average annual price increase for services was 4.0 percent, while for goods the average annual price increase was only 2.4 percent. Economists have understood why this happens for a long time. Technological progress has not reduced the number of labor hours required to provide most services. By contrast, technical innovation has significantly reduced the number of labor hours and kilowatts of power needed to produce most manufactured goods and agricultural products. As a result, the cost of a service such as a year of college must rise compared to the price of a basic car or a basket of groceries.

This is the well-known “cost disease” phenomenon. We think most contemporary critics of higher education fail to credit this argument’s real power in explaining the time path of higher education costs. The artisan nature of higher education certainly explains the past. And while the arrival of distance education changes the learning experience, quality programs rely on providing strong interaction between professors and students. As long as this is what people value, college costs will tend to rise faster than the overall inflation rate.

Higher education also shares with many other personal services a reliance on a highly educated workforce. In the late 1970s, the wages of highly educated workers began a sustained rise. All personal services that rely heavily on this sort of labor have experienced a surge in costs. This is actually hopeful, since there is no reason to believe that this trend must necessarily continue. In fact, if the United States could do a better job of funneling college-capable students through the system, the increased supply of college-educated workers could ameliorate this part of the problem by reducing the rate of increase in salaries.

Lastly, technological change does affect higher education directly. But instead of reducing the number of labor hours it takes to produce a class, new technologies alter what we teach and how we teach it. To take but one example, the contemporary physics student must be familiar with current tools that define a modern physics laboratory. These tools are more expensive than the chalk and blackboard world of the past. Just like modern medicine, colleges and universities must meet a standard of care, and that standard is set in the labor market that will employ our graduates.

We take the dysfunction narrative seriously. Some of its arguments hold together as coherent stories, while others fall apart when probed more deeply. Yet taken together, the dysfunction arguments fail to explain the data on college cost and price nearly as well as simpler and more general arguments that flow from our aerial view.

Consider, for example, the claim that rising numbers of administrators per student is clear evidence of waste that needlessly drives up college cost. Like many other businesses, over the last two decades universities have shed most of their typists, replacing them with a smaller number of IT specialists. Replacing “clerical workers” with “support staff” raises the fraction of the employee base that is “administrative.”

Colleges also have more administrative staff working in areas like career services, counseling, and health care, to name a few. Those workers aren't producing additional college graduates, so the ground is laid for more charges of unproductive waste. But that reflects how researchers choose to measure output or productivity more than it does any objective measure of inefficiency.

The gold-plated dorm argument often begins from a simple observation that dorm rates are rising faster than apartment rents. The problem with this comparison is that data on apartment rents are adjusted for rising quality (like increased square footage and more bathrooms) while the data for dormitories are not. There is no evidence whatsoever that quality-adjusted room and board prices are going up any faster than their private sector counterparts. This issue is not hypothetical. Over the last 40 years the American standard of living has more than doubled, and the quality of the American housing stock has improved substantially. The standard of what families expect in student housing and dining has evolved as well.

Lastly, the claim that government subsidy simply raises cost by pushing up demand is based on a misunderstanding of basic economics. The notion that rising demand leads to rising price relies on the assumption of an upward sloping supply curve. Yet there is a wealth of evidence that the long-run supply curve for a college or university is flat.

There are indeed higher education-specific reasons for why list-price tuition has risen, but not all of them are nefarious. When state government finances are troubled, public universities face a choice between allowing quality to decline and raising in-state tuition to compensate for public cuts. Landing on the side of tuition increases suggests an affirmative choice for maintaining quality.

Likewise, another force for rising sticker-price tuition is the increasing amount of tuition discounting done by public and private universities alike. This increased tuition discounting is in part an institutional response to growing income disparities in the nation, disparities that are not well addressed by public financial aid programs.

We do not argue that colleges and universities are particularly efficient organizations. But we are not persuaded that rising inefficiency offers a very good accounting for the pattern of cost increases in the higher education industry over long sweeps of time. Inflation-adjusted tuition actually fell slightly during the 1970s. This is hard to reconcile with narratives that posit growing inefficiency as a primary cause of the soaring cost of attendance.

The American higher education system has evolved over more than a century to meet a wide variety of social needs, including undergraduate teaching, graduate and professional training, basic research, and public service. It is a system under stress. But the economic and political forces that are tugging at it also affect many other parts of the economy. This is the context that is often missing from the debate, and our work is an attempt to fill in that blank.

Our story about rising cost has no villains, so it lacks a certain sex appeal. We see no simple solutions to the problems of rising college cost that would not reduce quality or ration access. There are indeed problems in American higher education that can be remedied. Our complex financial aid system is a real barrier to increasing the numbers of college-qualified students who benefit from advanced training. And the financing compact between public universities and the states is badly in need of a rewriting. But the first step on the path of wisdom is to ratchet down the overheated rhetoric of crisis and fix what can be fixed.