Higher Edonomics

Understanding higher education’s rising price tag

June 20, 2019

College affordability is back in the headlines. Walmart just announced that it will recruit high school students with free SAT prep and $1 a day college tuition.  Virginia has frozen its tuition for the first time in two decades. Private colleges continue to increase their discount rate, while many Democratic presidential candidates call for a public college education to be free.

Fifteen states have enacted promise programs that allow some students to attend college tuition-free. (Typically, these programs apply only to community colleges, full-time students, and recent high school grads). Twenty-nine state legislatures are currently considering proposals to create or expand free tuition programs.

And yet, the sticker price of a public and private education continues to rise faster than student aid.  One recent study predicted that in 20 years the in-state tuition at a public university will reach $35,270 in California, $91,351 in Connecticut – and a whopping  $130,555 in Pennsylvania. 

And if you think that the increase in published rates of undergraduate tuition is unsustainable, take a look at professional schools. Annual tuition at Harvard Law School currently stands at $65,875 and at Harvard Business School, $72,000.

What explains the rising cost of tuition and its inevitable toxic by-product, high levels of student debt?

To many members of the public, the answer seems self-evident: Gold plated, country club-like amenities, administrative bloat, overpaid and underworked faculty, the high price of intercollegiate athletics, starchitecture, and ambitious Presidents’ and board members’ Harvard envy.

But it turns out that luxury-laden dormitories, climbing walls, lazy rivers, and proliferating deanlets do little to explain higher education’s rising sticker price.  What does?

Much of the debate about the economics of higher education centers on four long-standing schools of thought. 

There’s William Baumol’s cost disease model: That while the manufacturing sector can increase productivity through mechanization, infusions of technology, and other ways to increase productivity, labor-intensive industries that rely on a highly trained labor force, like higher education, cannot. 

Then there’s Howard Bowen’s revenue theory of cost: That “Colleges raise all they can—and spend all they raise.”

There is also William J. Bennett’s hypothesis: That government-subsidized student loans have allowed colleges to raise tuition.

And, finally, there is the public disinvestment argument: That inflation-adjusted, per student cuts in state funding force colleges and universities to raise tuition, which in turn forces students to take on crushing educational debt.

Each of these theories contains elements of truth. Each also has limitations.

Take Baumol’s cost disease. It is certainly true that, on average, the salaries of tenure stream faculty members tend to rise in good times and bad. In contrast to most other sectors of the economy, those salaries rose even during the depths of the Great Recession. But instructional spending represents a surprisingly small part of institutional budgets, typically 20 to 30 percent, and that figure has remained relatively stagnant over time.

Colleges discovered that they could control instructional spending by expanding class sizes, especially in high demand STEM, economics, and business courses, charging a premium for online courses, and replacing full-time tenure-track faculty with adjuncts, post-docs, lecturers, visiting scholars, and administrators teaching overloads.

How about Bowen’s theory? Beginning with Harvard, private colleges adopted a high tuition, high aid model that allowed them to extract more revenue from each student, a practice that public universities increasingly imitated. (In practice, this approach has not resulted in a student body that reflects the number of talented low-income students, since that would sharply reduce overall revenue). In fact, the most prestigious and selective institutions could dramatically raise tuition and augment revenue and still attract many well qualified applicants, while offering substantial financial aid to less affluent students.  However high their tuition, fees, and room and board – and Harvard’s will be $69,607 in 2019-2020 – these institutions are not, in actuality, revenue maximizers.

As for the Bennett hypothesis, the main beneficiaries of student aid programs have been for-profit institutions. For most non-profit institutions, there are real limits to how much federal student loans can support much higher tuition rates. For undergraduates, the maximum amount that a dependent undergraduate can borrow is capped at $7,500 a year (and $31,000 over a lifetime).  And while the loan limits have remained constant since 2008, posted tuition has continued to rise.

As for public disinvestment, there is no doubt that state support, on an inflation adjusted, per student basis has fallen sharply over time. Indeed, between 2008 and 2013, state higher ed funding per full time equivalent student dropped by 25 percent, even as enrollments increased by 15 percent. But overall public investment in higher education – including financial aid, state appropriations, federal research grants, and tax credits, deductions, exemptions and exclusions – is vastly larger in real dollars than in the 1960s or 1970s, higher education’s supposed golden age  It is certainly the case that a significant portion of those funds has gone to financial aid, as the number of lower income students rose. But total institutional revenue and expenditures have risen – though the increases has been very uneven, with the wealthiest institutions experiencing the greatest gains.

Disinvestment can explain some of the shift in the financial burden to students, but not all of it. And it does not explain the growing stratification among higher education institutions, with the most prestigious, well resourced, and selective institutionsbenefiting disproportionately from federal policy.

So how might the conversation about the cost of college be reframed? We might add three additional lines of thought to the mix.

The first comes from the economists Robert Archibald and David Feldman, who emphasize the importance of rising standards of care. Student and parental expectations, an increasingly diverse and in certain respects a needier student population, and legal pressures have placed immense pressure on institutions to expand the range of services and their quality. At the same time, in order to attract more full-paying students, many colleges and universities, public as well as private, have invested in physical plant improvements, raising the bar for all institutions.

A second line of thought stresses the significance of market-driven competition. The higher education ecosystem has grown much more competitive, and not just for the most resource-rich, rankings-conscious institutions. Local and regional colleges and universities now face intense competition from online providers, community colleges, and institutions that were previously outside their region. Competition has forced many smaller institutions, including liberal arts colleges, to launch expensive programs in new fields of study, including computer science, communication, engineering, and nursing.

A third line of argumentation emphasizes a radical rethinking of what a college or university ought to be. Under intense pressure to control costs while meeting rising expenses – for information technology, financial aid, enrollment management, student services, benefits, utilities, and compliance with government mandates – institutions have had to become much more entrepreneurial. This has led to increased spending not only on development and contract research, but on continuing education and a host of ancillary programs, including summer camps and facilities rentals. It has also led to a proliferation of centers, institutes, and research initiatives.

In addition, it has inspired better resourced, optimally located, or politically-connected campuses to adopt a get big fast strategy to preempt competition, expand their reach, and enhance their brand. In Texas, one form that this strategy has taken is to launch medical schools. UT Austin, UT Rio Grande Valley, the University of Houston, Sam Houston State, Texas Tech, and the University of North Texas have all recently opened medical schools. Another way to expand reputation and reach is by opening branch campuses. Texas examples include the University of Houston in suburban Katy and Pearland, Texas A&M in San Antonio and McAllen, UT Rio Grande Valley across the Rio-plex, and the University of North Texas in Dallas.

Clayton Christensen’s grim prediction that half of colleges will soon close their doors is almost certainly grossly exaggerated, unless one takes large numbers of for-profit bankruptcies into account. The real threats lie elsewhere:

  • In the deepening stratification of higher educational universe, with the neediest students concentrated in the least-resourced universities and community colleges;
  • The chronic financial problems of many small colleges and regional comprehensives that are gradually eroding quality and competitiveness; and
  • The appeal of for-profit and non-profit institutions that emphasize credentialing and training rather than a traditional education and replace scholar-teachers with pre-packaged courses taught by faux faculty.

Steven Mintz, who directed the University of Texas System’s Institute for Transformational Learning from 2012 through 2017, is professor of history at the University of Texas at Austin.

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