Cutting College Costs
AEI Newsletter

Going Broke by Degree
Soaring costs and declining value plague American colleges and universities; it is estimated that only about $0.21 of each added dollar of university resources goes toward student instruction. In Going Broke by Degree: Why College Costs Too Much (AEI Press, July 2004), Ohio University economist and AEI adjunct scholar Richard Vedder finds that not only are funds deployed inefficiently, but that the trend of ballooning tuition is not sustainable.

This alarming pattern, Vedder argues, reflects added staff, generous compensation payments for faculty, and increased spending on noninstructional activities. Because most universities are nonprofit organizations, they lack the market-imposed discipline to streamline and modernize. With third parties such as government and private donors covering a large share of the bills, educators do not worry that higher tuition will trigger a consumer backlash, depriving their institutions of needed revenues.

These problems continue to fester because traditional universities lack a "bottom line" that would indicate when a school is using its resources inefficiently. Without a bottom line, accountability is vague, and without accountability, few incentives exist for university personnel to streamline their resources. Undergraduate education receives the short end of the stick in this case, with universities favoring higher-profile and flashier graduate education projects. Low-income and minority students also receive special treatment. Total revenues grow when affluent students are charged more; price discrimination allows many universities to take advantage of the fact that richer students are typically less sensitive to price than poorer ones.

As tuition fees skyrocket, consumers search for substitutes. Vedder notes the increase in online instruction, soaring enrollments at for-profit universities, and the growth of private certification of skill attainment, and he predicts that these areas will continue to boom. Computer whizzes sometimes forgo expensive university computer science degrees altogether, opting instead to pass privately administered examinations measuring expertise. Relatively lower-cost community colleges may start taking students from more expensive comprehensive universities. After the 2001 recession and the stock market decline, the public has become stingier with its support of higher education, and universities feel the pressure of squeezed budgets. In turn, as universities solicit more money from alumni, the public is becoming skeptical about the purpose of these contributions.

Vedder urges governments to largely forsake the higher education business, ending state subsidies and tax advantages for private donations. Governmental surges of funds, he argues, along with tax-sheltered private contributions, have fueled the cost explosion in higher education.

Generous government support has also led to many poorly performing students attending college, which feeds a high attrition rate among students. Vedder recommends a scholarship or voucher program with performance standards attached. These vouchers could be structured as loans, forgiven if the student graduated successfully on time but repaid if the student dropped out. The familiar phenomenon of partying students lurking around universities would largely end. Appealing to liberals and libertarians alike, vouchers could be made progressive, providing greater funding for students from lower-income families and using education to promote economic and social equality.

Small changes, including modifying tenure, increasing teaching loads, paring administrative staffs, reducing costly low-enrollment programs, increasing distance learning, addressing high student attrition rates, contracting out services, and cutting costly noneducational programs, could alleviate burgeoning tuition costs. But, according to Vedder, even more dramatic changes, such as transforming state grants to universities into student voucher programs and steps to increase privatization of state universities, must occur to adequately address swollen college costs.

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State income taxes and the Supreme Court: Maryland Comptroller v. Wynne

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Tuesday, October 28, 2014 | 9:30 a.m. – 12:15 p.m.
For richer, for poorer: How family structures economic success in America

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The 7 deadly virtues: 18 conservative writers on why the virtuous life is funny as hell

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The forgotten depression — 1921: The crash that cured itself

Please join Author James Grant and AEI senior economists for a discussion about Grant's book, "The Forgotten Depression: 1921: The Crash That Cured Itself" (Simon & Schuster, 2014).

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