Dimensions: 6'' x 9'' 284 pages AEI Press  (Washington) Publication Date: June 2004 Hardcover ISBN: 0844741973 Price: $ 25.00 Add to Cart   Examination Copies

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July 2004
Going Broke by Degree: Why College Costs Too Much
By Richard Vedder

Americans are increasingly outraged over the rapidly rising cost of attending college. The complaints come not only from current students and their parents, but also from the broader public. Why are tuition costs rising? Are there ways that they can be contained? Is there a better way to fund higher education? More fundamentally, does higher education deserve the increasingly generous support it has received from government? The author suggests that potential solutions to the tuition crisis include modifying tenure, increasing teaching loads, paring administrative staffs, increasing distance learning, and cutting costly noneducational programs. He also suggests more dramatic changes, including transforming state grants to universities into student voucher programs, as well as other steps to increase privatization of state universities.

AEI adjunct scholar Richard Vedder is distinguished professor of economics at Ohio University and the author of Can Teachers Own Their Own Schools? (Independent Institute 2000).
 
Undergraduate tuition fees have increased at a rate exceeding inflation consistently for over two decades, and indeed did so for most of the twentieth century. Moreover, in more recent times the rise in tuition fees has exceeded the increase in family incomes, making college attendance an increasing burden from a financial perspective.

While there are many reasons for soaring college costs, one factor dominates: the productivity of university personnel is almost certainly falling. Why? Universities are mostly nonprofit organizations, subject to only limited competitive forces, and lacking market-imposed discipline to economize and innovate. University presidents and other administrators see no personal gains from reducing costs. Major policy issues are decided typically in committees, where advocates of the status quo usually have the upper hand. With third parties (typically government and private donors) footing most of the bills, there is little fear that higher tuition will trigger a consumer backlash depriving the institution of needed revenues. Not surprisingly, per student costs of instruction are dramatically lower at the typical for-profit university where market discipline is much stronger.

If students receive grants or subsidized loans covering much of the cost of attending school, they become far less sensitive to tuition increases. The discipline of the market is not strong. In a free, unsubsidized market, consumers are sensitive to rising costs, and entrepreneurs seek to cut costs and lower prices to lure new customers away from others. But higher education does not work that way in America today. Few universities, for example, advertise on television that "we offer as good a product as our competition, but at a lower price."

There is no clearly defined "bottom line" in traditional universities. Did Stanford University have a good or bad year in 2003? How would we know? There are a few vague indicators that people use, such as college rankings done by magazines like U.S. News and World Report. But in the for-profit world, there are very precise measures of changing fortunes (stock prices, income reports) that give a very tangible measure of success.

Public Subsidies in Higher Education

In many ways, higher education resembles health care: third parties (e.g., governments, insurance companies, foundations) pay most of the bills, making consumers relatively indifferent to the price of services. As in health care, already some signs point to big changes coming: a huge growth in online instruction, booming enrollments at for-profit universities, and a growth of private certification of skill attainment in certain fields. These trends should intensify-prodding the traditional universities into changing their inefficient ways.

Rising tuition also reflects more price discrimination against affluent students, as well as an increase in cross-subsidization within universities, with institutions diverting resources away from undergraduate instruction toward other activities, such as research, student activities, bigger administrative structures, and costly intercollegiate athletic programs.

Tuition fees are reduced by "scholarship" aid. Over time, that aid has grown substantially, so the actual average price of college to consumers has risen somewhat less rapidly than stated tuition fees suggest. Price discrimination allows many universities to take advantage of the fact that affluent students are typically less sensitive to price than poorer ones. By charging relatively rich kids more, total tuition revenues grow. Universities have increased "sticker prices" aggressively to charge "whatever the traffic will bear."

Over time, resources have been shifted away from undergraduate teaching. Professors who two generations ago would have taught twelve hours a week now teach six or possibly nine hours, supposedly doing research in the time freed up from lower teaching loads. Undergraduate instruction used to be heavily subsidized by third parties (mainly governments and private donors), but as a larger proportion of university budgets go for other purposes, student tuition fees increasingly simply cover the cost of their instruction.

The evidence shows that very little increased government support given state universities over the past generation has actually gone toward instruction. Moreover, the evidence shows that lavishing more state funds for higher education does not have much effect on the number of kids going on for college degrees.

The following scenario has been commonplace: University presidents beg legislatures for more funds to keep tuition costs down and to improve access for low-income students. Sympathetic legislators largely grant those requests. The universities then take most of the new money and give employees large salary increases, add staff members (thereby lowering productivity), build more luxurious facilities, expand research (instead of teaching as promised)-and raise tuition. The same thing, with some variation, occurs with respect to donations to privately endowed universities.

In seeking public funds, state university presidents claim that supporting higher education is investing in human capital and that human capital is vital for economic growth. Yet the empirical evidence suggests that, other factors held equal, the more state governments support higher education, the lower the rate of economic growth. Why? When government support for colleges grows, it forces higher taxation on private sector activity that, on average, is produced more efficiently than university activity. Money is shifted from highly productive to less productive uses. Also, much increased public support for universities does not go to expand learning or student access, but to provide higher incomes and lighter work loads for university staff. The funds support "rent-seeking"-redistributing income from the productive to the less productive.

The high earnings differential between high-school and college graduates exists partly because universities serve as screening devices, identifying future workers who are bright, dependable, and ambitious-for reasons largely unrelated to their college learning. The differential means that the financial benefits to an individual of earning a college diploma typically outweigh the costs
of getting it.

If university graduates derive substantial financial benefit from their training, why do third parties pay most of the cost of colleges? Why should low and modest income families, through their tax payments, give children from affluent families opportunities to solidify and expand their already relatively opulent lifestyle?

Three arguments support external assistance for higher education: most important is the so-called "positive externality" argument. Universities supposedly have positive "spillover" effects, benefits accruing to individuals other than the providers or recipients of university services. A well-educated population, for example, will likely make more informed decisions about public policies, leading to better governance. Yet it can be argued that colleges have negative spillover effects as well. For example, campus riots and disorders harm innocent third parties. "Politically correct" efforts by universities to stifle free expression can reduce discourse and disrupt the orderly communications that make democracy work.

Some empirical evidence in this book suggests that the negative externalities are greater than the positive ones. For example, the ultimate expression of feelings toward a community comes when people move out of it or into it. Statistical evidence shows that, holding other things equal, there is net out-migration from university-intensive states towards ones where less effort is put into higher education. That suggests that universities, on balance, have negative externalities.

Government subsidies for higher education assume net positive externalities. If they do not exist, what justifies governmental support? Many argue that our nation champions equal economic opportunity, and a college education enhances income. Poor people cannot afford to go to college without state support. Yet this book shows that there is little correlation between state funding of universities and the proportion of students attending them.

Others argue that the government should fund university research. That research, in turn, often leads to vaccines or drugs that extend our life expectancy, to innovations that enhance the quantity and diversity of our output, or even to works of art that help us define and interpret our lives. This argument, however, is also flawed. To be sure, scholars at universities do some useful research. However, there is some doubt whether the university is a better venue for most research than, say, private research laboratories or nonprofit research institutes. Much of our most useful research has commercial potential, earning profits for the owners of the property rights, and thus should appropriately be privately funded.

 In short, the case for public subsidies of higher education is, highly debatable. A good case can be made that governments should largely get out of the higher education business, ending state subsidies and tax advantages for private donations. Moreover, the evidence is strong that massive governmental infusions of funds, along with tax-sheltered private contributions, have contributed to the cost explosion in higher education. At the margin, generous government support has led to some poorly performing students attending college who should not, thereby contributing to a massive attrition rate among students. It has also allowed students to linger around campuses for five or even six years at taxpayer expense.

Alternative Instruction and Funding

As tuition fees soar, consumers are looking for substitutes. More students are studying online. Highly profitable for-profit universities like the University of Phoenix are growing exponentially. Relatively lower cost community colleges may start taking students from more expensive comprehensive universities. Computer whizzes are sometimes forgoing expensive university computer science degrees altogether, opting instead to pass privately administered examinations measuring expertise with Oracle, Microsoft, or other systems.

The public is becoming skeptical of universities begging for more money. The 2001 recession and stock market decline led to less support for higher education and hence squeezed budgets. Since those effects are only partly offset by large tuition increases, many universities are being forced to reduce costs. Examples of cost-reduction measures include raising teaching loads for faculty, slashing administrative and other noninstructional positions, abolishing tenure or passing its implicit costs onto recipients, ending expensive low-enrollment programs (particularly at the graduate level), outsourcing or selling certain noninstructional (or even remedial instructional) operations to the market-based private sector, and using computers and television technology to substitute for, not merely supplement, traditional classroom teaching.

Yet the culture of universities tends to resist such changes. Faculty will try to use their power to thwart these cost-cutting moves, in some cases joining unions. Impatient legislators may try to "do something," for example, put price controls on tuition increases, mandate minimum teaching loads, or legislatively abolish tenure.

Even bolder changes in public policy likely will be forthcoming. Some politicians are suggesting that state universities should be privatized. A good case can be made to lower public subsidies for universities and simultaneously increase scholarship support for students themselves. Colorado is already moving in this direction. If students paid most of the bills at public schools, university administrators would pay more attention to their needs, diverting fewer resources to noninstructional purposes. Student price sensitivity to tuition changes would increase, reducing the urge to raise sticker prices. Moreover, competition would grow in other ways, particularly if the vouchers or scholarships were acceptable at private colleges and universities, much like the G.I. Bill for veterans after World War II.

Moreover, a scholarship (voucher) program could have performance standards associated with it. Vouchers could be structured as loans that would be forgiven if the student graduated successfully on time, but that would have to be repaid if the student dropped out. This would almost certainly dramatically lower attrition. The phenomenon of party-going students staying around universities for one or two more years enjoying the good life while studying in a desultory fashion would largely end.

Finally, vouchers could be structured in a way that would appeal to liberals and libertarians alike. They could be made progressive, providing greater funding for students from lower income families, in keeping with using education as a means to promote economic and social equality. By giving students from wealthy families only small vouchers or none at all, a growing percentage of students would not be dependent on government for financial assistance. Indeed, the voucherization of higher education largely would end the distinction between public and private universities. State universities, as we know them today, would become privatized, freed of many onerous governmental regulations.

All in all, the future for universities looks like one of challenge and great change.

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