April 9, 2008

And Why Exactly Are College Costs So High?

Washington — Founded in 1920, the private National Bureau of Economic Research is one of the nation’s premier research organizations, routinely issuing reports on such complex and politically charged questions as the interplay between interest rates and exchange rates, monetary policy in developing countries, and the effects of Medicare rules on pharmaceutical prices.

Today it issued a report tackling the subject of student lending.

In the 55-page report, two economics professors — Lance J. Lochner of the University of Western Ontario and Alexander Monge-Naranjo of Northwestern University — employ hundreds of advanced mathematical equations, tables, and footnotes to calculate and analyze quantities such as “unrestricted allocations” and “exogenous borrowing constraints.”

Their conclusion: “We show that the rising empirical importance of familial wealth and income in determining college attendance is consistent with increasingly binding credit constraints in the face of rising tuition costs and returns to schooling.”

What’s all that mean? An official with the National Bureau of Economic Research, who asked that he not be identified by name, says the professors appear to saying, “College costs are increasing, students are having a tougher time borrowing money, and therefore poorer students are having a harder time attending.”

A spokeswoman for the bureau, which is financed through government and foundation grants, had no estimate of what the research cost. —Paul Basken

Comments

1. well, good to know that mathematics bears out what common sense already told us. Although this may seem to have been a waste of money, occasionally common sense is wrong.

   — Dan    Apr 9, 04:03 PM    #

2. There are at least two factor that have a significant affect on increasing college costs. One is that students expect much more luxurious living quarters than did students of a generation ago. Suites replace plain dorm rooms. Cafeterias offer choices that were absent in a generation ago. Numerous other student services are available that universities did not provide in earlier times. A second factor is a dramatic increase of administrative costs. This relates to both a dramatic increase in the number of people involved in administrative positions and an even more dramatic increase in executive salaries, especially when compared with faculty salaries.

   — David    Apr 9, 04:04 PM    #

3. And don’t forget IT as a major cost driver. Twenty years ago most campuses spent relatively little on this; now we spend millions on campus networks, software licenses, computer labs, etc.

   — hippokleides    Apr 9, 04:11 PM    #

4. At each college where I’ve been, compensation has been between 76% to 82 % of the Colleges’ operating budgets and the percent seems to be increasing as faculty members and staff members age. However, I ve’ yet to see an analysis of the impact of an aging workforce on the cost of higher education. Can someone point me to one?

   — Michael T. Murphy    Apr 9, 04:18 PM    #

5. According to the president of our university, the most significant driver of increased tuition is the cost of providing health insurance coverage to employees.

   — Mike    Apr 9, 04:20 PM    #

6. Perhaps the biggest reason for the increase in college costs for students has to do with rapidly falling state funding for higher education. When institutions are losing thousands to millions of dollars the costs are passed on to students.

   — Michelle    Apr 9, 04:23 PM    #

7. Part of the issue is also that students want instant service and gratification. With that more staff is needed, higher quality of IT products, students want a wider variety of classes to take(meaning more professors and more buildings), and state funding is down from a decade ago. The last is one of the largest issues. In SC when the LIFE and Hope Scholarships were created the general assembly reduced funding to colleges as they felt that this would fund colleges. That assumption was wrong, it funded students…if tuition was $5000 and the scholarship was $5000 but the state cut funding then tuition increased by $5000 at these colleges because the funding levels were cut by the state. Many other states in the US have cut funding levels for colleges and the same effect occurred. Also, playing into this factor is that the cost of living has increased and in order to retain valuable employees colleges have started paying closer to market value which has driven the overall cost to run a college up as well as increases in costs of medical benefits(BC/BS has increased their rates over 200% the past two years for institution where I currently work and we have doubled the number of faculty and staff in that time.)

   — James    Apr 9, 04:25 PM    #

8. To David’s points – I suggest that luxurious dorm room have almost nothing to do with rising tuition, since those are off in the “auxiliary” side of the budget. They may make a little money or lose a little money for the college, but on average are break-even operations. Also, some presidents’ salaries might be higher than we’d like, but even if they’re double what we’d like they’re way less than $100 per FTE student at a typical college.

   A bigger reason college costs keep rising more than the CPI is that colleges are adding services and amenities (not just in the dorms) that none of us saw a couple decades ago. Another reason is that, in spite of all the hand-wringing, colleges can get away with all this – i.e., overall no one has stopped going to college yet. They’ve bought the bill of goods that it’s worth $1 million (or whatever the latest estimate is) over a lifetime and therefore are willing to borrow more and more to attend. If enrollment dropped 20% across the board it might get colleges attention. Until then, tuition will continue to exceed the CPI.

   Finally, there is Mr. Baumol’s famous work on how very difficult it is to wring productivity gains out of health care, education, and government. The main way to increase higher ed productivity is to have fewer and fewer staff and to stuff more and more students into classrooms. And the public (who’s surprised?) doesn’t seem to want that yet. Cheers.

   — Bill    Apr 9, 04:27 PM    #

9. Many good points above and mine is not necessarily the worst single item, but T&E expenses are way to high IMHO. Attendance at seminars, conferences and the various professional specialty groups are often boondoggles and should be justified far better than they are now.

   Many will say that the costs of these conferences are reduced by private sponsors, but in fact these sponsors don’t spend that money for nothing. They get sales, sales and more sales to colleges and universities in exchange for the pittances they dish out like candy.

   — Number Cruncher    Apr 9, 04:39 PM    #

10. A couple of these comments repeat the claim that state funding of higher education has declined over time. I have seen this statement on numerous occasions and it may be true, but I do not recall seeing appropriate evidence to back it up. The usual argument contends that the percentage of total operating costs that are funded by state allocations have declined over time. This is no doubt true, but it is the wrong evidence to support the conclusion because both operating costs and state allocations can increase over time. If the former is increasing faster, the percentage funded by the state can go down at the same time that allocations are increasing in absolute terms. I think this is exactly what has happened in my state. At any rate, I would like to see an analysis that presents the right number: state allocations to support higher ed, controlled for inflation and by enrollment. How much does the state actually allocate per student over time?

    — DJ    Apr 9, 04:41 PM    #

11. Among the factors driving college costs—one of many—is health care. Salaries are a much larger proportion of college budgets than for most enterprises, so increases in health care costs drive college budgets more than in most sectors.

    — James    Apr 9, 04:42 PM    #

12. It’s not just IT and expectations. Every industry has those two issues. It seems to me it’s really a constraint on scale. In industry there are consolidations and shakeouts. Large industry leaders appear and displace inefficient mom and pops, producing better products at lower per unit prices. In Higher Ed, every school is doing its own thing, re-inventing the wheel, clinging to its own customized ways, believing it is somehow unique. No one wants a WalMart education, they want a Jaguar education. Guess what? It costs more for the boutique solution. What a surprise. But even Jaguars are mass produced. Where is the happy medium?

    — -larry    Apr 9, 04:42 PM    #

13. A possible nominee for the IgNobels next year?

    — Don    Apr 9, 05:15 PM    #

14. I’ve been in higher ed at public universities since 1980, and the decline in funding has been easy to see. The formula is pretty easy to explain: universities are funded from three primary sources – federal and state money, tuition, and research money. Since 1960, federal/state support has declined from about 40% of actual cost to about 14% of actual cost. All faculty are now pressed to grab every research dollar possible (to the detriment of time spent teaching), but that can’t make up the difference. Result: there’s only one funding source left, and that’s the students. Therefore, tuition goes up and up…and will continue to do so. Of course, due to inflation, the costs of everything associated with college have gone up too, so that adds to the dollar amount in the bill. Higher ed is now only accessible for kids of the well-to-do (fortunately mine are included), those who luck into big scholarships, or those who are willing to incur a staggering amount of debt in college loans.

    — Al    Apr 9, 06:30 PM    #

15. A major reason why costs are rising is that retention is dropping like ice ledges in Antarctica. Colleges are bringing in more and more students through the front door to try and make immediate costs, providing weak to poor ACADEMIC (not retail) customer/client service and then losing them out the back doors. The costs of attrition are enormous for most all schools. Just apply one of the formulas in the book Customer Service Factors and the Cost of Attrition (The Administrator’s Bookshelf) by Neal Raisman who has been studying academic customer service and attrition since 1999 and you begin to get some sense of the issue. His first formula is {(P X A = SL} X T}= lost revenue(i.e. $$$$$$$$$) that is made up buy increased tuition. P = total college population in the Fall times A annualized attrition rate which will give you SL = students lost times annual tuition. So if a school has 3000 students with an attrition rate of 25% (nor unusual) that means it loses 750 students times a tuition of $10,000 yields a revenue loss of $7.5 Million. To try to offset that, most colleges do not work to change attrition. They charge more to start with to try and offset losses. But these are just tip of the iceberg losses according to Raisman.

    — TR    Apr 9, 08:50 PM    #

16. The price of college education goes up because there are people willing to pay those higher prices. Demand is solid, enabling prices to rise. Dropping 1/6 the US national population out of having parents, healthcare, and education is a national tradition in the US, a part of the culture, and a way to make “being elite” more fun by not having to take care of the poorest 1/6th of those around you. The American way!!

    — Richard Tabor Greene    Apr 10, 06:22 AM    #

17. Seems to me that the reason for rising costs of higher education are similar to those of real estate. Loans are available which are amortized over a very long period of time. Thus a significant difference in the amount loaned does not result in a very significant rise in a monthly payment. There isn’t much of an upper limit.

    — T    Apr 10, 06:26 AM    #

18. Our community colleges, as “full opportunity” institutions will be bombarded with applications due to the rising costs at our 4 year colleges and universities.

    — Timothy Gallineau    Apr 10, 08:48 AM    #

19. I think that you guys did a much much better job than the National Bureau of Economic Research in explaining the complex issues of runaway tuition costs. #2-David is my favorite. Yesterday I received my kid’s notice for next year’ tuition, room, board, fees, (UPENN) of more than $51,000.

    — Mary Ann    Apr 10, 10:24 AM    #

20. DJ – in Minnesota, state budget to higher ed was 8% in 1980; by 2002 or so, that number was 3.9%, and it’s still dropping. And Minnesota is one of the state with a higher commitment to education than the national average.

    At the same time, there are more ‘Vice Presidents’ at the UM than ever – each with an admin staff. Despite spending over a decade there, I truly have no idea what they all do, but apparently they are ‘critical’ for faculty to teach and students to go to classes.

    This is a double tax – less base budget support from the state, and less of this budget available for mission-critical work.

    I left public academia for private academia because this financial crunch has meant a major loss of support for research across the board nationally. Why? Because the undergrad education mission has a way out – they charge more tuition and board. But the research sector is inelastic – we cannot just ‘charge’ our grad students more as we pay them out of our own pocket.

    — Stephen    Apr 10, 10:35 AM    #

21. Congratulations! Everybody had a right answer, but not all of them. For example, no one recognized the rapid expansion of institution-funded financial aid. No one mentioned the critical factor of the lazy pace that increasing numbers of students take to earn a degree, or that institutions really are investing more to improve quality in all their programs and services. I earned my BA forty years ago, and when I visit my alma mater I can’t believe all the exciting things going on and the quality of opportunities students have compared with my day.

    So, what’s the simple answer? There ain’t one.

    — bill    Apr 10, 10:42 AM    #

22. Although many people decry the number of VP’s, Assoc. VP’s, Directors, Deans, Assoc. Deans, etc. as if the positions were make-work jobs and featherbedding, they are not because of the heavier levels of reporting requirements. We have to report to state legislatures, state coordinating boards, regional accreditation agencies, federal agencies, etc. Everyone micromanages colleges and universities because they distrust us to run our shops properly. Unfortunately, this may be because we have not done a very good job in the past. We also write more reports because we now have software that allows us to crank out the 50 page reports with graphics and spreadsheets. When you only had an electric typewriter, at most, you wrote a lot fewer reports. One of the effects of robust IT services.

    — Anthony Duben    Apr 10, 10:49 AM    #

23. Having run the gamut of college visits this past year in an effort to get our soon-to-be high school graduate into a good college, the selling points were low teacher to student ratio, high outplacement for graduates, immeasurable activities from educational to sports to social endeavors and cafeterias (can I still use that word to describe sushi bars, fry bars, homestyle etc. on a daily basis), it all adds up to higher costs. I’m sure there are still colleges that have 200-300 students in an auditoriums taught by Graduate Assistants on high definition TV screens. In the end, it still boils down to supply and demand.

    — Gene    Apr 10, 10:55 AM    #

24. Bill, you make good points, but I am moved to comment further. Why is institution-funded financial aid expanding? Mostly because tuition has gone up so much that lower income students can’t afford it. So institutions overaharge everyone, then give scholarship money to lower-income students so they can attend. It has become a circular process moving money from one student’s pocket to another student.

    Also – I’m far from convinced that lazy students are a problem. Many students carry 20+ hour jobs every week to pay the bills, and as a result cut back on credit hours and end up going an extra term or two in order to graduate. Many states have forced their public institutions to provide the courses for a 4-year path to graduation, but that doesn’t mean students can actually take that path if they’re working while going to school.

    — Al    Apr 10, 10:55 AM    #

25. I take issue with Bill’s comment on the “lazy” pace students take to earn a degree. In my experience, the numbers of students who are trying to go to school, work at least part-time if not full-time, care for a family, and try to find time to study is steadily increasing. This is NOT the fault of a “lazy” student; it just is what it is. Getting a college education for many nontraditional students does not translate to keg parties, swanky dorm rooms, and all the other “amenities” that resident students enjoy. In addition, many nontraditional students must spend a substantial amount of income on such things as gas to and from school, and on day care, which is horrifying in its costs.
    Your cavalier attitude to our students is shameful.

    — Vivian    Apr 10, 11:41 AM    #

26. Let’s not kid ourselves. Faculty salaries are 75% of a college budget, the Chronicle itself concluded long ago that those salaries have outpaced inflation by an unconscionable level, rivaled only by physicians’ salaries and Rolling Stones tickets.

    — the first marci    Apr 10, 11:46 AM    #

27. I wonder to what extent in some universities (and maybe colleges) tuition dollars are support research and not classroom education. At my institution, we recently reduced our teaching load from 4 courses to 3 per year so we could write and publish more (in no small part to try to increase our USN rankings).

    — A Prof    Apr 10, 11:56 AM    #

28. A Prof, you make a good point about research.

    That overhead rate recovery money should be hijacked and divvied among departments for more research is nonsensical. What happens then is that all the costs that made up the overhead rate in the first place have to come from someplace else—like higher state appropriations (the double-tax thing) AND higher tuition rates.

    The money that comes to the institution should go back to the components of the university that incurred those costs to begin with. Let research stand on its own—all of its funding should come from outside the institution.

    — Number Cruncher    Apr 10, 12:27 PM    #

29. So where does this article actually EXPLAIN the reason that college costs are so high?

    — Dennis    Apr 10, 12:36 PM    #

30. Almost all of those posting above are partially correct — rather like a committee of the blind looking at the proverbial elephant. Most of the commentary are local versions of the one great American truth, whether airline prices, tuition, or Presidential elections: we want more for less! The Grover Norquest view of reality — taxes are evil and I am therefore NOT my brother’s keeper — has infected academe as well as the rest of this country. Norquist and his believers in the Congress, the While House, and most of the
    State Houses fully believe that “I’ve got mine; screw you, Jack.” Hence, rising college costs are helping divide academe into rich and poorer, and this split can be seen nationwide in every area of our collective life. Bridges are falling down, airlines get grounded for unregulated failures of proper maintainence, and state-sponsored college costs are being driven by the same mentality of wanting more for less. Ask your state and national representatives when they last voted for an increase in taxes to offset college tuition. Don’t hold your breath while you wait.

    — JVK    Apr 10, 12:36 PM    #

31. What this article mostly demonstrates is that if the Chronicle publishes a brief note about a very complex topic they can engender a long blog and call the endless comments an indicator of serving academia. A better name for this process would be “globbing”; descriptive of the resulting cluster of incomplete analyses stuck together only by the arbitrary and fact sterile nature of unaccountable IT brain dumping.

    — FEL    Apr 10, 03:35 PM    #

32. One of the things we’re being told here at our Community College is how the state is slashing funds, utility costs are rising, etc. I think it might be useful to examine and slash some internal costs, like providing our President with free housing, a free car, walking around money and a nice extra helping of money added to her retirement fund. Perhaps we need to look at cutting expenses at the top and passing the savings on to the students instead of crying that the state’s cut funding and we have to raise tuition.

    — FAW    Apr 11, 11:01 AM    #

33. My Masters Degree is from Kent State University in Kent, Ohio. Every time I receive another sales pitch letter for an alum donation, it features glossy pictures of the latest campus buildings. These buildings are a new “wellness center”, new dorms, and generally buildings which have very little to do with classroom instruction. For that small minority of students whose parents have the means and willingness to pay for four years of a country club experience, great. Country club accoutrements like the new KSU buildings are what is driving up the cost of a degree. I have yet to hear a compelling argument for the taxpayers to subsidise such nonsense.

    — Mark Smith    Apr 14, 09:28 PM    #

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