What is Driving Up the Cost of College?

Sometime last year — exactly when depends on whose data you rely upon — the debt total of American college students topped a trillion dollars, surpassing credit cards, second only to home mortgages as the major source of indebtedness for students and families.

The principle reason that students are taking on debt is a dramatic rise in the cost of attending college. I have used this chart on other occasions,  but it is still the most dramatic illustration of what has  happened to  college tuition over the last twenty years.

This chart stops at 2005.  From 2005 to 2012, tuition has risen at an annualized rate of 8%. It is a breathtaking climb, and it means that students (and their families) are turning to student loans in unsustainable numbers.

None of this is news.  It is fodder for cable TV talk shows, Presidential campaign speeches, and a considerable number of faux populist attacks on the very idea of a college degree. The Obama administration has even weighed in with a Race to the Top for Colleges initiative that focuses to a large measure on affordability.

Conservatives say that it is the ready availability Federally backed loans that a driving cost increases.  Progressives –including many who support the Occupy Wall Street movement — say that that a the same cultural factors that drove banking abuses are also driving the disparity between who can afford a college education and who can not.

There is little evidence that either statement is true and considerable evidence that neither are. I will return to this subject in a later post.

The first thing to understand about the rise in college costs is the difference between the cost of running a university — the spending side of the equation —  and the price paid by students. In higher education there are all kinds of prices.  There is the advertised or sticker price, which is what it sounds like. But sticker prices can be discounted, and there are also wholesale and retail prices.

For-profits aside, you would think that there would be a straightforward relationship between costs and prices since, after all, the name of the budget game in a university is to take in just enough revenue to offset the costs of operating programs and facilities.You would think, for example, that costs were simply passed along to students in the form of tuition and fees, which are components of the revenue side.

If that were true then rising tuition would be a result of rising costs.  Some costs, like healthcare, have risen dramatically, but the rise in tuition is for the most part unrelated to increased operational costs.

College costs are high and have been high for at least a hundred years. When Harvard President Charles Elliot began  to dismantle the university’s rigid core curriculum — replacing it with an elective system — in the late 19th century, he grew the size of Harvard’s faculty tenfold. It was a shock to Harvard’s carefully tuned financial model, but it led to even more dramatic growth in private giving, creating a sustainable system in which endowed funds are used to offset variable costs of operation.

Labor alone accounts for much of the variable cost of running a university.  That means, as James Surowiecki, pointed out in his recent New Yorker article:

In other words, teachers today aren’t any more productive than they were in 1980. The problem is that colleges can’t pay 1980 salaries, and the only way they can pay 2011 salaries is by raising prices

That, however, does not really explain why tuition has risen so dramatically. Faculty salaries have been stagnant for almost a decade. Furthermore, when measured as cost per degree awarded, universities are actually just as productive today as they were in 2005.

As Surowieki points out the “arms race” that causes universities to invest in bling could explain some of the increase, except that the rate of increase in those expenditures have been flat,  too. In fact spending in general has been flat.

So what’s going on?  Have universities been pocketing the difference between what it takes to run an academic program and what students are willing to pay? The only players in the higher ed game that have the ability to do that are the For-Profits and their 3.2%  tuition increases have been the lowest among all types of institutions.

This post begins a series that over the next couple of weeks tries to answer the “What’s going on?” question.  Part primer and part road map, the series continues next week with some of the facts you think you know about college tuition that are in reality not true.

Next: Three Myths about Rising College Costs