Three Myths about Rising College Costs

“What is Driving Up the Cost of College?“, asked the question that many outside and inside academia want to know the answer to — especially this time of year as families contemplate writing college tuition checks that over four years will top $200,000   According to a recent Pew poll, the majority of Americans believe that a college education is becoming unaffordable and want to know why. Facile explanations are easy to come by, but there are few that match the facts.

So what’s going on?  Much of the popular discussion of tuition increases is based on three  “facts” that  are not true.  They may be easy to toss off on editorial pages or cable talk shows, but they are myths.

Myth 1: The rate of college tuition increases is abnormally high.

If you listen to many commentators, college tuition is hyper-inflationary.  In fact, students at many public campuses have seen tuition and fees double over the last decade, and–as the stubbornly persistent effects of the recession strain family budgets–become increasingly unaffordable.

Affordability is a real problem and prices are on an unsustainable path, but it is not the case that we are in the middle of some hyper-inflationary bubble.

In normal times, tuition rises at roughly twice the rate of inflation.  From 1958-1996 that averaged somewhere near 8%.  For most of those years, the increases were offset by increased spending for financial aid and by general growth in personal income, which hid many of the most serious consequences of this rise in prices.

Recent years are different, some argue. Let’s take a look at that claim. Annual inflation for 2011 was 3.16%, but that actually understates inflation for the months in which trustees and legislative committees approve tuition increases. The  annual rate of inflation for the last three quarters of 2011 was just under 3.5%.

Private institutions  raised their prices last year, but the rate of increase was actually in line with inflation.   2011-2012 tuition increases at nonprofit private institutions averaged around 4%.  For-profits increased their prices  3.6%. When it comes to holding the line on prices, these institutions actually performed much better than historical trends.

Public universities raised their prices at the much more dramatic rate of 8.6%, 20% above historical highs of the decade 1992-2001.

In short, the only increases that are above historical highs are at public universities, but only by a relatively modest amount.

Myth 2:  Easy availability of Federally-backed student loans is driving tuition increases.

This is a myth with many political consequences, but there is very little evidence that it is true.

The theory behind this myth is that a free market will cause prices to rise in proportion to a market’s ability to pay those prices, and the widespread availability of federal loans affects a student’s ability to pay.  The often unstated political corollary to this theory is that the students who are least able to pay are also the ones who are least likely to complete their degrees and pay back the loans.

In reality, the part of the higher education market that has control over its prices has been demonstrably immune from any such affect.

Less than 40% of all Federal aid is in the form of student loans (the rest is used for Pell grants and merit-based support).  These loans are distributed to public, non-profit and for-profit institutions, but for-profits tend to get a disproportionately large percentage of these loans.   These are the institutions that have raised their fees the least.

The remaining loans are distributed to nonprofit and public institutions, but since non-profits have also had historically low tuition increases, all of the factors affecting tuition would have to be concentrated in the sector that has the least flexibility in setting its own prices — the public colleges and universities. And as we have seen prices when viewed as a multiple of consumer price increases have risen only 20% faster than historical averages at these institutions.

Public institutions cannot retain earnings, so costs would have to have risen in proportion to loan availability, but that has not been the case.  Costs at public universities have been constant for several years.

So why have prices increased? In fact, total state support for public institutions dropped 7.5% in 2011-12. The total increase in tuition can be attributed to making up for lost income. Federal loan availability may be correlated with tuition increases but there is no reason for believing it is a cause.

Myth 3: Tuition rises because of declining productivity.  Professors are earning more and teaching less.

Productivity is not easy to measure in academia, but one thing is certain: unproductive professors are not a contributing factor to rising tuition.

One popular measure is the average ratio of students to faculty in general education courses.  This number has risen significantly at public universities whose state budgets have been squeezed.  In many industries this would be the very definition of increased productivity, which would mean that rich professors are skimming the cream off the top of rising revenues.

That is not true.  Faculty salaries have been stagnant at public colleges for almost a decade.  Many large state institutions have resorted to hiring part-time or “contingent” faculty to satisfy increased demand, which further depresses average annual compensation.

Another  measure of productivity is the number of courses taught per semester.  This number has been on a slight decline for over a decade, which might indicate that prices are going up even as productivity is decreasing.

However, the decline in average teaching load has been most noticeable at schools that are building sponsored research programs.  As I have pointed out in prior posts, sponsored research seldom pays for itself, so a decline in teaching loads represents, not  a productivity decrease, but rather a shifting of costs from academic programs to another income producing activity but one which often fails to cover even its own costs.

Next:  Three Reasons that Tuition is Rising: Capacity, Capacity Capacity