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October 27, 2013

New Report: Why Colleges Get
an 'F' in Cost Control

collegeexpense.jpg

By Richard Vedder

The College Board has released its annual report Trends in College Prices, and never has a seemingly boring document full of tables and graphs revealed more about American higher education.  Five observations culled from the data:

  • The rate of increase in tuition fees moderated a good deal this year, continuing a trend, especially at state universities, although less so after inflation is taken into account; (p.15)
  • In some regards, state universities are becoming more like private ones; 25 years ago, four-year public universities charged less than 20 percent the tuition that their not-for-profit private counterparts did; today they charge almost 30 percent; adjusting for inflation, fees roughly doubled at private schools, but tripled at public ones; (p. 15)
  • 10 flagship state universities--West Virginia, Mississippi, North Dakota, Iowa, Alabama, Oregon, Delaware, Rhode Island, Vermont, and New Hampshire-- all have more students paying out-of-state tuition than in-state fees; (p. 19)

  • Total enrollment and inflation-adjusted revenues rose considerably at both public and private research universities in the first decade of the 21st century, in spite of the financial crisis and protestations of universities over inadequate revenues; (p. 26)
  • Over the 25-year period 1988-89 to 2013-14, inflation-adjusted room and board (not tuition) rose more than 67 percent at public universities and 50 percent at private ones, explaining much of the rise in total (tuition, room and board) charges over time. (p.15)

Let's elaborate. While sticker prices at universities now are growing at a slower rate than historically typical, they still are rising after inflation adjustment - annually about one percent (public schools) or two (private schools). The actual decline in enrollments last year (and possibly this year) has softened demand, but universities are very reluctant to slow their reliance on tuition revenues. That may be changing -a few schools have announced rare tuition reductions for next year. To really do that, though, schools are going to have to really cut costs - not merely reduce the rate of increase.  The pressure to ax administrators, increase teaching loads, get rid of low enrollment majors, etc., is growing.

More Out-of-State Students

In 2000, private research universities were much more tuition dependent (38 percent of revenues) than public ones (27 percent); a decade later, a majority of that difference had disappeared (private schools got 39 percent, public ones 35 percent from tuition). Since out-of-state tuition fees are higher than in-state ones, almost certainly all of the 17 flagship schools with at least 40 percent out-of-state students (including such major state universities as Michigan, Wisconsin, and Colorado) are more dependent on out-of-state tuition monies than they receive from in-state students. State schools are becoming less state-centric, reaching out of state in order to gain tuition revenues.

Colleges increasingly complain about a lack of resources. At public schools, they point to stagnant or falling inflation-adjusted state appropriations. At private schools, they emphasize that endowments in real terms are lower than a half dozen years ago, 2007. Yet the overall "bottom line" is one of rising per student revenues, even adjusting for inflation. In the first decade of the 20th century, the College Board data show that institutional revenues per student adjusting for inflation rose by 14.2 percent at public research universities, and even more (19 percent) at private ones. Resources were expanding -except at the community colleges, where they did in fact decline. At a time when most of the American economy saw a decline in the resources needed to produce one unit of output because of productivity growth, higher education required ever greater amounts of resources to educate a student. While it is true colleges also do many other things -research, medical services, food and dining operations, entertainments (e.g. ball throwing contests)--supposedly teaching is "job one."

The Big Rise in Room and Board

The soaring price of room and board is particularly revealing. Suppose over the 25 years from 1988 to 2013, room and board charges rose only at the national inflation rate for food and housing services (which was very close to the overall inflation rate). In 2013, average total charges (tuition, room and board) for students at American public research universities would have been 21 percent lower.  About 40 percent of the real (inflation-adjusted) increase in college costs was in the non-instructional area of housing and food service.

Why did room and board costs rise so much? Three explanations come to mind.

  • First, colleges are experts at providing instruction and doing research, but they are extremely inefficient at running hospitality operations.
  • Second, colleges have inflated food and lodging charges to earn income used to finance other operations (or perhaps pay for capital expenses). In other words, these rising charges are a disguised tuition increase, with the disguise used to damper already strong negative public sentiment about growing stated tuition charges.
  • Third, more luxurious housing and food goods and services are being provided to students.

My guess is that all three explanations above have some validity. They show the importance of non-instructional factors in the tuition cost explosion. The purest element of instructional costs is faculty salaries: faculty salaries per student have risen a bit over time with modestly higher faculty to student ratios and some increase in real faculty compensation. But the increase over the past decade, which varies a good deal from college to college, is seldom as much as 50 percent in inflation-adjusted terms -way below the over 100 percent increase in stated tuition fees.   A central reason college has become more expensive is that college is less and less about learning (instruction), and more and more about other things -much to the detriment of students and their parents.

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Richard Vedder directs the Center for College Affordability and Productivity, teaches economics at Ohio University, and is an Adjunct Scholar at the American Enterprise Institute.

(Photo Credit: Clark Community Volunteers)



Comments (2)

PTurner:

The problem is that college students want social services at a pathologically high rate. They want luxury dorms and facilities. They, however, expect someone else to pay for it.

RKV:

The university as an institution, has been regulated into a box. Federal money has a cost - see the loads of new administrators hired since the 1970's. If you want to reduce costs, then reduce the need for employees at its source - reduce government regulation for "diversity," etc. Cutting headcount can and should be done.

Further, higher ed benefits (excluding the exploited class of adjunct teachers and GSIs) are overly generous. It's typical that 80% of the cost of higher education is employee labor - employees need to pay more for their health insurance, get defined contribution pensions, rather than defined benefit pensions, and reduced vacation and sick leave to private sector levels. This would likely make the university a less attractive place to work (particularly for women). Oh well.

Just to be as politically incorrect as I can be, I'd add that certain departments (any with the word "studies" in their title) should disappear. We ought to be reducing the number of students overall, and that will help with costs as well.

Nota bene - I have 5 years experience as and IT manager in higher education and you can read the budget briefings as well as I can to back up my numbers.

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