The economics of higher ed are notoriously complicated and even shambolic. Approaching this Byzantine system requires a good amount of research and care just to get started. Which means it’s very easy to write badly about the topic.
Today’s case in point comes from Scott Galloway. I’d like to take it apart not to criticize the guy himself (no malice here, to pick up on his tagline), but to illustrate some common mistakes in his article which readers can spot and avoid. I take my job as a futurist to mean (among other things) that research about the present and recent history should be excellent, in order to improve forecasting. Let’s see about improving things.
The piece is a Medium article titled “Why the Cost of Higher Education Has Spiraled Out of Control” and it makes some good points. Galloway is right to repeat the common wisdom that published academic tuition has soared for some institutions over the past two generations. He’s right to echo many people who see the nearly $2 trillion in student debt as a disaster. Yes, accreditation is a powerful force. Calling out senior administration compensation as excessive is a popular charge, as is arguing for taxing excessive endowments. And I’m glad to see a professor from an elite institution complain that being exclusive runs counter to the democratic promise of access.
Yet the piece makes a series of mistakes that too many others fall prey to.
Confusing a handful of universities for all of higher ed. There are about 4,000 American post-secondary institutions, and they appear in a wide range of forms: public and private, liberal arts and community colleges, arts-centered and vocational, huge and tiny, to name a few. This diversity must be hard to grapple with, because writers so often like to pick on one slice of it, then generalize to the rest therefrom.
“Why the Cost…” has many examples. The title calls out higher education as a whole, but the first paragraph immediately slices it down to state-funded schools: “undergraduate tuition has risen nearly three times as fast: 6.7% a year at public colleges…” A few paragraphs later the author explains all of rising tuition by analyzing “[o]ur best universities” and “our great public universities,” and “the top 200 schools.” Why does this matter? Because different sectors, systems, and individual campuses have different pricing structures. And because community colleges – the largest slice of American higher ed – have far, far lower published tuition that most other institutions, which makes the article’s argument at best an overreach.
To be fair, the article offers this graph of prices, which displays several tracks, although the article on picks on one:
And at the article’s end Galloway changes tack and addresses other schools, citing “local public institutions, including two-year schools, that charge modest tuition…” It’s too late in the piece, but welcome.
Missing tuition discounting. Yes, the published tuition rates have increased. However, a good number of students and families don’t actually pay those prices. They pay less, even a lot less. This is because colleges and universities use various tools to cut those prices for certain students. Scholarships, grants, and other mechanisms let campuses charge less.
To recap what I and others have been saying for a while: tuition discounting has been going on for decades and is well known to everyone who looks at college finances seriously. In fact, it’s been increasing drastically since 2000. The median discount for first-year students is around one half – that is, if a school publishes tuition of $60,000, its median student pays $30,000. Here’s a recent finding from the profession group devoted to campus business and finance officers:
Why is this? Partly it’s to attract certain individual students or types of students. Tuition discounting makes an institution more appealing to, say, sports stars or underrepresented minorities. Another reason is to respond to escalating income and wealth inequality. If one part of American society soars in wealth, a college or university can soak them for full price. Then that subvents those on lower economic levels. I’ve heard this current steep tuition discounting practice described as a means test, and that’s not a bad analogy.
So yes, published tuition has risen. But what people actually paid – there, the picture is quite different.
Not seeing the actual enrollment picture. Galloway’s piece makes a different mistake, one that’s very popular to commit. “Kids are still getting into college (total enrollment has kept pace with the growth in graduating seniors)…” This assumes college students are recent high school graduates. Such a view contains some truth – some people do jump from high school to higher ed in a few months – but misses the large number of adult learners attending college. Depending on one’s data, this can be one quarter or one third of all enrolled students.
Also on the enrollment side of things, that quote seems to say that total enrollment is rising. As readers of this blog and my most recent book, Academia Next, know, the opposite is true. American higher ed student numbers peaked in 2012 and have declined every year since.
Confusing goods and services. A very popular argument compares published tuition to well known commodities, like tv sets. Galloway leads off by looking at the price of gas.
Why is this a problem? Because higher education as an economic function offered to students is a service, not a good. Services behave differently in the market, especially services famously resistant to the efficiency improvements which drop the price of goods. Moreover, the market often prices services to reflect the credentials of who provides them, and higher ed is very well credentialed. I don’t just mean faculty, but also staff, who increasingly work with graduate credentials.
Consider this graph from Marc Perry:
Note how all of the blue items (decreasing prices) are goods, like toys. Then see how many of the red ones (rising prices) are services: health care, nursing, and tuition.
(Three quick caveats: first, remember what I said above about actual tuition after discounts. Second, some goods increased, and we might be rightly angry that they have done so. Third, I’ve heard various critiques of this chart’s details; I’m not sure if they are correct, but the broad curves seem pretty convincing.)
If we talk about higher ed as a service sector, then the conversation changes. We can compare it to, say, health care or law to see how those fields’ prices have changed, and look for any lessons to apply or ideas to be inspired by.
Not engaging other explanations for rising tuition An essential part of academic writing involves considering previous research into one’s topic. I know that Medium pieces are not scholarly papers, but even there it pays to address well known arguments in the space, which Galloway’s article avoids.
For example, it’s pretty widely understood that American states gradually reduced per-student funding to their public universities since circa 1980.
There are several reasons for this, and defunding takes various forms, yet the overall picture is clear. Without going into too much detail, the argument goes that losing state money while educating more students (until circa 2012) meant state colleges and universities turned to student fees to make up the difference. Hence the (published) tuition takeoff. I’d like to hear Galloway’s take on this. Would he call for states to reverse course and increase support?
Another argument is the famous “amenities arms race,” whereby colleges and universities spend themselves mad by building up elaborate residence halls, climbing walls, wellness centers, lazy rivers, gourmet dining services, etc. Personally, I find this overstated, especially as the main chunk of campus budgets go to personnel compensation, but it’s a popular explanation and worth addressing. Should colleges withdraw from the race?
Personally, I’m persuaded by Archibald and Feldman’s argument that higher ed’s published prices are expensive because we have a lot of highly credentialed professionals. More staff and senior leaders have more degrees, which we tend to reward with higher compensation. We insist that full time faculty should have the highest degree possible, the PhD. Now, this doesn’t account for the humanitarian disaster which is the adjunctification of the professoriate, where we are happy to pay people with advanced degrees poverty wages (and wages only, no other benefits), which is a weakness.
I’m also persuaded by the importance of state defunding. And I think we should also bear in mind rapidly rising medical costs for full time staff and some students (again, not for adjuncts). (I do plan on writing this up at some point.)
There are some other problems in the Medium piece which are not quite so evident elsewhere. In the article and elsewhere Galloway calls for a massive increase in enrollment, but this runs smack into the reality of a decade’s decline in students taking classes. Similarly, his call for starting up a bunch of new schools falls short on that issue (why make new institutions when the present ones are seeing their market fade?). He needs to address this. Also, I’m not sure what “putting schools on the hook for a portion of the bad debt” would look like – ISAs? – and the article doesn’t elaborate.
Yet the key thing for me is not these local issues, but how “Why the Cost of Higher Education Has Spiraled Out of Control” embodies so many popular mistakes. Focusing on published tuition instead of the discounting system, overemphasizing parts of the whole ecosystem, comparing higher ed to the wrong economic category, and not engaging with the actual conversation around academic economics… we would all do well to avoid these. Higher education needs better discourse.
Thanks for that interesting analysis!
I’d add that no discussion of the rise in tuition rates at U.S. institutions is complete without including the effect that federal student aid has by making available an artificial ocean of money that tuition rates rise to soak up. Bill Bennett is not my cup of tea, but he was right about this.
Relatedly, Perry’s chart about price changes is interesting because you characterize it as a difference between services and goods, which it is, but it’s also a difference between industries whose markets are highly regulated/distorted and those that are less so. It’s no surprise that hospital services are the services that have outpaced inflation the fastest, or that new cars are the goods that have become less expensive the slowest.
Steve, thank you for that.
I’ve read many arguments back and forth about the Bennett Hypothesis. At this point it’d be worth a small research effort to summarize!
Bryan, interesting post, thank you for shining a critical light on the rhetoric out there. Further to Steve’s comment, The National Bureau of Economic Research published research in 2018 with findings that “suggest that expanded student loan borrowing limits are the largest driving force for the increase in tuition, followed by the rise in the college premium.” https://www.nber.org/books-and-chapters/education-skills-and-technical-change-implications-future-us-gdp-growth/accounting-rise-college-tuition
Too much money chasing too few degree programs, but with the wrinkle that we have the “decade’s decline in students taking classes” — so less students, but with more to spend. This adds a compounding effect of making student recruitment a much more competitive undertaking… leading to not only the “amenities arms race”, but also institutions adding such things as marketing departments (more personnel plus expensive advertising budgets), OPM contracts, etc (online programs may be seen as a competitive / strategic growth capability which, while wonderful for expanding access and reaching folks who might otherwise not be able to be present at the time and place of on-campus education, bring with them a whole new cost-structure (instructional designers, technologists, new technology systems, digital advertising, and vendor relationships)).
If “the main chunk of campus budgets go to personnel compensation”, how much of the personnel compensation is driven by the amenities and the aforementioned strategic growth capabilities? That is, all of the added amenities would require additional staff to operate and manage, plus overhead, vendor contracts, etc. It would be interesting to study what *types* of personnel have institutions been adding and in what roles have they seen the most expense growth.
The NBER research raises some interesting questions for the future: what happens if/when the supply of financial aid contracts, and what would the trigger(s) be for such a contraction? Is there a credit crisis around student debt waiting in the wings, and how might that unfold, and what would it mean for HE institutions? Is the financial aid bubble leading to a bubble of over-credentialed graduates, an “overproduction of elites” a la Peter Turchin? And if so what are the implications for our already strained social fabric?
Thanks for the link to the NBER study, Jeremy. Given their reputation for ideological equanimity, that’s among the most compelling sources I can think of.
It also tracks with how some of the lowest cost institutions in the U.S. are distance learning universities that don’t participate in Title IV, even though they’re for profit.
I suppose if the supply of money dried up that most institutions would have to drastically lower their tuition rates. The pace of mergers, acquisitions, and closures would hasten. I expect many who work in higher education would see that as bad, and in some senses it surely would be, although it’s also worth asking whether it would be better for students, especially in the long run. Would it be zero sum, where less capacity meant fewer people going to university? Or would the market adjust, where the more nimble institutions capable of serving students at lower cost would expand to make up for those institutions that could not adapt?
That said, perhaps it’s a moot point, since I have yet to see any legislative appetite for rethinking Title IV, even though student loan debt is a front burner issue for many activists on the left and even though dismissing the value proposition of higher education altogether has become common among those on the right.
The NBER study is interesting, but as is so often the case it involves some really sweeping simplifications and assumptions to make it work. (There is an old joke about a religion prof, physics prof and econ prof on a desert island. They find a case of canned food they need to open to survive. The religion prof says “God will provide”, the physics prof calculates how high they would need to drop a can for it to open, and the econ prof says “First assume a can opener.)
One of my biggest issues is it assumes 1 uber-university that is meant to stand in for all, yet we know the financial approaches differ wildly. I have no problem believing that some exec at a for profit said “Hey, they can take out more in loans? Excellent – jack up the prices.” But no public institution would say that. Rather, I would argue that additional student aid available allowed STATES to defund higher education without guilt because the costs were being covered by the federal government.
I also think that models like that tend to leave out the effect of political rhetoric on how these costs are seen. Reagan was the one who started saying things like the state “should not subsidize intellectual curiosity”. That was then connected to the idea that the only good degree was one that led directly to a job/career. This rhetoric changed the way the country looked at college, from something that was good for the community as well as the individual, to something that only benefited the individual. Again, this became an excuse for state defunding (a task in which he led the way).
One other point that I really wish I had the time to do proper research in is the cost of oversight/transparency. I work in the budget office of a state university, and the vast majority of my team’s time is spent, not determining the best way to spend our meager resources, but creating reports for everyone and their brother about how we spent them. I don’t want to say that oversight isn’t important – it is. But we have (as Americans so often do) swung past moderation and way off the other side. This leads to needing more people to create the reports (since they are rarely the same), communications professionals to make sure the reports written get the right message across, lawyers to make sure that no one can sue us over the content or the language and people to archive the reports so that when we do the next one we can assure it doesn’t conflict. It’s exhausting. Even if the impact of over-regulation isn’t meaningful, it’s not zero.
Recently we had a regent (heaven help us) say that he was a simple man and liked things explained simply. However running a university, community college, etc. is not simple. We do not live in a simple world. Essays like the one in Medium try to simplify what are actually far more complex topics. We can’t just assume a can opener to make that complexity go away.
I’m devastated — flattened — that NO ONE is talking about the chief culprit here: Credential Inflation!
Masters degrees — not BAs or BSs — now account for at least 48% of outstanding student loan debt. There’s no mention here of **credential inflation** that’s driving the expansion of higher ed and skyrocketing tuition.
“Educational credential inflation expands on false premises – the ideology that more education will produce more equality of opportunity, more high-tech economic performance, and more good jobs. Social class mobility in the United States has been stagnant since the mid-twentieth century, unaffected by the huge increase in levels of education over that period. … The proportion of good jobs has declined as the middle class has been hollowed out, and working-class jobs exist mainly in the poorly paid service sector.” (Randall Collins, 2013).
Figure 2 should answer your questions about Credential Inflation. Even Jeremy and his NBER study are oblivious.
Our hypothesis was that a decreasing labor market value of having completed a particular transition between two generations would lead to a higher
likelihood to make that transition. We found evidence for this hypothesis for the transition into some tertiary education in the Netherlands, and the transition into full 4-year university degrees in the United States. For the
transition into high school completion we found evidence supporting this hypothesis in the United States only if parents made the transition. For the Netherlands, on the contrary, children were more likely to enroll in this
transition when its labor market value increases …
The mechanism underlying our general hypothesis is that education functions as a positional good, and if education loses value people need more of it in order to reach the same social class as their parents. This would particularly be true for the USA, because the educational system is generic and unidimensional.
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