Why does college cost so much? One very good explanation

Why have American colleges and universities become so expensive?

This is a deep and complex question, one not susceptible to single answers or easy slogans.  Fortunately, two William and Mary economists have published one of the best and most accessible explanations I’ve ever seen.

MHEC logoRobert Archibald* and David Feldman, authors of The Road Ahead for America’s Colleges and Universities, recently wrote “Drivers of the Rising Price of a College Education” for the Midwest Higher Education Compact (MHEC).  There they identify three primary trends.

  1. We generally tend to pay more for the services of professionals with post-secondary degrees.  “The higher education workforce is highly educated and the cost of hiring highly educated workers has risen sharply since 1981…”  They find similar patterns in fields that are similar in this way, such as physical therapy, law, and dentistry.
  2. American higher education generally devotes a great deal of attention to student success, more so than most nations’ systems, and more over time.  “A college’s mission and market require it to meet a rising standard of educational care.”
  3. Baumol’s “cost disease” applies to higher education.  Put very clearly, “[l]agging productivity growth is endemic to personal service industries, so service prices rise faster than goods prices.”  For example,

a 15-student research seminar isn’t the same if taught to 40 students, and a 35-person lecture isn’t the same if taught to 120. Measured productivity can always be increased by stuffing more students into a class, but the experience changes

Added to these three is a fourth trend for public colleges and universities: “The decrease in real state appropriations per student has been one of the major reasons why tuition at public institutions has risen more rapidly than tuition at private institutions.”  The authors remind us that 74% of students attend public campuses, “44% studied at public four-year universities… and 30% went to public two-year schools.”

Summing up and simply put, “[t]he cost of producing a year of college education has risen substantially.”

Cost to offer a year of college since WWII

Note one key part: “In the early 1980s, real college costs then began a sustained ascent that continues to the present day”

Archibald and Feldman also take down some other explanations for rising costs:

  • Administrative bloat?  This may “grab headlines but do[es] not account for much of the rising cost. Rising numbers of professional staff and improved amenities are not inherently inefficient…”
  • The amenities arms race?  See preceding.  Also this devastating note: “less than 20% of America’s college students actually live and eat on campus.”
  • Increased federal support drives increased tuition, sometimes dubbed the “Bennett Hypothesis”?  “The notion that more generous federal grants and loans cause upward pressure on list-price tuition has only been demonstrated conclusively at for-profit colleges. Public universities tend to pass most or all of any increase in federal aid back to students as a lower net price.”

Helpfully, the authors remind us of the important difference between published tuition and what students actually pay:

At private non-profit institutions, fewer than 20 percent of full-time students pay the list price, and the average discount is close to 50 percent. At public universities, roughly half of the students pay list price.

This gap is increasingly driven by escalating income and wealth inequality:

At public and private colleges alike, list price tuition has risen more rapidly than the net price the average student pays. Rising list price reflects the increasing affluence of high-income families relative to median-income and low income families. This reflects the increasing use of tuition discounts, not soaring costs.

As a result, “many families still misperceive the true cost of attendance.”  Worse, “[t]his problem is greatest among students who are the first in their family to go to college…”

Note the way Archibald and Feldman carefully distinguish between higher education institutional categories: for-profit versus non-profit, public versus private, campuses that can draw significantly on philanthropy versus those who cannot.  (For the last point, the authors offer a keen and painful insight:

Most public universities, however, have not been able to tap into non-tuition revenue in great amounts…

The most selective flagship institutions have been more successful [in private fundraising], and this is differentiating them from less selective institutions that serve a greater number of lower income and first-generation college students.)

I would amplify or tweak some points in the report.  For example, in their description of wealthy families and their role in tuition debates (“Families that pay list price tend to have well-above average income, and they vote, so changes in list price tuition have an outsized political impact, especially at public universities”) I would add “they also are more likely to donate to candidates and parties, and also are more likely to socialize with same.”

In their history of college costs the report offers this important little nugget: “College cost per full-time student rose rapidly in real terms until the late 1960s and then entered a stable or declining phase for over a decade.”  I wonder how many people who enjoyed that 1960s-1970s cost period now shape American higher education, either within the field (as senior faculty and administrators, as board members) or nearby (as state legislators)?  That must have been a deeply formative experience.

I’d also like to see more details broken out by race and geography.  And I’d explore why news media are especially keen on rising college costs; my theory is that this has to do with rising education standards for reports plus the wealth of media outlet owners.  But for a 20 page pdf, Archibald and Feldman cram in a lot.  Recommended for reading and sharing.

*Professor Archibald was a fine and early Future Trends Forum guest:

 

Liked it? Take a second to support Bryan Alexander on Patreon!
This entry was posted in economics, trends. Bookmark the permalink.

14 Responses to Why does college cost so much? One very good explanation

  1. Lisa Stephens says:

    Thanks for the break down Bryan. I’ll give this a read.

  2. Phillip Long says:

    Bryan: they have written a concise readable summary of the problems, which you’ve synthesized well. What stands out to me is the lack of tangible options to respond to this reality, or at least reshape the discussion around it to get past the McGuffins that side track useful progress.

    We’ve known the reality of Baumol’s ‘disease’ for human intensive service organizations for a couple of decades now. It’s well documented in the healthcare domain and stands out in sharp relief there as insurers continue to reduce the billable time a physician or allied health specialist can spend with a patient to improve ‘productivity’, as if dropping the face time for 20 min to 8 min is a health improvement tactic and not simply a blatant shareholder dividend improvement strategy.

    So where are there opportunities to reframe the discussion, and more importantly, address the growing inequities that result from the rising costs and hidden but significant subsidies that reduce those suggested retail prices for those at private schools with families of greater means?

    • Bryan Alexander says:

      I think the solution space was constrained by the authors’ sense of the Trump administration, but I might be wrong. The report didn’t have much space for answers.

      Reframing the discussion: first off, I think much of what the report says is new to many in and around academia (think legislators and parents for the latter), so this information needs to get out there.
      Second, I have seen nearly zero interest in addressing economic inequality within higher education. Quite the opposite: we seem desperately wedded to a structure that both depends on and accelerates inequality. I hope in my work to raise this topic, but most people would rather discuss technology instead.

  3. Bryan – This report penetrates the appearances of the issue quite well, and while I can’t offer much as a solution to the issue as a whole, I can certainly react to a recent decision by Syracuse University (my Alma Mater ’11) to blow $118 million on a new football dome: https://www.syracuse.com/orangesports/index.ssf/2018/05/syracuse_details_118_million_in_carrier_dome_renovations_including_permanent_roo.html

    Having trudged through the crumbling School of Education building during my two years there while the iSchool and Newhouse enjoyed stadium seating, it was clear where the college placed its priorities. (To be fair, the SoE has since enjoyed a massive rebuild of their facility).

    Still, it is very difficult for me to resolve the appearances of this move by SU in terms of the realities of tuition costs at a private college (think: Schindler’s List — how many semesters could this football stadium have paid for?).

  4. Joe Murphy says:

    I’m having a little trouble reconciling the claim that “administrative bloat… do[es] not account for much of the rising cost” with the finding that “We generally tend to pay more for the services of professionals with post-secondary degrees.” It seems to me that a fair number of administrative services have been professionalized in the 60 years being studied, so even if it’s not a growth in headcount, it might be a growth in salary. (Of course, the mix of worker education and available technology might balance that out, following the model of one highly-paid worker taking the place of 2 or 3 lower-paid ones.)

    I am increasingly dissatisfied with the “selective flagship” model, particularly as the work of people like Sara Goldrick-Rab and Tressie McMillan Cottom have made me attuned to the impact of higher education deserts (and as my professional network has informed me better of the outstanding work happening at various public and private regional institutions). The efficiency imperative, and the bigger-is-better model, have accomplished some great things, but I’m not entirely sure the costs to widespread communities have been worth it.

    • Bryan Alexander says:

      Good point about professional degrees for administrators. I think that makes sense, though, when we consider how those degrees map onto needs (IT, library, administration, etc.). Unless one wants to make a case for too many of them.

      Flagships: are you objecting that they draw resources from the rest of the system?

      • Joe Murphy says:

        Boy, my opinions about the absolutely toxic culture around “professionals” and “paraprofessionals” make the first point hard to respond to. Degrees don’t correspond perfectly to professionalism, and professionalism doesn’t perfectly confer good judgment… but they sure do correlate.

        In a nutshell, though, yes – framing the debate around people (and their “bloat”) is a tricksy way to sidestep questions about prioritization of needs.

        Also yes, I’m objecting to the way that flagship focus literally moves resources away from students who don’t have a lot of geographic mobility, and their communities. You want to talk about ways the system depends on and extends inequality… well, there’s one way.

  5. Bryan, I look forward to reading the report, but one comment – I’m reasonably sure that at least some institutions have *reduced* the cost of producing a degree over the past 20 years. I want to pull the numbers for Cal State U but I believe that because of the large reduction in the real-term value of the state contribution has combined with an aversion to tuition increases to drop the dollars spent per student. I suspect the main way this has been accomplished is by slow growth in salaries and increasing reliance on contingent faculty. I know Cal State’s conditions are not unique so you will likely find something sinilar at other large mid-tier public universities. It’s frustrating that the reality of increasing *price* has been conflated with increasing *cost* once again. They are related but independent variables.

    • Bryan Alexander says:

      See what you make of the report, then. To begin with, they’re talking about the entire sector of American higher ed when it comes to cost. If CSUs are an exception, then they are – and good for you!

      Price/cost – see the report.

      • If I might weigh in here. Some schools have indeed cut their spending per student. As non-profits, revenue per student (from tuition or from public subsidy) must equal what the institution spends per student (its cost). If revenues shrink, cost will fall too. This does not imply that the institution has discovered the magic elixir of productivity growth.

        As you note, many of these institutions have cut spending by replacing tenure eligible lines with contingent faculty. When faced with falling state support, this choice is often the “least bad” way to respond, since respond they must. This is not a positive choice driven by evidence that shifting more teaching to contingent faculty is a best practice that improves the quality of higher education.

        By contrast, there is strong evidence that money matters in higher education. Caroline Hoxby’s work on productivity (NBER), for instance. And Bound, Lovenheim and Turner (AEJ applied, 2010) connect lower spending per FTE student to declining graduation rates in underfunded public universities.

        The schools that deal disproportionately with the nation’s 1st generation and lower-income student population are the ones that disproportionately have had to make do with declining budgets. This is not a recipe for improving the social mobility function of our higher education system. These are not the schools we need to make “more efficient” by starving them.

  6. Here’s a report on the prospects for funding the UC System

    Also, I’ve added my comments on whether academic labor saving technology should be seen as an “anti-goal.”

    Apparently, at least one ed-tech group at UC Berkeley think it should be seen as an “anti-goal.”

    ————–

    Elite private universities such as Harvard or Stanford do not have, as part of their mission, a committment to increase enrollment to keep up with the demand of students who wish to enroll in an elite institution. Not so with the University of California. According to the Clark Kerr’s master plan for public education, the three school systems in California – the University of California, the California State Universities, and the California Community Colleges – were supposed to grow, with state support, to meet the needs of a growing population. Each of these three systems were supposed to address the needs of a certain percentage of that growing population.

    This report suggests that the UC system may not be able to meet this committment unless it receives additional funding from the state. The alternative is for it to: “limit enrollment and program growth to focus on quality and productivity.”

    My take on this is that states should continue to support the growing needs of public colleges and universities. However, if public schools want to continue to receive state funding, they need to take responsibility for controlling the cost of education. When it comes to controlling the cost of instruction, it’s fairly easy to see why efforts to introduce labor saving technology may not be popular. The governance structure of the university gives faculty control of educational technology and teaching methodology. There are good reasons for this, but it creates a conflict of interest. Why would faculty want to look for ways to innovate themselves out of a job?

    This report, which was developed by UC Berkeley’s Center for Studies in Higher Education, does not address this conflict of interest. Further, it simply dismisses the idea of using technology and teaching methodologies that incorporate technology (e.g. flipped classrooms) as being too expensive to develop. It doesn’t explore ways to handle large upfront development costs such as outsourcing development or creating consortiums of schools to shared development costs so as to create an economy of scale (i.e. to spread out the upfront cost over a large number of schools).

    Nevertheless, I’d say this report is a worthwhile read for those of you who are interested in the economics of higher education. Thanks to Jenn Ramsdell Stringer for posting this report on her FB page.

    —————————–
    Academic Labor Saving Innovation as an ‘Anti-Goal’

    To get a better understanding of the conflict of interest that prevents schools from looking for academic labor saving technology, consider this question:

    Who at Berkeley, if anyone, is charged with the ongoing responsibility for developing ways (or looking for ways developed by others) to reduce the cost of instruction through the use of information technology?

    Perhaps this question should be put to someone from the CSHE (e.g. C. Judson King):

    Judging from the email exchange between William Bowen and C. Judson King provided below, it would appear that the answer is: no one.

    Further, it appears that at least one edtech unit (BROCE) sees this sort of activity (i.e. looking for academic labor saving technology) as an “anti-goal.”

    ————————
    Here’s what William Bowen writes in his book Locus of Authority:

    “…, it is all too easy simply to ignore costs. The most vivid example of this tendency gleaned from our case studies is the listing on a University of California, Berkeley, website of efforts to seek cost savings as an ‘anti-goal.'[1] Apparently this listing has been taken down from the website in question, but the mindset it represents has a lingering presence – and by no means at Berkeley alone.” (p. 178)

    In footnote #1, Bowen writes:
    “We asked C. Judson King, provost and senior vice president – academic affairs, emeritus, University of California, and director, Center for Studies in Higher Education, Berkeley, about this, and he responded that he was unable to bring up the cited website.”

    Also in footnote #1, Bowen inserts an extended quote from an email he received from C. Judson King on February 2, 2014,

    “Perhaps the website has been redone since you consulted it. Hence my answer will reflect what I think may be at play. The BRCOE [Berkeley Resource Center for Online Education] and MOOCLab are designed to stimulate and help faculty get going in devising online approaches to higher education. In that sense citing opportunities and available assistance would be designed to get the faculty doing things, while citing cost savings would not incentivize and stimulate the faculty much at all. In that the goal is to get the faculty moving with regard to online methodology, the website may have been created to stress the things attractive to faculty and eliminate or minimize any implication that online methodology is going to displace faculty. With regard to the thinking that ‘online learning technologies are not going to reduce costs,’ I don’t think that feeling is universal at Berkeley. The statement probably reflects a feeling that online components will be an add-on, without significant reduction in current costs; i.e., the faculty will continue to ‘teach’ as much or nearly as much. It is true that enhanced delivery and pedagogy though the use of online elements can be attractive to many faculty members, and there is probably substantial feeling that the best role of online education, as it now stands, is to enrich courses rather than to supplant the need for the instructor. I think there is general appreciation that the use of online methodology can and should change the nature of classes, i.e., by adding components beyond the classical lecture. Finally, the typical cost structure of online education (of the quality in which most faculty believe) is a substantial cost out front for development of the online component, followed by little or very small cost per student hereafter. In that sense, someone looking at the cost of online instruction in the short run will see it as an added cost, and it takes an appreciation of the longer term to see the savings.”

    ————————-
    Approaching a Tipping Point?
    A History and Prospectus of Funding for the University of California

    by John Aubrey Douglass and Zachary Bleemer
    https://cshe.berkeley.edu/publications/approaching-tipping-point-history-and-prospectus-funding-university-california-john

    ABSTRACT:

    This year marks the University of California’s (UC) 150th anniversary. In part to reflect on that history, and to provide a basis to peer into the future, the following report provides a history of the University of California’s revenue sources and expenditures. The purpose is to provide the University’s academic community, state policymakers, and Californians with a greater understanding of the University’s financial history, focusing in particular on the essential role of public funding.

    In its first four decades, UC depended largely on income generated by federal land grants and private philanthropy, and marginally on funding from the state. The year 1911 marked a major turning point: henceforth, state funding was linked to student enrollment workload. As a result, the University grew with California’s population in enrollment, academic programs, and new campuses. This historic commitment to systematically fund UC, the state’s sole land-grant university, helped create what is now considered the world’s premier public university system.

    However, beginning with cutbacks in the early 1990s UC’s state funding per student steadily declined. The pattern of state disinvestment increased markedly with the onset of the Great Recession. As chronicled in this report, the University diversified its sources of income and attempted to cut costs in response to this precipitous decline, while continuing to enroll more and more Californians. Even with the remarkable improvement in California’s economy, state funding per student remains significantly below what it was only a decade ago.

    Peering into the future, this study also provides a historically informed prospectus on the budget options available to UC. Individual campuses, such as Berkeley and UCLA, may be able to generate other income sources to maintain their quality and reputation. But there is no clear funding model or pathway for the system to grow with the needs of the people of California. UC may be approaching a tipping point in which it will need to decide whether to continue to grow in enrollment without adequate funding, or limit enrollment and program growth to focus on quality and productivity.

    —————————–

  7. Alan Levine says:

    I’m curious just looking at the slope of the graph. It’s ascent in 1983-2003 is not all the different from the beginning (1948-1963). Was the beginning a steep rise because of the physical costs of building campuses? And why did costs flatten, even decease 1973-1983? And even was flat ~1998-2003? Or do these correlate to times of stronger over all economy? Or what happens when you factor this into the changes in opportunity for even getting into higher education?

Leave a Reply

Your email address will not be published. Required fields are marked *