A fortune in tuition: why does college cost so darn much?

National Review, Oct 11, 2004 by Richard Vedder

TUITION fees at the typical American state university rose "only" 9 percent this year, USA Today tells us, down from 14 percent last year. For every single year for over 20 years, average tuition hikes have exceeded the inflation rate. When I entered Northwestern University in the late 1950s, it took a median-income family less than two months' income to pay the annual tuition; today it takes over six months' income to pay it, at a typical selective private school.

Why is tuition soaring? According to conventional campus wisdom, it's because of declining external funding: lagging state subsidies to public universities, inadequate contributions and investment income at private ones. Schools also sometimes argue that higher tuition is funding qualitative improvements.

My own research--published in a new book, Going Broke by Degree: Why College Costs Too Much (AEI Press, 2004)--suggests that the conventional wisdom is wrong. Tuition has been growing for decades--during periods of rapidly rising as well as falling state and private funding. As to qualitative improvements, it is true facilities are nicer these days and some new academic offerings have been introduced, but at the same time the average score on the Graduate Record Exam is lower today than in 1965; it is highly questionable whether college kids are learning any more than they were decades ago.

The real reason for soaring college costs is higher demand for colleges, largely resulting from well-intended but dubious governmental policies. When demand rises relative to supply, prices (in this case, tuition fees) go up. Demand is rising partly for non-governmental reasons, such as higher incomes and a growing earnings differential between high-school and college graduates. But it is also rising rapidly because of the huge growth in government loan and grant programs as well as tuition tax credits. Pell grants, Stafford and Perkins loans, tax-sheltered college-saving schemes ("529 plans"), work-study programs, etc.: All serve to increase the number of students wanting a college education at any given price. Kids without money for college simply borrow it.

Rising tuition and enrollments have meant surging college revenues. Real per-student spending rose about 70 percent over the past 20 years. How have the universities used this extra money? Financial data provided to the federal government suggest that remarkably little of the higher spending has gone toward instruction: perhaps 21 cents for each new dollar per student since 1976. Teaching and learning are becoming almost secondary activities at some universities. Research has grown, but so has spending on myriad other things. Administrative staffs, for example, have soared. In 1976, it took the typical university about three "non-faculty professionals" to service each 100 students; today, it takes nearly six. My fairly typical university spends over $10 million a year subsidizing intercollegiate athletics.

Awash with funds, university personnel have taken good care of themselves too. Over the 1980s and 1990s, real average faculty compensation (including fringe benefits) probably rose about 45 percent, and near-mid-six-digit salaries are commonplace for top administrators and superstar faculty. A large proportion of tuition increases has gone not for qualitative learning improvements, but to making life better for the permanent paid members of the academy--lower teaching loads, more travel, higher salaries, etc. University presidents beg legislatures and big donors for more funds "to improve student access and academic quality," but use most of the money for fancy facilities, athletics subsidies, administrative-staff increases, and other things peripheral to the main mission of the institutions.

How can universities get away with it? Unlike the private for-profit sector, which faces strict financial discipline imposed by competition and markets, the not-for-profit modern American university is largely (although not completely) shielded from these forces. How is IBM doing? You can get real-time changing assessments of its fortunes by following its stock price, and at least quarterly estimates of its profits in press releases and stockholder reports. But how did Stanford do last year? Who knows? There is no bottom line in higher education. The closest thing to a bottom line for most high-quality schools is privately issued rankings of universities. The most influential, that of U.S. News & World Report, evaluates partly on the basis of the amount spent on inputs (e.g., faculty resources): The more the school spends, the higher the ranking.

Not only is there little financial discipline, but political or institutional accountability is lacking as well. Unlike most governmental agencies, state universities typically are largely operationally independent of their funding source, with relatively little legislative or executive oversight to ensure accountability. Boards of trustees nominally run most not-for-profit institutions of higher education (both public and private), but they are usually dominated by part-time volunteers with little time for independent exploration of campus issues, and are usually co-opted by the administration they supposedly oversee.