Thursday, August 20, 2009

Explaining the college cost explosion

Source: Carpe Diem

As this chart shows, and I have noted before, two areas where costs have exploded in this country in recent decades are health care and education. While some seek to explain the surge in health care expenses by citing factors such as more expensive medical technology and drug development, it is not at all obvious why education should be experiencing similar inflation. If anything it would seem that improved technology should make education, which is essentially the dissemination of information, much easier and cheaper.

So what explains these rising costs? Any examination has to start with the two determinants of price, which are supply and demand.

The supply of higher education is largely a function of the number of institutions that can award degrees. In order to award degrees an institution must first become accredited by the Council for Higher Education Accreditation. This is a barrier to entry to the education market. It is in the self-interest of the CHEA to not be overly liberal in its granting of accreditation as it means more competition for students.

Nevertheless, it is still possible for a for-profit company to eventually enter the market and try to compete with other institutions for students and their tuition dollars. One such example is the University of Phoenix where undergraduate tuition averages $12,000 (while this may seem like a lot, consider that many schools with lower tuition also receive public funding and/or have endowments).

It is also worth noting that until 2006 that such distance learning programs were hindered by the "50 percent rule" that mandated colleges conduct at least half of all classes in an actual classroom, with a physically present teacher, or half of all students to be physically enrolled in order to receive federal student loans.

You can look further down the food chain and examine whether the colleges themselves are suffering from supply problems of their own in terms of faculty and staff and have bid their costs up, this explanation seems dubious with little reason to think that the supply of academics or staff is particularly tight.

On the demand side of the equation, however, we see a lot of factors that could explain the cost increase.

First there is the fact that much of the cost for college is -- just like health care -- borne by third-payers. Grants, scholarships, low interest loans and the like make consumers less cost conscious and apt to consume more education resources than would otherwise the case. Indeed, it is perhaps more than mere coincidence that college costs have risen so dramatically in the wake of passage of the Higher Education Act of 1965 which sought to "strengthen the educational resources of our colleges and universities and to provide financial assistance for students in postsecondary and higher education."

Although more speculative, there is also substantial reason to think that a college degree serves as an important signaling mechanism. In our society it seems that those without college degrees are much less employable, even for those jobs where it is not at all apparent why a four years of higher learning are needed such as secretarial work. This might be a tribute to the poor state of public education and the low value of a high school diploma or a result that with so many people possessing BAs that businesses simply raise their requirements.

With a high premium placed on obtaining a degree, barriers to entering the education marketplace and sizable third party payments the rapid increase in tuition should come as little surprise. Higher education is an area ripe for the introduction of new efficiencies, with economist Richard Vedder offering some suggestions:
What might be some useful reforms? Emulate competitive market practices by increasing incentives for college decision-makers to reduce costs, for example by giving bonuses for cost savings. Tie presidential compensation to indicators both of qualitative improvements and tuition cost restraints. Numerous potential cost-savings come to mind. The central administration should rent buildings to departments to encourage more efficiency, including year-round use.

Slash administrative staffs. Increase teaching loads. Eliminate low enrollment and costly graduate programs. Get out of non-instructional businesses like housing, food, and building maintenance. Make tenure a fringe benefit with a dollar value tied to it that faculty can buy from a fixed dollar fringe benefit menu available to them.Use technology to lower—not raise—costs. Vary tuition for various programs depending on costs and demand.Integrate high school and college learning more, reduce barriers to transferring between institutions, and encourage students to enroll in lower cost community colleges.
It seems clear that a lot of money is being wasted on education that could be better spent elsewhere, as any parent facing a $20,000 college tab can probably attest. Too many people are going to college (6 year graduation rates hover around 50 percent) and receiving their education at institutions that do an inefficient job of providing it. It's a problem that demands a solution other than simply throwing more money at it, which is the preferred course of action by too many of our politicians.

No comments: