Paul L. Caron

Tuesday, February 9, 2016

Federal Student Aid, Not Faculty Salaries, Is Primary Driver Of Escalating Tuition

Grey Gordon (Indiana) & Aaron Hedlund (Missouri), Accounting for the Rise in College Tuition:

We develop a quantitative model of higher education to test explanations for the steep rise in college tuition between 1987 and 2010. The framework extends the quality-maximizing college paradigm of Epple, Romano, Sarpca, and Sieg (2013) and embeds it in an incomplete markets, life-cycle environment. We measure how much changes in underlying costs, reforms to the Federal Student Loan Program (FSLP), and changes in the college earnings premium have caused tuition to increase. All these changes combined generate a 106% rise in net tuition between 1987 and 2010, which more than accounts for the 78% increase seen in the data. Changes in the FSLP alone generate a 102% tuition increase, and changes in the college premium generate a 24% increase. Our findings cast doubt on Baumol’s cost disease as a driver of higher tuition.

Inside Higher Ed, Why Is Tuition So High?:

Higher education's critics tend to blame high prices on overpaid professors or fancy climbing walls. At public colleges, lobbyists tend to blame reductions in state support. But a new study places the blame elsewhere: the ready availability of federal student aid.

“You've got to somehow tie aid to lowered tuition if you want to give money to students,” said Grey Gordon, an assistant professor at Indiana University and co-author of the paper. “You have to somehow structure it so colleges can’t just increase tuition and capture that money.”

But the idea that increased student aid drives up tuition is contentious, as is the researchers’ model. The paper’s conclusions depend on a model of one hypothetical college, which is based on data from private and public nonprofit institutions.

“This is an atom bomb mathematical technique on a problem that requires much more nuance,” said David Feldman, economics professor at the College of William & Mary and author of Why Does College Cost So Much? (Oxford University Press, 2010). Feldman said increasing federal aid will rarely change how high a college sets its tuition. A college’s sticker price is set by its wealthiest students’ ability to pay -- and the wealthiest students never take out loans. ...

The second, equally divisive finding of the paper has to do with what doesn’t drive up colleges’ price tags: faculty salaries.

The idea that faculty salaries increase tuition is popular, and the reason is something called Baumol’s cost disease. In the 1960s, the economist William Baumol noted that certain sectors become more productive over time, which allows them to cut labor costs and lower prices. But sectors that don’t see productivity increases still end up increasing their workers’ salaries, which drives up the cost for consumers.

Think of a string quartet, the example Baumol used in his original analysis. Even as time passes and technology improves, it will take the same number of people the same amount of time to play a piece of music as it did hundreds of years ago. Productivity isn’t increasing, but the cost of a string quartet will still rise -- and the consumer has to pay the extra cost.

Education, proponents argue, is the perfect example of Baumol’s theory. Instructors stand in front of lecture halls or seminar rooms, interacting directly with a manageable group of students. For centuries, the argument goes, nothing has changed about this model. Faculty members are expensive, and tuition goes up.

But according to the researchers, Baumol’s hypothesis doesn’t hold up. In the model, costs did rise -- but instead of raising tuition, the model college responded to the higher costs by increasing enrollment.

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When I first began to study pre-engineering at Auburn in the summer of 1966, tuition—whatever my course load—was $100 a quarter. I still have the textbook I needed for all three quarters of physics. It cost me $8.50 used. Housing could be had for under $200 a quarter and in the summer for as little as $60.

Yes, nothing was fancy. Half my classrooms were not air-conditioned despite the heat and those cheap apartments wouldn't pass today's building codes. But I got an education at least as good as that today. The difference was that college loans were rare. The system had to adapt to what I could afford and that was good. I graduated debt-free.

I now live about half a mile from that campus and I feel sorry for its students. Costs have grown enormously. I had to work about seven hours to by that physics textbook. I checked and today's students have pay $160 for its equivalent, that's 22 hours at the current minimum wage or three times as long. I could manage to work my way through school, paying as I went. Today, the chance of doing that is so slight, many don't even try. They just take out a bigger load and live to regret it.

That said, I don't think the availability of college loans is the only cause. Administrative indifference is another. Today's college education is no better than that I received. Yet college officials have no problem with charging three times as much as I paid in real money. They're indifferent to the post-graduation burden that places on their students for the most obvious of reasons—they don't care.

You don't hear most of them complaining about this do you? They simply want to tap new sources of income.

Posted by: Michael W. Perry | Feb 10, 2016 12:53:34 PM


Federal student lending ceilings for undergrads haven't increased since 2009. College tuition increases every year anyways, even as the maximum a dependent undergrad can borrow per year is $7500 and the cost of many private colleges is north of $60,000 per year. This study is woefully incomplete. Defunded public institutions are a huge piece of the problem. Health care costs account for ten cents of every dollar. Many universities have issued bonds nilly-willy to fuel campus expansion and spend considerable sums paying it back. For instance, Suffolk University, which has been in the news lately for an imbroglio between its board and its latest president (the fifth in five years) has a maximum annual debt service that eats one dollar in eight out of its operating budget. Etc, etc, etc. There are many causes for tuition to increase. In my experience, most of the voices screaming that it is only the fault of federal student loans come from one of two camps: politicians who want to cut federal student loans or private student lenders.

Posted by: Unemployed Northeastern | Feb 10, 2016 9:08:01 AM

Baumol's cost disease affects the price of string quartet performances. But, most people who listen to string quartet music, listen to recordings of string quartets not live performances. The prices of recordings have plunged.

That this dynamic has not affected higher eduction is a tribute to institutional rigidity, and is not due to any inherent feature of education. I think that if modern technology were turned loose on the educational system, it would have the same impact there that it has had on the music business.

Posted by: Walter Sobchak | Feb 10, 2016 9:04:50 AM

Of course, extravagant tuition subsidies lead colleges to boost prices to take advantage. That's Econ 101.

Some of that money probably does go to faculty salaries... that which doesn't go to Administration and climbing walls, etc. But Baumol's cost disease applies in many areas that have not seen increases like tuition, so clearly it is at most only a partial explanation of tuition increases and not at all why tuition has increased faster than, say, the cost to repair an appliance or build a home of a certain size(ex-land costs). To say that faculty salaries are the driver is to reverse cause and effect.

Also, the admin side should see considerable benefit from new technology, etc., and cost growth should be slower than Baumol would say--but Admin has been the fastest growing major cost center. Some of that may be compliance costs (mostly educational deadweight loss, but arguably required as a cost of doing business), but the growth in Admin has been so explosive that it is clearly far beyond need.

The only answer is to phase out all tuition support except a very small program that is need-based and tied to the college offering discounted tuition and fees.

5 yrs to phase out ought to be enough, but start requiring big discounts immediately, with next Fall's grants and loans.

And the G can stop imposing requirements where it is no longer paying. That will help colleges shrink compliance-related admin and offer those discounts, and should start Fall 2016.

Posted by: mhjhnsn | Feb 10, 2016 8:59:26 AM

Lets try Econ 101. Higher demand tends to increase prices. Oh yes, of course faculty salaries don't soak up the extra money. More, and more expensive, administrators who hold more meeting with each other, and draft more mission statements, soak up the money.

Any more questions?

Posted by: Walter Sobchak | Feb 10, 2016 8:53:57 AM

I'm not surprised academics pooh pooh the idea that increased student aid drives up the cost of tuition. After all, if they were to confirm that theory (a correct one in my opinion) and tuitions were to fall what would be one of the first things cut? Academic salaries.
In other words, increased academic salaries are not the driver of tuition increases, they are a by-product.

Posted by: Ralph Gizzip | Feb 10, 2016 7:29:12 AM