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.