Thursday, March 3, 2016

Why college tuition is so high

Most of the prominent members of the American political left don't really have a plausible answer. The two things you will hear a lot of them say is a) because private colleges are greedy and heartless, and b) because public funding for education has been cut, but neither holds much water as a convincing explanation. If private colleges are greedy, they're surely not any more greedy than companies in other sectors of the economy (where goods are much more affordable/in line with their production cost). And federal funding for all sorts of education (K-12 and college tuition) has increased substantially over the past 40 years or so, at the same time tuition has skyrocketed.

That's not a coincidence: the biggest reason tuition has increased is that federal aid programs were introduced which radically alter the pricing incentives present in a healthy market. The way FAFSA works, as you may recall, is that college applicants fill out a long series of questions about their family's financial situation, from which the government calculates an EFC, or Expected Family Contribution - essentially how much they think you can afford to pay. Whatever accredited school you get accepted to, the government will essentially cover the difference between that school's tuition and your EFC through grants or loans. The intent was to ensure everyone can afford college by capping a family's maximum payment.

The trouble is, unless the tuition is lower than your EFC, the price seen by the consumer is not the same as the price charged and received by the college, which distorts how prices are ordinarily set. Colleges now have a guarantee that they can essentially charge however much they want WITHOUT RAISING COSTS FOR STUDENTS (or at least, not raising them on a 1-1 ratio with the tuition increase). Crucially, this all but removes the incentive to price your school competitively with other private colleges, since so long as all the colleges are priced above most students' EFC's, consumers don't save any money by choosing a cheaper one (either way, they'll have to pay just the EFC, not the excess portion which falls to the government). So colleges continually raise tuition so as to not leave free government aid money on the table, because there's no longer much business downside of not doing so.

There is a TON of evidence that this is what's happening. I'll limit myself to three links here, but each in turn has far more links to follow:

1. http://fee.org/articles/government-loans-make-college-more-expensive-worsen-income-inequality/


2. http://fee.org/articles/student-loan-subsidies-cause-almost-all-of-the-increase-in-tuition/

3. http://www.cato.org/blog/yet-more-empirical-evidence-yes-federal-student-aid-fuels-college-price-inflation

Absent the ability to undercut their competitors' prices, universities have had to compete in other ways: namely, by offering more and more and infinitely more perks and features and lifestyle benefits to their students which are barely related to "education" at all. Massive, multi-million dollar sports complexes larger than most NFL teams have, coaches with the largest salary of any public employee in the state, more free clubs than you could shake a stick at, constant construction and renovation and expansion of new dorms and new class buildings and new libraries, huge gymnasiums, counseling services, medical centers, etc. etc. One college (I forget which one) even has a lazy river now! Colleges are becoming so much more than just selling knowledge or critical thinking practice, it's a 4 year all inclusive vacation resort. These are the "frills" I was describing above, which the German universities apparently don't have as much of. And they can afford to pay for all these new features because they can charge whatever they want, and get the government to hand them whatever their students can't afford: http://www.forbes.com/sites/stevecohen/2012/08/28/oh-so-thats-why-college-is-so-expensive/#237056bb614e


The colleges themselves are the winners from this system - administrators especially, as my old professor Benjamin Ginsberg wrote a famous book on. They form their own little bureaucracy with great job security, much higher salaries than even most of the professors get, and no real competition or accountability to consumers. The losers are the students who can't pay their EFC's, or whose previously more affordable collegiate options are pressured to raise tuition to binge on the amenities applicants have come to expect. Oh, and the government, and the economy: they lose too. They lose because while education is very important, the law of diminishing returns applies to it as much as anything else, and we're well past the point where subsequent education funding does very little to actually make the country better educated absent significant structural reform.

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