Why is College Tuition so high?

This is one of the most talked about issues in American politics today. There is no shortage of information (as well as misinformation) about this issue. I have seen lots of different experts posit different explanations for what has happened and many of them don’t actually make sense when you look at the hard numbers. There are some explanations though that are quite convincing as the hard numbers behind them definitely suggest the reason for the dramatic tuition increases we have seen. Additionally, when you think about those who had the power to control tuition costs and think about their incentives and responsibilities, it becomes clear that no one was really held accountable for rising tuition as the students and parents had no way of holding them accountable.

 

First, I will start with the explanations that fall short:

Administrator salaries are too high: While I do not dispute this fact, the salaries of those at the top when you look at a university budget are usually just a small percentage. At my alma mater, NYU, John Sexton makes $1.3 million while the university likely gets $600 million per year from undergrads (20,000 students who pay an average of $30,000 per year after scholarships and grants, according to the NYU website)

Too many fancy buildings: Again, by the numbers, buildings are not that expensive. While the price tag may be in the millions, that only amounts to thousands per student for the entire building in many cases. The new buildings are also usually not funded entirely by tuition. Additionally, they are not going to pay for it all at once and will likely have a long-term loan, thus further reducing its impact on a student’s tuition.

 

The explanation that college administrators love to posit is that the state governments are not funding education enough. According to the documentary Ivory Tower, Reagan said, “The state should not be funding intellectual curiosity.” In his time, college was not the necessity it has become today. This has not changed the conservative attitude however. We thus have a perfect storm of old attitudes but new conditions. In any case, while this does help explain tuition increases at public colleges, it does not explain private college tuition increases. I want this article to explain the problem more generally, so I will not delve too deep into this source of tuition increases. Wikipedia actually does a really job of explaining the main sources of increases and it has a multitude of links to reliable data on what has really caused the problem. For the rest of this article, I will take the facts from the article as well as many other articles and ask the question of who was held accountable. Spoiler Alert: No one.

One of the main reasons presented in the article is the practice of tuition discounting, whereby the school uses the tuition money for financial aid to less fortunate students. If we ended tuition discounting, the tuition would decrease, but the affordability of college would be adversely affected. We could increase the amount of federal money for education, but that is not likely to happen any time soon. In any case, tuition discounting is only a small part of the increase and it would not explain the lack of affordability of college and the increase in student loans.

Now, let’s think about what is the biggest expense for most non-profits as well as many private companies. No, it’s not building maintenance. It’s salaries for the employees. Faculty and staff salary increases are one of the biggest drivers of tuition hikes. Faculty and staff are the heart of a university and are literally what makes it function and gives it its prestige. However, they come at a high cost. At some point, someone had to look at all the money that the university brings in and decide how many faculty and staff can be hired. Who are those people: university administrators. It is literally their job to look at the money coming in and decide how much money needs to be charged for tuition. Their incentive is to raise the profile of their school and one of the main ways that is accomplished is by hiring more faculty and paying top faculty large amounts of money. One of the main pillars in the US News methodology is faculty resources after all. Hiring more faculty is an ongoing expense and they thus had to increase tuition in order to afford these faculty members. Many education experts agree that the biggest reason for the tuition hikes is the increase in the cost of instruction.

Thus, all across the country, tuition started rising. As tuition was rising, people started borrowing more and more in student loans. They realized that if they declared bankruptcy, their student loans were forgiven. This was not a sustainable financial practice, so the government stepped in. Instead of asking the banks to lend more responsibly or the administrators of universities to stop raising tuition, they placed the blame on the students and imposed the law that student loan could not be forgiven by bankruptcy. This was the Bankruptcy Reform Act of 1994.

This created a terrible perfect storm. Universities were free to raise tuition because banks and the federal government would cover the cost for the students. They were happy to provide these loans since these students had to pay them. At no point were they worried about the welfare of the students. Why would they be? What power did the students have in that equation?

Now, I am not saying that hiring more faculty or paying top faculty a lot of money is a bad thing. Hiring more people to enhance your mission and paying the best people a lot of money is common practice in every organization. However with certain (unfortunately not all) corporations, they have to figure out how to do this without raising prices too dramatically. It is thus likely that university administrators heard two things from business executives:

(1) You need to pay a lot of money for the absolute best people

(2) You need to make sure you are not raising your prices in the marketplace to accomplish (1). If you fail to do this, you will get shut out of the marketplace or the government will come after you.

I think they listened to (1) but not (2). Instead they thought, “If we all agree to this practice, students will have no choice. After all, we control who is accredited.” So, there you have it. University administrators did not figure out how to provide faculty and staff salaries without raising tuition. They were not held accountable for this failure by banks or the federal government in any way and now we have our current mess that is only getting worse. Since all the top private universities abide by this practice, there is no way for a market to hold them accountable.

 

So what’s the solution. Trying to add competition to the marketplace might help but it does not seem practical as the costs of new universities are extremely high. Instead, we need to start holding university administrators accountable. I have been in academia for 6 years now and have rarely heard the words, “I love the administration and everything they are doing. The huge tuition that undergrads have to pay is completely justified.” On the contrary, most people have very negative things to say about the administration of their university. Faculty members are often included in this group of people dissatisfied with the administration. The NYU faculty gave its president a vote of no confidence recently. Everyone I knew at NYU was very upset about the lack of financial aid and we have been consistently voted “Most Dissatisfied With Financial Aid” by Princeton Review. Cooper Union’s administration made everyone angry recently for introducing tuition for the first time in 150 years. This is just a small sample but with every university I visit, I hear cries of dissatisfaction with the administration.

The administrators like to argue that the steps they take are painful but necessary. It would thus follow that a private university would release their budget and every practically-minded person would agree that it’s necessary. After all, we all want free food and free housing but we accept that the fact that it takes resources to provide those things so we have to pay for them. For the longest time, people accepted that college had tuition and they took out loans or worked summer jobs to afford it. I don’t think there was too much of a backlash about college tuition before 1980 after all. Unfortunately, tuition is out of control and no one seems to understand why. Additionally, many private universities, including NYU, don’t release their budget, so we have no way of knowing if they are being honest.

Since faculty members do most of the work in keeping a university’s mission of research and teaching functioning, you would think that they should elect people to be given the job of deciding how the university’s finances should be handled. That is not what happens at all. Universities typically have a separate board of trustees that has most of the power. The university president as well as some other administrators run the daily operations. The important thing is that at no point, does the faculty or students have a say in who these people are. The board and current administrators decide who the next administrators will be. History has taught us that when there is a gilding process like that with positions of power, the status quo is maintained and meaningful change is never accomplished.

I think it’s time we start auditing what they are doing. Because the federal government provides a lot of money in student loans to both private and public schools, I would argue that the government has the right to audit the administrations in both cases. We have a right to know if this money is truly being spent as needed. Universities are not the only people who need help figuring out how best to operate. Corporations hire consultants all the time for this task and there is a huge body of experts that has developed in how best to run an organization. I think it’s time the government hires some of these experts temporarily for an audit of university finances. The cost would probably be a fraction of what it pays in student loans every year. We definitely need to do something quickly or else, as the past 30 years have proven, tuition will just keep rising and rising.

The most important thing to look for in this audit: where does the tuition money go? I have a five-figure debt load from my undergrad. I understand that education is expensive but did it really need to be as expensive as it was. Around the country, people are saying NO! We all understand that education costs money, but why so much money? More specifically, undergrads should definitely be told how much of their money is going toward the following: tuition discounting, faculty salaries (up to $200,000), top faculty salaries (salary amounts over $200,000 paid), academic staff salaries, non-academic staff salaries, building costs, and administrator salaries.

Maybe this audit won’t do anything. Perhaps after seeing the budget for private universities, it will turn out that those line items are necessary. If this is truly the case, then administrators have indeed been doing a great job. However, our mistrust in them grows as they hide this information. The call for transparency has been growing. Let’s hope something actually happens. After all, the students, teachers, and federal government are largely paying the administrators and thus have a right to own if they are doing their job correctly. We all have to answer in this world for whether we are doing our job. Let’s start holding university administrations to that standard better.

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4 thoughts on “Why is College Tuition so high?

  1. Interesting article & good idea starting a blog. The main problem I see though is you want to “force” colleges to charge a “reasonable” amount of money. But what’s “reasonable”? The free market should determine that and would do so better than any individual in government – no matter how angelic and ” good intentioned” the person may be.

    And right now the demand for college is skyrocketing. To lower costs demand must drop. If students are turning to college because they can’t find jobs out of high school that means the public education system is failing – 12 years of school should be more than enough education.

    The demand is also artificially inflated because ppl think “I’m doing the right thing investing in my education” but are they? Once the next generation sees how bankrupt this generation has become they will have to really reconsider this.

    Also, the bankruptcy law you mentioned was put into place in a (failed) attempt by federal government to increase amount of student loans: They put restrictions on how banks can choose to lend out money, and in return for forcing them to accept riskier loans they had to put a clause exempting students from declaring bankruptcy.

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    • Nick, the rise in tuition is not due to market forces. I have not read a single article that has attributed it to market forces. If there is one, please let me know. A college education is not a product in the same way that food, housing, and consumer goods are products. One of the main differences is that universities are generally non-profits who have to spend all the money they take in rather than for-profit companies who are competing to make the largest profit. Also it is very misleading to think that the tuition price we pay is a “fair market price” as it is not a proper market.

      Marco Rubio actually has some good ideas about reforming higher education:
      http://www.rubio.senate.gov/public/index.cfm/press-releases?ID=a24acd97-025e-4ed7-9672-7a84eb76606b

      As the demand for an education grows, the acceptance rate for the top colleges will lower, which has indeed occurred. Since colleges are not supposed to be making a profit, they are supposed to only charge tuition which matches how much it will cost for them to operate. Since tuition has been rising much higher than inflation, it begs the question of why has operating costs per student increased so much. The number of students has skyrocketed, but universities should be able to keep the per student cost relatively under control.

      In terms to what is reasonable, I am not completely sure. Remember though that it’s not a proper market in that the top institutions have a monopoly of sorts and a lot of benefits from the government. Since they are getting benefits from taxpayers, the taxpayers have a right to know where the money is really going. If you kept asking your parents for more money year after year even after your income was rising, they would get suspicious. In any case, we should know where the money is going so that we can then engage in the discussion of what is reasonable. That is why I suggested auditing the budgets of these institutions.

      As it turns out, there is a MASSIVE discrepancy between the cheapest and most expensive schools:
      http://www.usnews.com/education/best-colleges/the-short-list-college/articles/2014/09/09/10-most-least-pricey-private-colleges-and-universities

      There are clearly more forces at play than just the cost of providing an education. Seeing this massive discrepancy shows that there are institutions that provide an education at not such high a cost. The higher priced faculty at the East Coast schools probably explains part of the discrepancy, but does that mean such a large discrepancy is justified?

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  2. Why would consumers buying college degrees be exempt from the laws of supply and demand? If you think it is, then it is a massive economic anomaly and you should provide evidence suggesting why that is the case. There is indeed govt interference in higher education (which occurs in the food and housing industries you mentioned as examples of “normal” good following supply/demand) and the “product”, somewhat uniquely, can not be consumed by everybody willing to pay (hence admissions standards) because that would hurt the academic reputation of the school and hence devalue the product, but neither of these things exempt the price of University from rising to meet excess demand.

    Why wouldn’t Universities benefit from making money and hence wouldn’t have an incentive to make money just as an individual pocketing the profit would? Universities use money to set up endowments, build lavish buildings, expand their bureaucracies throughout campus (60% of UC staff is non-academic staff; only about 8% are Professors), invite celebrities like Obama to speak at commencement, increase Administration salaries, build new labs, medical facilities, recreation facilities etc. Some of these things are probably wasteful (like most of the Administration) but some of them help the University remain competitive among prospective students: people choose a school partly based on academics, but also they want to go to a school with a nice Gym, good extracurricular activities, beautiful campus, good social life, and a school with a good reputation, which ultimately comes from research (& good lab equipment) even if the students have no intention of doing research.

    I agree that the tuition costs are way too high, but ultimately it doesn’t matter what I think: it matters what people are willing to pay. There are some ways govt can help, as Rubio suggested, but I think a big problem is people are overly-trusting and under-critical of Universities; “The University” (especially if it has a highly “reputable” name) has a certain idealized stereotype associated with it: detached from the material world, pursuing a higher calling by placing pursuit of knowledge above all else, the promise of a “good education” or “good future”. These things are often not the case in practice, though they are widely believed, and I think this inflates demand and explains why many people pursue “useless” degrees. Additionally, the students don’t know what a “good” vs “bad” education in, say, Math looks like (is this the right way to learn proofs?) so it’s hard for them to accurately assess the quality of the product, and change their consumption patterns accordingly (somewhat unique to this product).

    Since we are not in govt, we should set our goal as (1) finding out where the money is going (info should be public for public University) (2) if it is being spent on things students and public would deem “unnecessary” (which I predict it is) expose this clearly to the public and student body (3) Show education is suffering (e.g. TA situation) by poor allocation of funds – this is something we as TAs and professors can see, but is not necessarily obvious to public and students.

    But ultimately, the Administration will never vote to curtail its own power or spending, so reform must come from the outside. This is such an important issue right now I think If we frame it right we can get Undergrads, Grad students, Profs, Alumni, Media outlets, & local politicians to join together and force them into common sense reforms (whatever our research turns up – maybe for public school require at least ~60% of tuition goes directly to educating students and also allow Professors, Department chairs etc more power over money and decision making)

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