Why College Costs Are Rising; J. Hood

Young men and women are going further into debt than ever before, hoping that future earnings will make repayment relatively pain less. All are wondering if the education stu dents are receiving is worth the investment. And through it all, more and more taxpayers' dollars are being routed through state and Fed eral programs to fund grants and guaranteed loans. Since 1980 the cost of going to college has risen twice as fast as the cost of living, climbing 57 per cent between 1981 and 1986. The Consumer Price Index went up 26 per cent during the same period. On average, a four year college education now costs more than $25,000-while at some elite schools like Harvard and Stanford, the bill comes to as much as $70,000. This explosion of college John Hood is a student at the University of North Carolina at Chapel Hill, where he founded and edits The Carolina Critic, a student journal of opinion. A graduate of the Na tional Journalism Center in Washington, D.C., Hood was an intern last summer at Reason magazine, and is a news paper columnist in North Carolina.

costs has even outpaced the much-decried in crease of medical care costs, up 47 per cent be tween 1981 and 1986. During the same period, the cost of all commodities went up 12 per cent, while the average cost of all services rose 31 per cent. In short, the cause of burgeoning college expenses lies not in the general economy, but in higher education itself. The burden on families has become critical. From 1981 to 1986, college costs rose 80 per cent faster than median family income. Ex pressed another way, the portion of the median family income needed to pay tuition and ex penses at a public college or university went from 11.3 per cent to 13.1 per cent over that period. For families sending a student to a pri vate institution, costs went from 31.2 per cent to 40.1 per cent. Has the real value of a college degree increased so much since the beginning of the decade, or are parents simply paying too much for their children's education?

All the available evidence points to the latter conclusion. "I think students are getting ripped off," says Robert V. Iosue, president of York College of Pennsylvania. He points out that American colleges and universities have raised prices even more than the gross numbers show by providing less education per dollar-trim ming the school year, requiring and offering fewer classes, arbitrarily declaring three-credit classes to be four-credit classes, cutting the length of classroom periods, and spending less money on libraries and other educational pro grams. "It is a concerted effort on the part of faculty to say, 'Hey, we are working too hard; let's pull back a bit,' " Iosue says. Indeed, tuition increases have not improved 428 THE FREEMAN. NOVEMBER 1988 higher education in any measurable way. Aca demic standards have remained constant or have even fallen during the 1980s. This should be no surprise, since the extra funds raised through price hikes are going mostly to admin istration, not instruction. According to the Higher Education General Information Survey, the portion of total funds spent on instruction at American colleges and universities declined over 4 per cent between 1974-75 and 1984-85, while the administrative portion increased by almost 13 per cent during the same period.'An other portion of the academic pie getting an in crease during the period was "student ser vices"-a dubious category including not only institutional financial aid but everything from "safe sex" kits to college-run counseling ser vices.

"Our policy is total Robin Hood," says Eamon M. Kelly, president of Tulane Univer sity. "We put our tuition up as high as possible and then put most of the extra money into fi nancial aid." Michael O'Keefe, president of the Consortium for the Advancement of Private Higher Education, puts it this way: "At some colleges, institutional student aid now exceeds total expenditures for the educational program. It makes one wonder what business these col leges are in, higher education or income transfer. " Exempting student services and ad ministrative costs, the share of expenditures for almost everything else-research, .libraries, in struction, operation, and maintenance-has gone down between 1975 and 1985. To regular observers of government at work, this scenario is far from unique. In so many areas, ranging from telecommunications to agriculture to electric power, government "help" in the form of subsidies has allowed firms to raise prices above the market price, encouraged waste and inefficient "cross-sub sidies" (overcharging one customer to subsi dize another), and created an ever-increasing "need" for government expenditures. The higher education market operates in the same manner.

Though President Reagan's foes continue to deny and obscure it, the Reagan administration has been a very generous subsidizer of higher education. Federal student aid appropriations increased from $5.1 billion to $9.0 billion be tween 1981 and 1986, a 77 per cent increase, while the Consumer Price Index rose 26 per cent. Total available student aid (including loan programs that leverage private funds with Fed eral dollars) shot up over 60 per cent during the same period, or more than twice the rate of in flation. Not to be outdone, state governments also have allowed the bucks to flow: state sub sidies went from $20.9 billion to $30.7 billion between 1981 and 1986, an increase after infla tion of about 20 per cent. More Need-Based Aid More important, the focus of financial aid shifted during the 1970s from merit-based (in cluding entitlements like the GI Bill and Social Security that are not means-tested) to need based (like Federal Pell grants and guaranteed loan programs). By the beginning of this de cade, the student aid regime had become largely predicated on need, linking the avail ability of Federal subsidies to students' ability to pay. Colleges, naturally, took the bait-and made school more expensive to attend, thus boosting their Federal dole. This, in turn, fueled the political pressure on government to increase its need-based student aid. A vicious circle began. By the 1985-86 school year, need-based aid accounted for 95 per cent of all Federal student aid. Only a decade before, such aid accounted for a minuscule portion of Fed eral aid budgets.

One way to get a better grasp of this process is to consider the difference between an eco nomic market and a political market. In an eco nomic market, the potential to make a profit puts a premium on efficiency. In a political market, in which there is no profit incentive, a premium is placed on sheer expenditure-and, to a certain extent, on inefficiency, since evi dence that a particular political program is failing is usually grounds not for ending it, as a business might do, but for increasing its funding (to "solve" the problem). These gen eral principles have been discussed at length elsewhere, but their application to higher edu cation is illuminating. Economist Howard Bowen wrote in his 1980 book, The Costs of Higher Education, that colleges and universi ties exhibit the following market behavior: 1) each institution raises all the money it can; 2) each institution spends all it raises; 3) the cu mulative effect is toward ever-increasing ex penditures.

Even Governor Mario Cuomo of New York seems exasperated at the tenacious bureaucratic waste of college administrations. At a budget presentation earlier this year, Cuomo blasted the State University of New York for failing to suggest budget savings. "They couldn't iden tify a single budget-cutting measure-not one penny's worth," he said at the presentation. "I found it really inexplicable .... The whole mentality was: 'You get whatever you can for your agency.' " Waste is. rampant in other states as well. Northern Illinois University recently opened a new engineering school, at an estimated cost of $65 million to $85 million over the first 10 years, even though there were 1,700 empty places in three other engineering programs within a 65-mile radius. In the "student ser vices" area, California Polytechnic State Insti tute offers a program to help freshmen over come shyness, while Pennsylvania State Uni versity gives out Roommate Starter Kits to ease WHY COLLEGE COSTS ARE RISING 429 that dreaded campus trauma. Even Harvard University, which offers some of the most prestigious graduate programs in the world, managed to spend $100,000 building a guard house that a Boston hotel later duplicated for $5,000.

Absence of Price Competition One factor behind these costly mistakes and extravagances is the virtual absence of price competition, especially among private schools. "The goal of pricing is to get into a pack," says Christopher Small, vice-president of the University of Tulsa. "You want to be a part of a group, not an aberration." Though this phe nomenon has long been accepted in the Ivy League, where attendance has become a luxury good for the very rich or academically gifted, pack pricing-or pricing high to boost prestige -can be found in other areas. At a Wash ington higher education seminar earlier this year an administrator at one Michigan college joked that he was considering writing an "honest" tuition-increase letter to parents, saying that the school is maintaining high tu ition for prestige rather than, as asserted in pre vious years, to offset rising operational costs. In fact, there is an added irony in the higher education market: since colleges seem to be getting away with steep tuition hikes without losing a significant number of students, they have come to rely on such hikes to fuel their expenditure binges, while keeping the proceeds of other fundraising activities-like charitable donations and investments-"in reserve."

Even as college administrators justified price increases on the grounds that more money was needed to meet operating expenses and to fund student scholarships, charitable contributions to higher education rose from $4.2 billion in 1981 to $6.3 billion in 1985, a 22 per cent increase when adjusted for inflation. Between 1981 and 1986, endowments of higher education institu tions grew from $20.9 billion to an estimated $42 billion, a 60 per cent increase after infla tion. The money was there, but the cushion' provided by government subsidies allowed ad ministrators the luxury of raising prices instead. Why is it that colleges have been able to boost their prices without losing many stu430 THE FREEMAN. NOVEMBER 1988 dents? According to the laws of economics, it would seem that charging more than the op timum market price would cause supply to ex ceed demand. Yet total enrollment has fallen only once during this decade (in 1984) despite the fact that the college-age population has shown a marked decline. Higher percentages of 18-to 24-year olds went to college in 1985 than in 1980. According to a recent Bureau of Labor Statistics study, 58 per cent of the high school class of 1985 went on to college in the fall, compared to 49 per cent in 1980.

This continued high demand, in the face of rising prices, can be attributed to many factors. Polls show that a large majority of Americans think a college education is more important today than it was in the past. Therefore, it ap pears that (for now) families are willing to pay exorbitant amounts of money, perceiving that the investment is worth it. To be sure, it is ob vious that one factor elevating college educa tion to this revered "necessity" status is the availability of government subsidies, especially guaranteed loan programs that delay the real costs of education until later. The phenomenal number of defaults on such loans demonstrates their economic inefficiency, as well as their growing strain on government budgets. Ac cording to Education Secretary William Ben nett, defaults last year cost taxpayers $1.1 bil lion, up from $254 million in 1980 and $117 million in 1975.

Who Pays the Bill? The high cost of government loan defaults spotlights the most important factor in main taining the inordinate demand for higher educa tion: consumers of the product are not the same as the purchasers of the product. Taxpayers, who mayor may not have college-aged chil dren, foot a large part of the education bill. Uwe Reinhardt, professor of economics at Princeton University, asks: "Where is the jus tice in taxing a young auto mechanic to provide a heavily subsidized education for a friend who will earn three times as much money when he gets out?" Newsweek (May 18, 1987) points out: "To some critics that amounts to a policy of robbing the poor to pay the soon-to-be rich." Once again, a government program to redistribute wealth and opportunity has become a burden on the very people it was supposed to help-the poorer members of society. In this case, government has taken on the rather bi zarre role of taxing one group to help another group become educated, who can then turn around and compete with the first group usually successfully-for jobs and economic opportunities.

One effect of this artificially sustained de mand for college degrees is that it provides ad ministrators with the resources to engage in in efficient cross-subsidies. A cross-subsidy is simply the "overcharging" of one customer to subsidize the "undercharging" of another. It is a common practice, but government interven tion frequently distorts its use beyond efficient limits. For example, in the currently "deregu lated" telecommunications industry, the fed eral government requires local phone sub scribers to pay an extra monthly fee to their Bell company, which then is used to help the Bells compete for lucrative business telecom munications contracts. In much the same way, government subsidization of general student demand allows colleges the luxury of keeping graduate student tuitions at or near the price of an undergraduate education-even though graduate students cost a lot more to educate than undergraduates. Scholarship programs also are the beneficiaries of cross-subsidiza tion, as high tuitions for all students fund schol arships for a few of the most academically gifted students. Both types of cross-subsidies help schools in the competitive segment of the education marketplace-attracting academic ,'stars, " athletes, and promising doctoral can didates-by overcharging students in the un competitive, government-protected market for general undergraduates.

Naturally, advocates of government funding for higher education claim that other factors be sides Federal and state involvement are respon sible for rising prices. The most common argu ment is that since higher education is so labor intensive, prices will tend to rise more readily than in private business, because technology and other means of reducing costs are not appli cable. To some extent, this is true. But costs in other labor-intensive industries have failed to keep up with the rise in higher education costs.

And methods for increasing efficiency in higher education have been successfully tested at many schools. Charles S. MacKenzie, presi dent of Grove City College in Pennsylvania, suggests that colleges "take a look at things like whether low student-faculty ratios really impro\'e teaching, and the extent to which the tenure process prohibits needed flexibility." Furthermore, the major increase in labor costs during the 1980s has been for administra tive positions, not teachers. A survey by the College and University Personnel Association found that, although faculty salaries rose 5.9 per cent from 1986 to 1987, the salaries for presidents, chancellors, and other top posts went up 7.3 per cent during the same period, while alumni affairs directors' salaries climbed 10.3 per cent. Although some officials have correctly diag nosed that government aid programs are to blame for the college cost crisis - William Bennett's Education Department being a no table example-in many cases they have advo cated simply replacing "bad" programs with ,'good" ones. Seizing upon the popularity of individual retirement accounts, some states have come up with plans to set up government pools of funds deposited by parents for their children's education. These "education trusts," run by bureaucrats, supposedly would offer parents a painless, secure way of stock piling potential tuition payments. But as Peter J. Ferrara recently pointed out in a Heritage Foundation report, education trust plans could exert even more upward pressure on college costs, because substantial new funds would be Education in America WHY COLLEGE COSTS ARE RISING 431 accumulated which parents would have to spend on higher education within a specified time period-or else suffer heavy taxation or even loss of their funds altogether. Funds com mitted to education in this manner will isolate colleges still further from market forces.

Another proposed solution to the crisis, an "income contingent loan," is now being tested by the Education Department in a five-year pilot program. This program, among other things, would spread the burden of repaying loans over a longer period of time, during which a college graduate's income could be ex pected to increase. In theory, the pilot program is admirable because it will reduce the interest rate subsidy to students, and may be fairer to taxpayers without a college education, says Robert Staaf, an economics professor at Clemson University. But he adds that the idea simply doesn't get at the root of the problem government subsidies. A better approach would be to cut loan subsidies, thereby providing stu dents with the incentive to reevaluate their re turn on higher education while pressuring col leges to reduce costs. But, Staaf concludes, "this effect is likely to come about only if the government gets out of the loan business."

Only when government steps out of the. edu cation funding picture once and for all will the upward pressure on college costs subside, and the burden on students and their families lessen. This is but one more application of the axiom coined over 200 years ago by French businessmen in negotiations with their "helpful" government bureaucracy: "If you truly want to help us, leave us alone." 0 IDEAS ON LIBERTY W hy should the money of one citizen be taken by force to finance the education of other peoples' children, any more than to fi nance the building of other peoples' homes, the gasoline for other peoples' cars, the payment of other peoples' medical expenses? I have yet to hear a compelling moral argument justifying coercion for such a purpose. -GEORGE CHARLES ROCHE III 432 Minimum Wage, Maximum Harm by Perry E. Gresham I learned a very big lesson in a very small town. I was president of a small college, but that college was the biggest thing in town; in fact it was about the only place of em ployment. Teachers were the principal earners, and their salaries were modest. Children came to town anyway. The baby boom reached into the Allegheny foothills. Town children had limited opportunities to earn spending money.