Over at Life as a Physicist, the Physicist for Life gets on a well deserved soap box and laments certain comments concerning articles about a recent College Board study: Trends in College Pricing 2009. The gist of the Physicist for Life’s comments concern the fact that one should not be surprised at rising tuition costs at public universities, given that state budgets have been shot to all hell in the present downturn.
But what I find interesting, and what I’ve never been able to figure out, is the larger trend (ignore the last two years, please). Why are tuition prices increasing at such a fast rate for four year colleges? For example, see slide 5 of this presentation where one sees that over the last three decades, the inflation adjusted price of college has more than tripled at public four year universities and gone up nearly as much a private four year universities. So that is question number one for me. Question number two is really related, and is where is this money going? (And of course the real question, as a pseudo-professor, how do I get some of it?)
Speculation below the fold.
My own theory is that we are in the middle of a leverage driven bubble. Okay, yeah, its a stretch, but its fun to look at the numbers.
First I’d point to the evidence. Total student loans in the last decade (in 2008) dollars have gone from 44.6 billion dollars in 1998 to 94.5 billion dollars in 2008 (27th slide from here). During that time the number of undergraduates has only increased by a small percent (see Table A-7 here) from around 12 million to 14 million. Taken together these imply that the average indebtedness of the student has skyrocketed. In effect a large amount of the increase in tuition has been “paid” for by an increase in federal loans.
Of course there is a reason for this. There is a perceived (and actual) value in a college degree, so people are willing to lever themselves up to pay for this value. And, if you are a university president, and you consider the costs of raising tuitions, you have a very good out. Make a proposed raise and then calculate not how much the tuition will actually go up, but how much the students will have to pay excluding the federal loans. This number, of course, will be much less significant than the actual tuition raise and thus you can say “well it will only cost you X amount” where X is not as scary.
So the question is, does the fact that people are increasingly leveraging themselves really mean that there is a bubble? Well in order to make that argument, one would have to argue that the leverage that the students are taking is not worth it. If you look at the total earnings benefit over a lifetime, then it’s pretty clear than even with today’s amount of indebitness there is value on average from a degree from a four year institution. But I wonder if this is the correct metric. For example, if I were to have analyzed the recent housing boom in terms of value of a home 40 years from now (which is morally what one is doing when looking at lifetime earnings) then you would not have spotted the bubble. I’m willing to bet that forty years from now, assuming that you don’t default, even a house bought at the height of the bubble will be worth a considerable amount more than it currently is.
So what is the correct metric for deciding whether the leverage being taken on is too much? Well I’d guess it has something to do with whether the loans are causes severe hardship in the short term. One proxy for this is default rate for loans, but this data is going to lag significantly behind the increases in tuition. The most recent data does show an increase in student loan defaults (it’s going to be hard to separate out the financial crisis in future data.) But what I find more interesting is that because of the lagging nature of defaults for student loans (a built in four year window) we won’t know whether students are taking on too much debt until, well, until the bubble bursts.
There are, of course, many flaws in this argument. The first is how is such a bubble going to burst? Demand for entrance into four year colleges doesn’t seem to show any sign
O brave new quantum world!
I often wondered the same thing until my college’s administration decided to be completely transparent about the budget (plus I got stuck on the college’s Strategic Planning Committee).
Our costs are pretty standard for private, four-year institutions – a little over $44,000 including tuition, room, and board. We have about 1800 students or so. Since we’re run by the Benedictines, we have no high-salaried administrators. Hence, here is where the money goes (this is just for us, obviously, but gives you some idea):
1. Believe it or not, for my institution, taxes. The state of New Hampshire is the only state in the US that actually taxes supposedly tax-exempt organizations (there’s no income or sales tax so they need to get their money from somewhere).
2. Maintenance of buildings and grounds. Most buildings on college campuses in the US were built long before anyone cared about energy costs. Unfortunately this meant inefficient design standards. As such, most institutions spend a bloody fortune heating and cooling their buildings along with supplying electricity.
3. Health care and benefits (mostly the former). I don’t understand why, during the present health care debate, companies and organizations haven’t been more vocal about reducing health care costs. They’re ridiculous and the vast majority of the burden is taken on by the employer. Colleges frequently have lower operating margins than private companies and hence the cost has to be passed through to the customer which, in this case, is the student (and/or his or her parents). You can’t, of course, forget about just plain, old regular salaries in here too, which are a large chunk of the operating budget.
4. Financial aid. While our tuition, room, and board are listed at over $44,000, almost no one actually pays that. This happens to be true at almost any private college or university. Some is covered by loans, but a good deal is also covered by scholarships which are simply outright discounts provided directly by the college.
5. For my institution, some goes to building up the endowment since ours is not quite as a sustainable level. Most non-profits take their operating budgets from the interest off their endowment. The higher the operating budget, the higher the endowment needs to be. Ours isn’t quite there yet. For some schools it is there, but I would bet that is not the norm. As such, if my school is the norm, then we’re the ones driving the market right now.
Now, my institution hasn’t maximized it’s income potential yet (the campus is seriously underutilized in the summer and at night, and we have tons of land we don’t need). That’s part of what our Strategic Planning Committee is working on.
Anyway, that’s a snapshot of how at least one private institution in NH spends its money. I give the administration a ton of credit for being transparent about the budget. We’re weathering the financial crisis a lot better than some institutions and its given me a greater understanding of how the whole thing operates.
Here in Illinois the support for higher education has been decreasing as a % of the cost of going to college for almost 30 years, declining from nearly 2/3s to less than 1/4th (1985-2009). Add to that unfunded mandates, things universities have to do, but weren’t given money for. And then there’s the cost of new technologies and upgrading the infastructure, and so on. Tuition is the only way to make up the difference, so it has increased faster than costs.
Eric: “No, it won’t. What you are overlooking is that students have to repay that debt, with interest, eventually. Student loans are generally not dischargeable in bankruptcy.”
My point is exactly that this is a slight of hand. That is what I mean by the President having an “out.” It sounds good until you have to actually repay.
Matt: On the one hand, you’re right about there not being many top-notch distance education programs in the US (though there are a few – most are graduate programs, though the University of Maryland’s University College has a number of undergraduate programs). But I really must disagree with you on the licensing idea. I have a few problems with this.
First, in the US, unlike many other countries (maybe all?), we have a plethora of “liberal arts colleges” (primarily undergraduate institutions according to the government). These schools have a fundamentally different philosophy from universities that have graduate programs. In fact it’s a completely different model of education (much more classical – the model evolved out of the fact that most of these early colleges were primarily divinity schools). Many of these institutions are very highly regarded, e.g. Williams, Amherst, Bowdoin, etc. and yet are quite small (Amherst has 1600 students). Schools like this have no reason to purchase a license from MIT or Stanford. In addition, many of these schools have uniquely tailored curricula. For example, ours (being a Benedictine school) includes heavy philosophy and theology requirements.
Second, since those of us who teach at these smaller institutions are often involved in recruiting, I can tell you that most students usually don’t pick a school based on the strength of the academic program (whatever they may tell you – my Dean believes otherwise). They generally pick based on a combination of some vague notion of reputation (which may be partly based on the academic program and partly not – US New & World Report bases their rankings on student statistics and don’t evaluate the status of the academic programs themselves) and all sorts of other intangibles like where their friends are going, where their parents want them to go, etc. Ultimately, I think you’ll find that the majority of students attend a school based on acceptance rates. In other words, in the minds of many students, there’s a correlation between how hard an institution is to get into and how good it is (this idea is perpetuated by US News and World Report). But I have heard from a number of people (including current faculty members, former students, etc.) that Harvard, for example, does not do that great a job at undergraduate education.
Third, faculty are generally very defensive of academic freedom. I can tell you that none of my colleagues would ever willingly teach a course licensed from another institution. Maybe they would use the resources from another institution like MIT to augment their own courses, but the strong belief in academic freedom would compel them to tailor it to their own needs and beliefs. Besides, what kind of message does it send to the students about the instructor if he/she can’t develop their own material?
Chandra: I agree to some extent that students are often deluding themselves into thinking private = better. Personally I attended a public university for my undergraduate degree. On the other hand, private colleges are far less subject to the whim of politicians and bureaucrats and this fact is not lost on students. News of states cutting funding for higher education appears almost daily.
Everyone: Basically, the tradition of liberal arts colleges/PUIs is an important one that, in many ways, is uniquely American. I work with these people every day. I’m passionate about it because I think it makes a difference in a lot of people’s lives. We’ve sent graduates to Yale, Tufts, Dartmouth, Boston College, and elsewhere for graduate school. Not all of these students would have done well at other types of schools and yet they are bright, motivated people and given where they were accepted for graduate school, clearly excel in their fields.
The cost of education is definitely outrageous on the surface. But when you spend some time digging a little deeper you come to appreciate why and you realize that the schools have been, to some extent, backed into this corner by other factors (see my earlier comments in Comment #1 above). I’m not defending the costs and I’m not trying to trivialize the expense. Something definitely needs to be done, but I don’t think licensing education from the likes of MIT is the way to do it. Some people actually don’t want an MIT education, believe it or not.
I hate to break it to you, but tuition in Canada is only $1,300 a term. This is at University of British Columbia, the second highest ranked school in the country. The US is sacrificing its next generation on the altar of profit.
EMJ: That is because, I’m assuming, Canadian universities are partially supported by the government. I do agree it ought to be that way here, but I can tell you that most universities in the US (there are thousands and Harvard is not typical) are not making a profit. In fact, in the current fiscal climate most are likely losing money.
Matt, et. al: I know it’s Wikipedia and, worse, it’s a stub, but here’s a bit about the philosophy behind liberal arts colleges.
@Anonymous: I mentioned faculty salaries in #3. Some courses are taught by the monks who technically work for free, but they’re “paid” a salary that is then given directly back to the college (that way each position has a salary structure associated with it in case a monk is ever replaced by a layperson). Administrators are handled in the same way.
I completely agree and am amazed this hasn’t come up as a major economic issue yet. The three most significant (by a lot shot) expenditures by the middle class are housing, health care, and education, and two of the three have dominated the economic dialogue recently–it’s only a matter of time until the third joins in.
You can still get virtually unlimited credit for student loans–this is EXACTLY what happened in the housing crisis. In both cases otherwise reasonable people have made decisions to buy something they can’t afford because (1) they think it’ll pay off in the long term and (2) thanks to easy credit, they can (or at least could).
I think what we really need to do is start offering viable alternatives to college. Technical and trade schools shouldn’t be considered lower-class work; these provide legitimate vocational skills instead of churning out liberal arts degrees that are slowly losing their utility and value in the workplace. And if the demand for these degrees falls, I assume the price will too.
But I’m a scientist, not an economist, so I could be dead wrong about the whole thing.
This number, of course, will be much less significant than the actual tuition raise and thus you can say “well it will only cost you X amount” where X is not as scary.
No, it won’t. What you are overlooking is that students have to repay that debt, with interest, eventually. Student loans are generally not dischargeable in bankruptcy.
I’m willing to bet that forty years from now, assuming that you don’t default, even a house bought at the height of the bubble will be worth a considerable amount more than it currently is.
In nominal terms, probably. In real terms, probably not. Unlike a university education, houses require a significant amount of upkeep, especially if they were poorly built to begin with (as a lot of houses built during the bubble years were). My house was built a bit over 40 years ago, and I’ve been living in it for 11 years. Since buying the house I have renovated the bathrooms (twice, because the first contractor botched the job), renovated the kitchen, replaced a bunch of landscaping, replaced the windows and siding, replaced the roof, replaced the furnace and hot water heater, and removed crumbling asbestos tile from the basement floor. Current project: fixing a minor basement leak while it is still minor. Still on the to-do list: repaving the driveway, repairing the garage floor, and refinishing the wood floors (the house has wood floors everywhere but the kitchen and bathrooms, as is typical of houses built around here in the 1960s). Total expenses so far: well into six figures and approaching the original purchase price of the house. That’s not counting routine maintenance (lawn mowing, tree trimming, touch-up painting, etc.) I bought pre-bubble and haven’t HELOCed, so I’m not upside down on the mortgage, but I doubt I could sell the house for my purchase price plus renovation expenses.
To determine whether education costs are in a bubble, I ask whether the growth rate is sustainable or not.
From what I can tell, the growth rate in tuition costs is far exceeding the growth rates in parent incomes (assuming many parents assist in paying tuition) and also exceeding the growth rates of degreed professional salaries. As I see it, this trend cannot continue forever, so some sort of correction is going to happen.
What I have not understood is the willingness of many
students and their parents to pay a factor of 2-3 higher
tuition at small private colleges over comparable in-state
universities. Are they doing good economic analysis in making
these decisions?
I can think of several mechanisms by which the bubble might burst, although, in the spirit of the blog post, these are very speculative.
The first is distance and online education. At the moment, I don’t think there are any institutions in the US that are offering a full-blown undergraduate experience online that has the same prestige as a regular degree at one of the top universities. Of course, many top universities do offer online and/or distance education, but this is currently seen as a way to top up your qualifications when you have already established yourself in a career, or as something to do if you want to change career, rather than something you might do right out of high school. However, since the costs of online and distance education are a lot smaller, partly because you can stay at home, this might change in the future. In the UK, we have the example of the Open University and it seems clear, to me at least, that its prestige has been rising gradually over the past few decades. Although its students are still mostly mature, I remember reading that their average student age has been decreasing steadily. One would need to look at enrollment figures to verify this.
Another potential mechanism would be the ability to take courses offered by top universities at other institutions. One way that smaller institutions can compete against top universities is on tuition cost, but it seems that students value the experience of top universities above cost at the moment. However, some top institutions, e.g. MIT and Stanford, are making a lot of their course materials available for free online, including video lectures. Therefore, it seems to me that it would make sense for smaller institutions to actually offer these courses themselves, making use of the available materials, especially in areas where they don’t have expertise to teach the course from scratch themselves. By doing so they could offer part of the experience of a top university, whilst cutting teaching costs, since they would have to provide fewer class hours on these courses. In fact, it may make sense for top institutions to actually license these courses to smaller universities – perhaps this would involve the top institution doing part of the assessment, e.g. exam grading, in order to assure quality. This might seem a bit crazy, but it is actually the way that GCSE and A-Level exams work in the UK already, i.e. schools pay other institutions to define a precise syllabus and perform assessment, so I am just imagining applying this model at the university level. If this happens, then the smaller institution could actually advertise that it offers, for example, official MIT courses, to potential undergraduates. This would level the playing field to a certain extent and make the competition on tuition cost more effective.
Matt: OK, I see what you’re saying. In that case, then, yes, that’s a great idea, though I will point out that most liberal arts colleges attempt to have expertise in every sub-discipline within a given department. When we hire people (and I’m not talking about my department, but rather the college in general) we usually hire for specific expertise so that we cover all the “bases” so-to-speak. So, for example, the English department has someone who knows African-American lit, someone who knows 18th century lit, someone who is a poet, someone who knows literary criticism, etc. (We even have a Sci-Fi/Fantasy/Horror specialist.)
There’s also a school of thought promoted by the likes of Saint John’s College in Annapolis (and Sante Fe) where all faculty are actually “tutors” and expected to lead any and every class (with the exception of certain lab courses). In other words, if I taught there, I could end up teaching English, History, Sociology, etc. The idea is that teachers should be model learners. So if a school doesn’t have the expertise in something, why not do a 1-on-1 where the professor and student learn the material together? I think it better engages the student. I also think it helps to break down the barriers between sub-disciplines which are becoming almost as large as the barriers between disciplines.
EMJ: 1300 bucks a term??? like from september to december? seriously?? in alberta it is over 3000 bucks a term at the u of a with all the extra fees and stuff. i think i need to move to bc….
@Ian #1,
I’m surprised that faculty salaries didn’t make the top 5. Are the classes taught by Benedictine Monks that work for free?
Ian,
I wasn’t primarily thinking of liberal arts colleges with the licensing model, but universities in general. Indeed, I think the liberal arts model of undergraduate education is much more likely to survive long-term than the big research university model because, unlike many big universities, it provides an added value that cannot be gleaned from online lectures and course materials. However, I do think that enlightened liberal arts colleges might allow individual students to follow advanced courses from other institutions if they are interested in a subject and there is not in-house expertise in the subject. If they do that then wouldn’t it be better if the student could get accreditation from the institution that is the source of the course?
When Caltech raised tuition before the recession they supposedly used “perceived value” to justify it. That is, everyone else was raising tuition so if we didn’t do it too then a Caltech education would be seen as less valuable and students would stop matriculating. If this is actually the case then I’d say this is clearly the mark of a bubble. Of course it could just be a persistent undergrad rumor.
That is, everyone else was raising tuition so if we didn’t do it too then a Caltech education would be seen as less valuable and students would stop matriculating.
This would be the Wine Snob Theory applied to college education. Certain people will always buy one of the most expensive wines available on the theory that more expensive wines are better wines. (Which is not always true; Two-Buck Chuck is a notorious counterexample.) This results in higher prices for certain wines which are perceived as having what it takes (whatever that may be), and these people will pay thousands of dollars for a bottle of Chateau Lafitte Rothschild (a wine I have heard of precisely because of the high prices it fetches–I’ve even seen it on a wine list once, in Beijing of all places, for something like RMB38k). But the target market for a place like Caltech is people who want to become scientists or engineers. While there are a few wine snobs among the scientists I have met, most scientists (myself included) are just as happy drinking a $20/bottle wine as a $200/bottle wine–more so, if I’m paying for it.
I’ve heard the same rumors as Ian about the inadequacy of Harvard’s undergraduate education, and those rumors have been out there for more than twenty years. What Harvard can offer that most other universities cannot is connections: many doors which open easily for people with Harvard degrees are much harder to crack if your degree is from State U. That’s why Harvard can charge premium tuition. It doesn’t explain the third-tier liberal arts colleges charging comparable tuition–those schools have to resort to something like the Wine Snob Theory. I realize that these days Caltech thinks they are competing against Harvard for students (and to some extent they are), but that by itself does not justify matching Harvard’s tuition increases. OTOH, if their expenses really are that high, then perhaps the increase is justified.
Caltech has always competed with Harvard, over undergrads, grads, postdocs, facukty, and Nobel Prizes.
When I posted a link to this on facebook, Anthony Richard Lewis commented:
There are many more administrators and “support” personnel than there used to be. The situation may be even worse in the elementary and secondary schools. My daughter went to independent schools where everyone on the staff taught–even the headmaster. I’m not sure if the school nurse also taught.
> those schools have to resort to something like the Wine
> Snob Theory.
The only problem with that statement is that we’re presently charging about as little as we can afford. We’re looking at possible reductions in benefits and frozen salaries (which already lag slightly behind our competitors) and we charge almost what Harvard does. We’re facing a HUGE increase in our health care costs this coming year and we ended up having to pay more interest on our bonds when S&P downgraded Citizens Bank’s bond rating thanks to the global credit crunch.
So it’s not always a Wine Snob issue. Yes, sometimes schools do charge more simply because there’s a perception that it draws more students. But sometimes it’s simply the economic reality.
Your suggestion that the growth in tuition is leverage driven is spot on. And since it is not sustainable, it might have some of the characteristics of a bubble. Time will tell if external factors will require sudden 30% cuts in tuition to get students to enroll, and massive layoffs to cover those cuts.
As for whether the tuition increase can be blamed on state government, I’ll put my observations here as well as in the comment thread at Physicist for Life. I looked at two data points for an institution I know well, corrected for inflation, last summer. Look at the bottom half of this longish article —
http://doctorpion.blogspot.com/2008/07/inflated-inflation.html
I think the difference between the inflation-corrected growth in dorm room-and-board costs and the growth in tuition is telling. Dorm increases exceed inflation, but not by much, and reflect some added value (internet, for example) and costs (health insurance). Tuition increases are sky high and NOT explained by the significant drop in state support. At most $1500 of the $7000 increase above inflation can be blamed on the state. I think most of it goes to salaries, health and other benefits, and staff in support of a growing R1 research enterprise.
I can’t blame it on energy costs. Old buildings have been replaced by new ones that are much more energy efficient. I can blame it on a med school, which has to be subsidized at a very high level by either the university or the state.
I can also blame it on their ability to compare their costs to those of equal or inferior, but more expensive, private colleges.
DrA @ 2:
I used to buy that university public-relations story where state funds were quoted as a fraction of the “cost of education” rather than using inflation corrections to look at them in real dollars. The drop in state funding is much MUCH less when viewed in real dollars.
In the R1 I looked at (which went from 2/3 state to 1/3 state), state funding dropped only 22% over 38 years in real dollars. Tuition would have had to go up about 50% to cover this (because tuition was a small fraction back then), but tuition actually went up 320%.
Quoting those fractions begs the question of why the cost of instruction has skyrocketed. My view is that (1) some of this is due to the labor-intensive nature of education but (2) it is not the cost of INSTRUCTION that has gone up the most.