What Are the Causes of the Higher Education Tuition Bubble?

Joseph Marr Cronin and Howard E. Horton describe the extent to which college tuitions appear to have become the next economic bubble:

According to the National Center for Public Policy and Higher Education, over the past 25 years, average college tuition and fees have risen by 440 percent — more than four times the rate of inflation and almost twice the rate of medical care.
…the middle class, which has paid for higher education in the past mainly by taking out loans, may now be precluded from doing so as the private student-loan market has all but dried up. In addition, endowment cushions that allowed colleges to engage in steep tuition discounting are gone. Declines in housing valuations are making it difficult for families to rely on home-equity loans for college financing. Even when the equity is there, parents are reluctant to further leverage themselves into a future where job security is uncertain.
Consumers who have questioned whether it is worth spending $1,000 a square foot for a home are now asking whether it is worth spending $1,000 a week to send their kids to college. There is a growing sense among the public that higher education might be overpriced and under-delivering.

What I have never been able to find, despite having read many books about the crisis of higher education and so on, is how colleges and universities spend their money. To put it another way, how have spending patterns, in relative and absolute terms, changed over the last three decades at private universities?* If anyone has any leads on data that could yield answers (data, not speculation–speculating is my job…), please let me know.
It seems to me that the following, non-mutually exclusive phenomena could be at work:

  1. Private institutions have decided to increase the staff (faculty and other) to student ratio. Combined with salaries and benefits that have increased faster than inflation (and health insurance inflation?!?), this accounts for the increase in tuition.
  2. Private institutions, competing for students, have invested heavily in physical infrastructure and amenities. Based on personal anecdote, living conditions seem better than they used to be–dorms are nicer, and so on. Also, infrastructure such as wired (and wireless) dorms and buildings needed to be built. Which leads to…
  3. Prices go up; they don’t go down. Various infrastructure, facility, and staffing needs have required tuition hikes. Typically, these are not one-time temporary increases: if you jacked up total costs by ten percent, and didn’t see a noticeable decrease in student applications, why lower tuitions?
  4. Many universities have overinvested in either big-time athletics or academics. One of the traps an institution can fall into is trying to shovel money into areas that will either bring prestige (e.g., a top sports program) or the promise of increased federal funding (a new science center). If these ‘earn back’ the money invested in them, great. But there is the potential for these to be massive money losers, if done poorly. Not everyone can have an exquisitely funded genomics center….
  5. Colleges charge what the higher income percentiles can afford to maintain their status credentials since ‘selective’ colleges are an inelastic good. Given the perceived (perhaps misperceived) importance of college for having or keeping an upper-middle class income, people will pay very high prices to be credentialed (which is not the same as educated). As long as there are enough families that can afford to pay full freight, prices don’t have to decrease, and can even spiral out of control. Something that always staggers me is when private colleges and universities will boast that sixty percent of their student bodies receive financial aid. Great! Of course, that means that forty percent can pay ~$50,000 per year out of pocket–in a country where the annual median household income is roughly $50,000. And that’s before one considers that many of these families might be paying for two or three students at the same time. In other words, rising tuitions are a result of an inelastic good meeting rising income inequality.

These are my ideas. So what are yours, and does anyone know if data are available to test these ideas?
*To a considerable extent, public universities ‘shadow’ private ones: after all, if Private U costs $50,000 per year, then increases at State U don’t look so bad.

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9 Responses to What Are the Causes of the Higher Education Tuition Bubble?

  1. Edward says:

    Ironically, I think that the demands placed on faculty to do research contribute in a small way to rising college costs. While a lot of research is paid for by grants, the facilities that house faculty have to be paid for somehow. As faculty do more research, they tend to do less teaching.
    Also, the number of clerical staff and administrators has grown enormously. Part of it is just bloat, but part of it is to support more research. Yet funding organizations like the NIH have rules that say you can’t pay a secretary off grants. These are supposed to come out of indirect, but I’ve never been in a department that felt they got their fair share of the indirect back from the central admin.

  2. MRW says:

    One factor you left off is the difference between how higher ed uses technology and how businesses often do.
    Businesses often use technology to enhance productivity – increasing output, decreasing staff, decreasing cost of production, etc.
    Technology in higher ed makes a better product (the graduates need to know how to use technology to become employed), but generally makes the product (the education/degree) more expensive, rather than less.

  3. george.w says:

    Every time the incompetent government of Illinois needs to trim the budget, they seem to start with the universities. We trim costs down to the bone, but sooner or later infrastructure needs to be replaced or our campus begins to look pretty unattractive (brown water from faucets, rusting fire escapes, leaky single-pane windows, poor environmental control in buildings, antiquated networks, asbestos, etc.) Students expect an attractive, safe and technologically current campus. Private donors have stepped in to help but they can only do so much. At least that’s what I have seen happening.

  4. Jim Thomerson says:

    I think, without having data at hand, that the proportion of non-tuition spending on higher education has decreased over the years. Perhaps particularly true of public institutions. I think the areas which have suffered most are science and the arts. Both these areas need equipment: electron microscopes and pianos, for example, which are always increasing in cost. At the same time higher education has been made available to larger and larger proportions of the population. There is a great deal of remedial education which goes on in all universities. This was not the case 50 years ago, and all these additional students need people, space, and other resources. More, perhaps than the old-time conventional student.

  5. WeLK says:

    Here is some food for thought. Why are online colleges or online credits more than campus credits? Why aren’t more courses offered exclusively online? Really, how many times does 19th century literature need to be re-lectured? Higher ed is a biz and it is going the same route as finance and housing. We really need a Wal-Mart for higher ed (business model only though). Research what they pay in Europe for higher ed and it makes one want to vomit.

  6. Eric Lund says:

    I also wonder whether the lower rate of income (as opposed to capital gains) on endowments has been a factor. The past two decades have been lousy for investors who depend on the income their investments generate, because interest rates on investment grade securities have been so low, and stocks haven’t been kicking out dividends the way they used to. (There was a time when people bought stock for the dividend, not for capital gains.) University endowments are certainly in the category of investors who depend on investment income, since traditionally the income on the endowment has provided the subsidy to cover shortfalls from tuition. Thus as costs increase and endowment income does not, tuition has to increase to make up the difference.
    That’s not to exclude any of the five points you raised, all of which are probably happening somewhere.

  7. Laelaps says:

    #4 is a major problem at Rutgers. The state budget is in awful shape and every year for the past several years has been a crisis. What I used to pay in tuition for an entire year in 2001 now does not even cover one semester. This makes the decision of top-level admins to go ahead and take out over $100 million in loans to expand the football stadium a stupid idea. Our team had one really good season followed by a few lackluster ones, yet the admins want to expand the stadium on the assumption that our team (which has traditionally sucked) is going to fill the seats. We won’t even be able to pay back what was taken out to expand the stadium for years, and there’s no sign that it will bring new income into the school. Instead RU has taken so many applicants that there is no room for new students, even though they just opened a knew multi-story residence hall just a few years ago. New students are being put up in hotels and shuttled back to campus.

  8. carlin says:

    some of this ever increasing tuition trend is nothing more than a simple me-too syndrome. when one raises, others follow (and raise tuition with not much basis).
    another fairly prevalent approach is that schools will track the CPI-education and raise their tuitions against that data point. it’s not at all clear to me why CPI-ed runs very differently than CPI-U, but anyway, there are well known “problems” with the calculation and reporting of CPI data overall and i believe that the institutions that continue to track with CPI-ed will be lead down an empty alley.

  9. muhtar says:

    Here is some food for thought. Why are online colleges or online credits more than campus credits? Why aren’t more courses offered exclusively online? Really, how many times does 19th century literature need to be re-lectured? Higher ed is a biz and it is going the same route as finance and housing. We really need a Wal-Mart for higher ed (business model only though). Research what they pay in Europe for higher ed and it makes one want to vomit.

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