Why Is College so Expensive?
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studentdebtrect02You might have heard that college tuition has been going up lately. And by lately, I mean for the last 40 or so years.

As higher education prices have risen, so has media coverage of the mess that is paying for college these. It’s not uncommon to hear the words “student,” “loan” and “debt” mentioned in the same sentence.

But how bad is the problem really?

Turns out it’s pretty bad.

Every year brings a new crop of fresh graduates who will have to work even longer than last year’s class to pay off their student loan debts. This year, over 70% of graduates receiving bachelor’s degrees owed student loan debt, and the average debt among these alums was about $35,000.

Worse still, soaring college costs give no indication of letting up. Over the last decade, tuition at private nonprofit four-year colleges has increased by 2.4% per year on average after adjusting for inflation, 3.0% per year the decade before that and 3.5% the decade before that. At public four-year colleges, these figures are 3.4%, 4.3% and 4.2% respectively.

All told, the cost of higher education has risen much more quickly than the cost of almost anything else you can name. Between 2003 and 2013, the overall consumer price index in the United States went up by 26.7%, but the price index for college tuition went up by 79.5% – far more than even the notoriously inefficient health care system, which saw a price index increase of 43.1%.

So what’s behind escalating college sticker prices?

Answering this question is a little complicated. First, there’s no single cause that’s exclusively to blame – rather, the situation seems to be driven by a toxic stew with several different ingredients.

Second, it can be hard to get straight answers even on what we do know because everyone has skin in the game. Ask a politician, a university president and a professor why college is so expensive and you’re likely to get three different answers.

However, the good news is that there are some things we do know at this point. In particular, there are a few factors we can say with a fair degree of certainty are partly responsible for college tuition hikes. Research is still going on into how much weight each of these factors carries in the grand scheme of things, but each of these things is part of the problem and therefore will probably have to be part of the solution too. Here they are.

Higher Education and the Incredible Expanding Administration

Salaries of college employees are maybe the most obvious scapegoat for rising college costs. However, to understand what’s really happening on college campuses, we have to get a little more specific about which employees we’re talking about.

Contrary to what some people believe, faculty with cushy benefits and ballooning salaries are not responsible for increases in college tuition for the simple fact that professors’ salaries are not rising. In fact, higher education is in the midst of a decades-long cost-cutting trend of replacing full-time professors with part-time instructors.

Therefore, even though unions are a convenient political punching back, full-time professors are in a precarious position in that there are fewer and fewer of them around each year. The corollary of this fact is a little troubling: there is a trend in higher education towards less experienced, less qualified teachers, so even as the cost of college continues to go up, the actual value of college in terms of educational quality may be going down.

The other side of the move away from full-time professors is that university faculty have less power overall and have far fewer administrative responsibilities than they did a few decades ago. Instead, higher education has seen a surge in dedicated administrators and administrative staff that have taken over the running of universities from faculty.

As a result, higher education has born witness to the phenomenon of the incredible expanding administration. From 1975 to 2005, the faculty-to-student ratio held more or less constant at 1:15. However the ratios of administrators to students and nonacademic professional staff to students fell from 1:84 and 1:50 to 1:68 and 1:20 respectively.

Between 1987 and 2012, United States institutions of higher education added 87 administrators and nonacademic professional staff every working day. As a consequence of the explosion of administrative staff combined with the declining reliance on full-time faculty, there are now more administrators and professional employees walking the halls of academia than there are full-time professors. According to Bloomberg, colleges added administrative positions at ten times the rate they added tenured faculty jobs between 1993 and 2009. From 1993 to 2007, they increased spending on administration at more than double the rate they increased research funding.

Although the jury’s still out on what portion of the increase in tuition costs can be attributed to administrative bloat, the fact that universities are building up an army of administrative personnel at the same time as college prices are going through the roof suggests a more economically efficient way of managing colleges may have to be part of any eventual solution to the student debt crisis.

The Rise of the Luxury Campus

Getting an education is great and all, but prospective students are factoring on-campus amenities more and more into their decisions about where to go to school. So in attempts to woo the best and brightest students, colleges are pouring millions of dollars into increasingly extravagant athletics facilities, dining halls, dorms, recreational options and so on.

College campuses in the United States have come to resemble closed bubbles, replete with everything students need to live comfortable lives and then some. The college campus arms race is a sort of higher-education version of “keeping up with the Joneses” where colleges find themselves forced to spend more and more on shiny new facilities and amenities just to stay in step with their competitors.

Not only are colleges not penalized for overspending on buildings on luxury features, they’re actually rewarded for it. As I wrote a few months ago in my article on the U.S. News college rankings, schools move up the rankings by spending more money, so they have an incentive to spend as much as possible.

Part of what makes college so expensive in the United States is that enrolling in university here has come to be associated with having a specific “college experience” that goes far getting an education. The much narrower focus of college elsewhere is one reason countries like Germany where colleges have more minimal facilities and less emphasis on competitive sports can provide college for free. (The other reason, of course, is that people in these countries pay more in taxes.)

Now, it’s worth noting that lavish spending on new buildings and the like isn’t the only or even the primary cause of skyrocketing tuition costs, as some politicians have suggested. But it sure as heck doesn’t help.

Federal Student Aid and the Bottomless Cookie Jar

A report released by the Federal Reserve Bank of New York in July suggests a counterintuitive cause behind growing tuition costs: federal student aid. It may be that having greater access to federal student aid leads colleges to raise tuition costs simply because they can.

This theory is still under debate, and there are reasonable arguments both for and against it depending on how you slice the data. That said, it seems clear that giving schools access to a bottomless cookie jar of federal student lending enables the cycle of rising tuition costs and rising debt.

There’s also another interesting fact that fits with the idea that schools are raising prices partly just because they can get away with it. Remember how the price index for college went up by 79.5% from 2003 to 2013, at a time when the overall consumer price index only increased by 26.7%?

Well, it turns out the cost of one other item is going up at almost the same rate as college: textbooks. In the same decade, the price index for textbooks went up by 79.4%. Clearly, however, textbook production costs aren’t tied to the costs behind running a school, and factors like administrative bloat aren’t relevant. Therefore, the fact that textbook prices have gone up parallel to tuition costs suggests that an attitude of “there’s more money for the taking, so let’s take it” is at play at least in the textbook industry and possibly in the higher education sector more generally.

That said, it’s important to keep in mind that just cutting federal student aid probably wouldn’t fix the United States’ college tuition problem or even the student debt crisis. Instead, it would likely make students more reliant on private loans or limit college access for low-income students – not a solution that would work out well in the long run. However, it’s important to acknowledge unfettered access to student aid as part of the problem because federal student lending is one prong of a system that drives up tuition by passing costs on to students, then artificially inflating demand through enthusiastic lending.

This situation is one reason people sometimes compare federal student lending with the subprime mortgage crisis that ushered in the 2008 recession. In the years leading up to the housing crisis, reckless lending resulted in an unsustainable number of homeowners taking on debt they couldn’t pay off. Ultimately, the bubble popped, triggering a crisis of historic proportions. As with the student debt crisis, stagnant wages and income inequality helped things along by spurring people to increasingly make up the difference between prices and wages with debt.

Of course, there are differences that make the comparison between the subprime mortgage crisis and the situation with student lending helpful only to a point. But the general takeaway is that any time your business model conjures up analogies to the events leading up to the greatest financial crisis since the Great Depression, you’re probably doing something wrong.

The End of Public Education

In the end, one of the most important factors in ballooning tuition prices is also one of the most obvious: lack of adequate government funding. Over the last several decades, the number of students enrolled in college has grown dramatically, but educational budgets have not kept pace.

Lack of funding has been an especially strong factor in recent years. A report from Demos concluded that between 2001 and 2011, decreased state support accounted for 79% of the overall tuition increase at public research universities. While the study was conducted during a period dominated by the effects of the 2008 recession and therefore may overestimate the role of budget cuts overall, there is little doubt that limited funding is a crucial factor in the college tuition crisis.

As a result of public funding not keeping pace with student enrollment, more and more educational costs are being handed off to students rather than covered by the government. The years between 2001 and 2011 saw a shift in which public universities went from getting the majority of their funding from the state to getting the majority of their funding from tuition.

Thus, the Demos report argues that “public higher education in this country no longer exists. Because more than half of core educational expenses at ‘public’ 4-year universities are now funded through tuition, a private source of capital, they have effectively become subsidized private institutions.” Students cover more of higher education budgets than the government.

This fact also shows how the causes underlying rising tuition costs are connected. The problem of shifting educational expenses is connected to the problem of rising federal student lending. And the fact that students instead of the state are covering expenses means that schools can burn money on more administrators and campus improvements, then just cover the difference with tuition increases.

So any solution to the student debt crisis will probably have to involve some combination of reversing the trend towards administrator-centric models of higher education, changing the culture around what nonacademic services and amenities schools are expected to provide for students, rolling back the federal lending bonanza and upping funding for public universities. It’ll take a lot for these things to happen, but in the end we might not have a choice.

By Niels V.