STANFORD — As high school seniors across the country confront the costs of a college education, parents and students wonder with mounting concern why colleges must charge so much, why expenses for an academic year are beginning to reach the $20,000 level and why these costs keep escalating when the cost of living increases have settled down.
To deal with these concerns, it is helpful to differentiate between the cost of education and the price of education. At most first-rate universities, public or private, the cost of education is much higher than the price--the tuition and fees actually charged to students. At Stanford, the $10,475 "price" of tuition for this year (excluding room, board and books) is between $4,000 and $7,000 below what is the university's actual cost of education. And for the 60% or so of our students who receive need-based financial aid, the actual price is substantially below this.
At public universities, however, the price is even lower, much lower than the actual cost. The reason is that in the public universities, the difference between cost and price is made up by a tax-derived state subsidy that is given to all students, independent of their financial need.
At a private university like Stanford, public funds are a relatively minor factor in the real cost of educating our undergraduate students. Federal grants and the Cal Grant Program accounted for about $4.5 million out of Stanford's $28 million annual undergraduate scholarship aid bill. The rest comes from a variety of sources: tuition, current gifts, grants, research overhead payments and interest from our endowment.
A number of commentators, including U.S. Secretary of Education William J. Bennett, have referred to the private institutions as "expensive" and wondered aloud whether it is in the public interest for the federal government to support, through Pell Grants and other devices, the payment of high private-university tuitions on behalf of qualified students. The answer is yes; it is very much in the public interest to do so. If those same students move from private to public institutions, the taxpayers shoulder a much larger burden through state taxes.
Parents who ask why it is necessary for tuition to rise so far so fast are facing some harsh economic realities; but so is the university their son or daughter is attending. At Stanford, balancing the budget each year has become a painful process of expenditure reduction, conducted amid agony over the salaries we are able to pay and over the tuition we must charge. We have little immediate policy control over most income lines in our budget, except tuition.
We see ourselves as lean, even stressed; we are perceived as being "rich." Yet in order to finance very modest levels of improvement in salaries and program quality, we have had to make moderate to severe cuts in our expense budgets 13 out of the last 16 years.
It is also important to keep in mind that the cost of knowledge is increasing.
The explanation, I think, lies in the very nature of intellectual inquiry: Behind our growth is an implacable law of the economics of knowledge. As German physicist Max Planck pointed out, new findings in science become increasingly difficult and expensive to obtain. After all, we tend to answer the easy questions first, and then proceed to the harder ones.
On the expense side, 80% of our budget consists of salaries and benefits. Our non-academic staff salaries are based on a position that is near the middle of the local market; for our academic salaries, we insist on remaining competitive with the best.
Thus, like most salary-intensive "service" industries, our inflation rate is two or three points higher than the consumer price index and other goods-based estimates of inflation. That requires us to move tuition ahead faster than the regularly reported inflation indicators for the economy as a whole. And that explains why sending a son or daughter to college has become more expensive a little faster, over the years, than a mid-sized automobile.
If one takes account of the increased financial aid we are contributing to our students, and then calculates the net payments made by families for tuition, a remarkable fact emerges: tuition here, and I'm sure elsewhere, takes almost exactly the same proportion of the family budget in 1985 as it did in 1960.
That surprises a great many people with long memories; they often dissent vigorously, saying, "It's a much tighter squeeze now."
They are right, and there are good reasons why. The first is that the overall data on disposable income conceal some important differences between age groups. A recent study by the Urban Institute for the Joint Economic Committee of Congress shows a remarkable change in the real income improvement, over time, of men between the ages of 40 and 50. That is the decade in which most fathers are asked to help meet tuition bills.