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Colleges Have Little Incentive to Hold Down Costs

The funding system shields schools from "market discipline." And as fees soar, the quality of education gets no better.

July 18, 2004|Richard Vedder | Richard Vedder is distinguished professor of economics at Ohio University and adjunct scholar at the American Enterprise Institute. He is the author of "Going Broke by Degree: Why College Costs Too Much."

ATHENS, Ohio — In 1958, when I entered Northwestern University, annual tuition was $795, an amount equal to a bit less than two months of gross income for a typical American family. This year's Northwestern freshmen will pay tuition of $29,940, or more than six months income for a typical family.

The increase is not confined to elite schools. At Ohio University, the mid-sized state university where I teach, tuition in 1980 was $1,206 for students from Ohio; today it is $7,128.

College tuition fees have risen faster than any major component of the consumer price index, including healthcare. Even as the real cost of food, clothing and transportation have fallen, the burden of financing college has tripled.

If the quality of a college education had improved dramatically, or if something unavoidable explained the rising costs, we might accept this alarming trend. But that's not the case. The staggering leap in costs can be explained by several factors, none of them having much to do with providing students a better education.

One reason costs have risen so dramatically has to do with the way college educations are funded. As with medical care, a big chunk of college costs are not paid directly by the consumer. In medicine, insurance foots the bill. With college tuition, part of the tab is picked up by the government, by scholarship funds and by private and public lenders. This leaves customers -- students and their families -- far less sensitive to price than they otherwise would be, which allows colleges to be far less concerned about keeping costs down.

Kids from affluent families do pay the "sticker price" for their educations, but there are few enough of them (60% of Northwestern undergraduates, for example, receive some sort of financial aid), and the competition for admission is sufficiently intense that schools haven't needed to bow to pressure from these families.

Another factor in the rising costs is that most colleges are nonprofit institutions and are largely sheltered from the market discipline private firms face. Without stockholders to answer to, most have seen little reason to curb spending and have greatly expanded their staffs (especially in administration), increased compensation of employees and built lavish new facilities.

One would expect that the positive part of all this spending would be that students get better educations. But that hasn't been the case, in part because only about 21 cents of each increased dollar of funding for American universities over the last generation has actually gone into instruction. Universities have actually lowered the portion of their resources devoted to teaching undergraduates, instead putting more into research, administration, graduate instruction, student services, intercollegiate athletics and other things that don't directly translate into better classes for students. Third-party grants that used to subsidize undergraduate instruction now increasingly fund smaller teaching loads for professors, research projects, burgeoning university bureaucracies and higher-profile athletic teams.

Students now live in nicer surroundings, with Internet connections and telephones in their dormitories and country club-like recreational facilities. Yet there is little evidence they are learning more. Average scores on the Graduate Record Examination, taken by graduating seniors considering graduate school, are slightly lower today than in 1965. There has been a reduction in class hours attended, and students increasingly take five or six years to get their degrees.

In 1960, total spending by colleges and universities was equal to 1% of the gross domestic product; today it equals 3%. But college costs cannot continue indefinitely to grow faster than family income. Already, students are seeking out other options, including community colleges, foreign universities and online programs. For-profit schools, like the University of Phoenix, are not only claiming a larger share of the market but also finding that they can make profits while still charging much less than many of their nonprofit counterparts. Some students are deciding to forgo degrees altogether, opting instead for intensive training programs in particular areas, like the computer certification programs offered by companies like Microsoft and Oracle.

In the end, this kind of competition will be healthy. As universities lose market share, they will almost certainly -- if reluctantly -- start to control costs. And the good news is there's plenty of fat to cut. Colleges could increase teaching loads and use more online instruction; they could cut back on administrative staff, subsidies for intercollegiate athletics and high-cost, low-enrollment graduate programs; they could abolish tenure and contract out food and lodging operations. The only thing missing so far is a will to change.

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