Everyone complains today about the cost of college: parents, students, politicians and even school administrators themselves. But to complain is one thing; to comprehend how matters have gotten so out of hand is another.
To understand why university or college tuition is now so expensive (on average, $22,218 per year at private places and $5,836 at public ones) and regularly outpaces inflation, you must first understand how money operates in academic life.1 It moves in a world of financial complexity where the standard model of supply and demand doesn’t apply, but where what economists call “information asymmetries between market participants” do. When George Akerlof introduced “asymmetric information” in a 1971 paper that studied how used cars are sold, he described a market in which the sellers of cars were much better informed than potential buyers. In higher education, substitute administrators for car sellers and parents for car buyers and you’re getting close to the point. The university and its administrators have massive advantages over the customers. They know what things really cost: big classes versus small classes; expensive professors versus teaching assistants; laboratory classes versus lecture courses; and all the rest. They know why administrative costs rise and how financial aid can dramatically reduce the sticker price of tuition for some families. Up against such superior information, parents and students are at a profound disadvantage.
Despite this imbalance, schools do not necessarily subscribe to the dictum “never give a sucker an even break.” Price-gouging or criminal intent is not the story here. But colleges and universities rarely explain to parents or students where tuition money actually goes. Nor are they forthcoming about why they charge students and their families so much (albeit some more than others). And they are reluctant to describe what the outlays in tuition will have delivered to the student upon graduation (reason: they don’t know). Thus when they market their “product”, they are happier advertising the qualities of their customers (“we are hard to get into”) than the specific outcome of the education (“this is what you will learn”). The proof of a superior school is, they suggest, its superior applicants. This is a little like the reputation of a doctor resting on the pre-existing health of his or her patients.
The Competition of the Non-Competitive
Part of the mystery of higher education is that while higher education is strenuously competitive, it employs few of the traditional tools of competition. No school lowers its prices to put pressure on the others. Instead, each cohort of schools nationwide maintains roughly the same stated prices. Among private elite institutions, Vanderbilt’s stated tuition is similar to Harvard’s, and the University of Chicago’s is very close to Yale’s. And while every school in each cohort promises a superior product, none is rude enough either to charge much more than the others or to undercut the competition by reducing prices across the board.
Strange as it may sound, to charge as much as one possibly can draws in customers. This is what selling status, as opposed to product, is all about. Little Ursinus College in Pennsylvania learned this truth by experimentation. After years of below-market tuition costs, it decided to play in the big leagues. In 2000, it raised its tuition and fees by almost 18 percent and was thrilled to see 200 more applications than the year before. By 2004, the student body had increased in size by 35 percent. What some call the “Chivas Regal argument” and others the “audacity model” worked: If something costs more, consumers think it has to be better.
Yet even a moment’s reflection raises a question about such logic. Even proud parents should be able to figure out that even though all schools promise a uniquely excellent product, history and popular demand force them to offer much the same curricular fare. The courses at all institutions featuring the liberal arts for undergraduates are similar because they are appeals to tradition and to the wisdom of the past. An abiding respect for tradition, being no springboard for innovation, makes competition on the basis of a strikingly different curriculum impossible.
The resistance to competition via the old-fashioned devices of price and product differentiation explains in part why higher education costs so much. If the administrative officers of a college or university can offer a product at a high price that varies only slightly from the price charged at all similar institutions, and if they are released from the imperative of making a profit to distribute to shareholders or owners (they need only balance annual revenues against annual expenditures), then they have much more freedom than managers whose livelihoods depend on vanquishing the competition, increasing market share and benefiting investors. In this way, they are like business leaders who run corporations to satisfy their own interests rather than the shareholders for whom they nominally work. For such administrators, revenue maximization is a very appealing goal, especially when their own executive compensation is tied to such maximization. And what they do with their freedom explains a great deal about how colleges and universities behave with respect to the money they collect.
That money, harvested every year, comes from just a few sources: tuition and fees, state allocations, philanthropic giving, earnings from the endowment, research grants and “indirect cost recovery” (the amount of money paid by government and other sponsors as “overhead” on those grants). Some of this money (for example, “indirect cost recovery”) must be used only for the reason it has been collected. Some endowments are use-restricted, and all endowments must be used prudently, so as not to eat into their earning power as the years go by. University administrators thus devote themselves to four fiscal priorities: raising as much money as possible in order to enlarge the endowment and have cash on hand for annual expenses; extracting as much tuition income as they reasonably can from parents, some considerable portion of which is redirected to financial aid for eligible families; maximizing the investment income from the endowment; and encouraging professors to pursue as much research support as they can.
As with nearly every other financial enterprise, there is never enough money. In addition to the campus activities it underwrites, money is also used as a symbolic marker of the school’s excellence—an instrument of exchange and an emblem of prestige. While colleges and universities are intentionally nonprofit, they are far from unworldly. They are aware that the annual U.S. News & World Report “Best Colleges” issue cites the amount of money available per student or per faculty member as a crucial criterion of excellence in their all-important, if highly defective, annual rankings. It is no coincidence that Harvard, with more than $35 billion in its endowment, is often thought to be America’s “best” school.
Furthermore, while college administrators know all the complaints about the high cost of education, they also know that those same parents want the “best” for their children. So the typical administrator is caught between competing demands: Consumers complain about prices while simultaneously putting considerable pressure on schools to enhance the quality of the product. The parents who want luxurious student residential facilities handsomely matched by restaurant-style dining arenas, recreational centers equipped with row upon row of body-building machines, bowling alleys, video game centers, psychological counselors by the score, remedial education offices, and classrooms outfitted with state-of-the-art electronics turn out to be the people most offended by college costs.
In the world beyond the campus, a typical response to such pressures would be to economize within the process of production by cutting workforce, outsourcing parts or labor, moving the plant to a cheaper locale, discontinuing unpopular product lines, or merging with a competitor. But campus economic rules are different. Few of these strategies can work in higher education.
Administrators and board members also know how deeply conservative their institutions really are. Outsiders can be forgiven for thinking that places famed for “liberal learning” would prove nimble in response to fiscal challenges, but they are not. For one thing, the chief “workforce” on a campus—the workers who on average command the higher salaries—are faculty members. The better paid among them are protected by tenure. Competent or not, they cannot be outsourced any more than most other activities on a campus (landscaping, food services, telecommunications and security are among the few exceptions). Moreover, few campuses can be moved; its place on the map locates its “soul”, where alumni have lodged their memories. While some curricular programs might have only a handful of students enrolled, they tend to be the very programs, typically part of the institution since its founding, that are also rightly honored as key parts of the Western educational legacy and symbolic of the institutional obligation to conserve knowledge (the Classics Department is the typical example). They are not easily thrown overboard. And most campuses would be appalled by the notion of merging with another institution. That would be surrendering its very identity.
Given these impediments to adapting as a normal business would, administrators are driven to seek efficiencies at the margin. They must become masters of the art of deferred maintenance, making sure that roofs don’t leak, buildings are cleaned, lawns are mowed, older technologies are purged (out go the typewriters) and new ones are acquired (faster computers, more efficient heating and cooling systems). But they are reluctant to do anything radical, for that would spread disruption through a place where being rooted in tradition is so important.
It Could Be Worse
These, then, are some of the reasons why colleges and universities cost consumers so much. But note: They could cost much more. Parents never get charged what it really costs to educate their children, pay wages and keep the place going; they haven’t been for years. The educational product is priced today, just as it has been for decades, at a much lower rate than it costs to be produced. In 2005, parents paid an average of $6,000 per year at four-year public institutions for an education that costs the school about $13,000 to provide. Private schools averaged a little more than $22,000 for a $35,000 education.2
So schools do subsidize education, and by most measures they are generous in doing so. But their generosity, largely underwritten by either tax revenues (at public schools) or endowment payouts (at private ones), arises from a careful calculation. Administrators know that the consumer market simply could not bear the real costs of the educational product. This is true today, a moment in American fiscal history when interest rates are relatively low (in part because of a glut of money coming into this country from overseas) making college loans more affordable. They know that if families had to pay those costs without borrowing, only the wealthiest among them could afford to send their children to colleges and universities, particularly the private ones. Lots of campuses would become virtual “gated communities.” Such calculation, enlightened yet market-sensitive, is another peculiar business arrangement helping to define higher education in the United States.
Such calculated generosity nevertheless has limits. Higher education is not so unusual that it can wholly escape market realities. That is why schools are gratified to observe that consumer demand for admission to the most prestigious among them shows no sign of weakening. The Ivy League, Stanford, MIT, CalTech, the elite liberal-arts colleges and others—these schools face a yearly avalanche of applications. While many middle-class families see no way they can afford to send their children to such places, even with loans at relatively low interest rates, that cost-avoidance population is more than offset by other, wealthier families.3 For wealthy families the costs are trivial; for some middle-class families, desire and hope for their children outweigh budgetary worries.4 Together, then, the rich and the determined have proven sufficiently numerous to keep demand and prices up, and inventives for schools to lower the costs of production down.
Administrators, after all, have no compelling reason to economize. They know, by virtue of their own annual budgeting processes, that higher education is not a business in an ordinary sense. They have learned that if your budgeting procedures operate by letting cost estimates determine revenue needs, rather than the other away around, you won’t be overly concerned with exercises in cost reduction. And that’s how the annual strategy for university and college budgeting works. The model they employ is “revenue maximization”, in which revenues are set equal to cost, with a result of neither profit nor loss. First comes the analysis of the costs for the next fiscal year; then comes the establishment of tuition rates and the rate of endowment spending for that year. Once administrators (mainly the chief academic officer and the chief financial officer) have balanced the books, their primary fiscal duty is done. After that, other tasks and other claims on their time take over. Central among them is to become “better”: To gain more favorable publicity and prestige, to recruit “the best” faculty and students, to augment the physical plant, to upgrade facilities, and to strive for the perception that the institution is among the top twenty, ten or even five in the nation. “Better” equals better. Status cannot be broken down into parts and analyzed.
Along the way to becoming “better”, however, in precisely this sense, both public and private schools have found themselves over the years allocating less and less money, proportionately, to the central activity of instruction and more and more to administration. In 1976–77, public universities and colleges directed 39 cents of every dollar to instruction. Some quarter of a century later, that number was down to 34 cents, and administration claimed more money. And research, which accounted for 18 cents of every dollar in 1976–77, took up 22 cents by 1999–2000.5 The economist Richard Vedder puts it this way:
Real spending per student for instruction at public universities from 1976–77 to 1999–2000 rose 21 percent; spending for all other items per student rose 51 percent. Put differently, only twenty-one cents out of each increased dollar spent per student went for instruction.6
Such trends, while not dramatic, have moved in one direction only: toward the increased satisfaction not of those off-campus, who provide the money, but of those on-campus, who use it. Neither parents nor children are the beneficiaries of such slow and incremental changes; administrators and researchers are. Parents might want to believe that each of their tuition dollars is earmarked for the teaching of their children, but only one dollar in three goes to that purpose. The other two go to everything else—maintenance of the plant, security, lighting, parking, computer operations and libraries, as well as the two largest on-campus consumers of dollars, administration and research. When parents write those tuition checks, they are buying some instruction and a great deal of everything else.
Not only does the administrative structure grow larger with each passing year, but the vast legion of those populating it—chancellors, presidents, provosts, vice-provosts, deans, sub-deans, legal counsel, marketing specialists, human resource directors, chief budget officers, information technology supervisors, public relations advisors and so on—command salaries that outstrip what most members of the faculty earn.
Take presidential salaries, for instance. No university president does as well as the average CEO of an American company, who is paid some 400 times better than the least well-paid of his employees. But the president of a university who makes $500,000 a year is still 47 times better paid than someone on campus earning minimum wage. To put it another way, in 1996, only one president of a private university was paid more than $500,000. By 2005, that number had grown to 70. Or: In 2000–01, the median compensation of presidents at private research universities was $389,208. Four years later, it had risen to $497,046—an increase of 27 percent (figures adjusted for inflation). Faculty salaries showed no comparably dramatic increases.7
How to explain this growing separation in salaries? The answer lies in the fact that some people who work at universities and colleges have by now become integrated into the professional employment economy. Others, like professors, have not. For many key administrative positions, universities and colleges compete directly for personnel with for-profit enterprises. But faculty members don’t get hired or paid that way; most of them compete for jobs only with each other and within a “market” immunized from external competition. Administrators, on the other hand, claim that their compensation must take into account what they could earn “on the outside.” Professors in a few fields can earn money as consultants; others can bring home income from book royalties, and now and again a professor leaves the campus to join the competitive commercial world. But there is no “outside” for most teachers, only limited competition within academia.
The result of this disjunctive system of compensation is to add another growing cost to the total bill for higher education. That bill is something that parents will increasingly be obliged to pay, and they will be told in a variety of ways—brochures, newsletters and speeches—that education is only getting “better and better” with each passing year.
Better Not to Ask
Their children may not, in fact, be better off. Unfortunately for higher education, students, parents and the attentive public, “better” has no verifiable meaning. There are those who say Yale is “better” than Tulane, Stanford is “better” than Rochester, and so on. But what do such distinctions mean? Is a student at Yale likely to know more, write more clearly, speak more coherently, and achieve greater success in life than the student from Tulane? Are Stanford graduates better equipped to deal with the world as they find it than those graduating from Rochester?
No one knows, and no one can make a persuasive claim one way or the other, in part because no national tests exist that would show comparative levels of learning, relative mastery of academic disciplines or career success. Most universities know little about how well their alumni have done in their careers. (For obvious reasons, they are more knowledgeable about their wealthier graduates.) And very few universities and colleges administer tests to their graduating students to see what they have gained in intellectual comprehension and mastery. Of the 3,600 schools in the United States, only 120 or so administer to both freshmen and seniors the Collegiate Learning Assessment, a test of critical thinking and analytical reasoning—and almost all of them keep the results of this assessment confidential. Better, it seems, not to ask—or tell.
This is puzzling. After all, most schools depend heavily on the SAT and ACT exams as a means of deciding which students to let in, so why don’t college and university administrators want to know what students have learned when they let them “out”? Among the thousands of colleges and universities in this country, not one has ever administered, even as an experiment, the SAT or ACT to graduating seniors.
One agency, the much-reviled and yet much-read annual “Best Colleges” issue of U.S. News & World Report, has come up with an instrument that claims to measure the quality of education available at colleges and universities. Everything that can be said for and against this publication has been said, and its editors are aware of all the criticisms leveled against it. Perhaps that is why they defensively introduce minor adjustments every year to the complicated formula that produces the rankings. As a result of such tinkering, the rankings do change up and down every year, even though it is hard to believe the schools themselves have changed much in just 12 months. What is even harder to believe is that the ranking criteria reveal anything substantial about what a given student learns at an educational institution.
But parents, eager to make a wise investment in higher education on behalf of their children, turn to that magazine and its imitators for want of anything better. Parents want to know fundamental realities: How good is the education, how devoted are the professors to teaching, what will their child learn. How can I compare this campus with that campus? Why should I believe that the professors of one school are more proficient teachers than those at another? To these crucial questions, the schools respond with only one thing, rhetoric. At every campus, they proclaim that something very “special”, “valuable” and “memorable” will happen to students during their undergraduate years at that particular campus, but they avoid pointing to anything specific. On the other hand, they are crystal clear about the amount of money parents have to pay.
The gap between the uncertainty of educational results and the certainty of high tuition is a quintessential symbol of American higher education. Baffling to many parents and mysterious to many students, this gap is an artifact of the peculiar market occupied by America’s colleges and universities, one made up of customers who want the product very much but are given little help in determining what exactly it is.
Can we transform this peculiar way of doing things—a way that bewilders and even angers the paying customers whose desire to have the “best” is in part to blame for the high costs about which they complain? Can we change the trend in which operating costs have ever less to do with either teaching or learning? Can we alter a system that now excludes many young Americans who need and deserve to be educated? Yes, but only if those in charge of the college experience gracefully retreat from the commodities marketplace back into the classroom. They must remember that young people do not need to be entertained but taught, not indulged but inspired. But for that to happen, parents and students must truly want and demand something at the same time simpler and genuinely better. If they ever do, they will find themselves face to face with the rich possibilities of a genuine education.
1.
According to The College Board, tuition was up 5.9 percent from last year at the privates and 6.3 percent at the publics.
2.
Figures derived from the “data cutting tool” from information in the IPEDS “Finance Survey” and “Institutional Characteristics” for fiscal year 2005, National Center for Education Statistics.
3.
An advisory group to the U.S. Congress and the Secretary of Education observes that 1–1.6 million low- and moderate-income high school students in the 1990s who had the brains and credentials to attend a four-year college did not do so. It also predicts that another 1.4–2.4 million high school students will make the same decision and face the same fate in this decade. See Mortgaging Our Future: How Financial Barriers to College Undercut America’s Global Competitiveness: A Report of the Advisory Committee on Student Financial Assistance (September 2006).
4.
Today, more and more elite schools proudly announce that they will charge little or no tuition to students admitted from the poorest strata of Americans. Since such schools never see more than a handful of such applicants anyway, their generosity is tempered by their seasoned knowledge of the applicant pool. From a strictly economic point of view, their policies amount to a nearly free public relations strategy.
5.
See “Table 350: Educational and general expenditures of degree-granting public universities, by purpose: 1976–77 to 1999–2000”, National Center for Education Statistics.
6.
Vedder, Going Broke by Degree: Why College Costs Too Much (AEI Press, 2004).
7.
See “Executive Compensation”, Chronicle of Higher Education, November 24, 2006.