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The curse of material progress, or “cost disease” has brought us another casualty: university tuition. In many countries, students are caught on an endless treadmill of debt and despair as the work to better themselves and gain an edge in the marketplace. While Baumol’s cost disease is a factor here, much of the tuition treadmill is unnecessary and self-inflicted. Only once we understand the causes of tuition inflation can we begin to propose workable solutions.
How We Got Here
Student loans have ballooned to become the second-largest form of consumer debt, after mortgages, in the United States. The average student loan debt is some $40,904. Millions of Americans, many in the formative years of their lives, are shackled to a ball and chain that hinders their personal advancement. It wasn’t always like this. For much of history, higher education was reserved for a privileged few. Classroom seats were limited, and those lucky enough to be admitted had to hold out hope for a scholarship, pay out of pocket, or obtain a private loan from a bank.
By the 1950s, however, it became evident that the future of work was shifting away from low-skilled labor and toward high-skilled jobs where a college degree would provide a competitive edge. But private loans were hard to come by. Banks were, understandably, unwilling to commit large sums of money to students who had no credit history, collateral, and very uncertain futures. Absent government assistance in the form of guarantees or subsidies, the private market will naturally undersupply credit to prospective students. Only students from wealthier families, whose parents could co-sign and/or have collateral assets, we likely to receive a loan. Of course, this is not socially optimal, for it adds an additional burden to the poor who desire to escape poverty.
For this reason, the United States Congress passed the Higher Education Act in 1965, which allows banks and private institutions to provide government-subsidized and guaranteed loans to students. These loans are available to all students with no underwriting. On its face, this sounds like a great thing, as college-educated citizens have higher earning capacity than those who received only a high school education. The problem is that immediately following the passage of the Higher Education Act, the cost of tuition began to rise, outpacing both general inflation and wages. As tuition costs rose, the government raised borrowing limits and created new programs like Parent PLUS loans, that allow customers to borrow the entire cost of attendance. It is my contention that all of this “free” money masked the price “signals” data of the market, encouraging universities to take advantage and overcharge their students.
Spiraling Tuition Costs
While there is no doubt that tuition inflation is a major issue, there is some disagreement as to the cause. If we are to propose a new means of financing education, we need to understand the possible underlying origins of tuition inflation. Here, two theories dominate. The first supposed reason for tuition inflation is the State Disinvestment Theory (SDT). The SDT argues that the primary cause of soaring tuition is government funding cutbacks at public universities. It is true, government funding for higher education has been curtailed, especially in the wake of the Great Recession. The second theory is popularly known as the Bennet Hypothesis, named after Ronald Reagan’s Secretary of Education, William Bennett. In 1987, Bennet wrote, "If anything, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.” In short, he felt that government-backed loans were inflating the cost of education as universities took advantage of this “free” money.
Which is correct? There is little research into the SDT but what little research exists suggests a very loose relationship between government funding and tuition, typically under ten cents for every dollar of allocations. In other words, increased government funding can reduce tuition costs, but only at the margins, and vice versa. As to the Bennet Hypothesis, the data appears stronger, with some studies finding that tuition rises up to sixty cents for every dollar of additional government-backed loans. The proliferation of easy student loans may not cause higher tuition but rather enable it. In reality, both state disinvestment and overzealous lending to students probably contribute to tuition inflation, alongside other variables, including the aforementioned Baumol’s “Cost Disease.”
Anecdotally, the Bennet Hypothesis seems to ring truer than the SDT. If tuition increases were primarily due to decreased funding, we would expect that schools would take austerity measures alongside tuition hikes. Yet, this doesn’t happen. On the contrary, to attract students, universities are building ever more lavish dormitories, cafeterias, and recreation centers. Universities are also hiring more staff, the number of non-academic administrative employees at U.S. universities doubled from 1987 to 2012, vastly outpacing the growth in the number of students. If indeed government budget cuts were to blame for higher tuition, it wouldn’t be possible to hire yet more administrative assistants, VPs, Assistant VPs, Deans…etc. In an era where businesses adopted flatter organizations and leaner administrative staff, universities moved in the opposite direction.
Stanford University is perhaps the poster child of perceived administrative bloat. In 2023, there were 18,038 staff members (administrators plus faculty), but only 16,937 students. As Richard Vedder writes in Minding the Campus:
The organizational chart for Stanford’s Office of the President lists fourteen high-level support persons, including eight with the title “Vice President.” But exploring further, the vice presidents have other vice presidents under them. For example, Martin Shell, Vice President and Chief External Relations Officer, has a “Vice President for Development,” a “Vice President for Communications,” and a “Vice President for Government Affairs” working for him. Patrick Dunkley, Vice Provost for Institutional Equity, Access and Community, has a “Director for Positive Sexuality”…
As the above example illustrates, the loan system isn’t working. “Free” money in the form of government-subsidized loans masks the price signals that ‘consumers’ of education need to determine the value of degrees and whether the investment is worth their time and money. It corrupts the data signals that our “problem solving machine” needs to function optimally. It also plays directly into credential inflation, which I will explore next.
We need a means to enable students to receive a quality higher education without exacerbating unsustainable tuition inflation and weighing down future generations with an anchor of debt it can never lift. I will explore several proposed solutions to this problem later on. For now, however, it is important that we understand the roots and ramifications of this unsustainable tuition treadmill.
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Universities do not make up a homogeneous group. It is a mistake to write about them as such. The business model and the issues relevant to costs differ strongly across these groups: Top tier privates, top tier publics, Research I schools, Top Tier liberal arts schools, most liberal arts schools, Lower Tier state schools, regional state schools (e.g., "teachers colleges"), community colleges, for-profit schools, and likely other categories.
That said, Mike Alexander in his comment covers a lot of reality that many authors and commenters are completely unaware of.
I don't think the rise of government-backed loans plays a major role in of higher college costs. If this were so college education would be the same product just more highly priced. But college is NOT the same product. When I went to college my classes were taught by professors and teaching assistants, both employees of the university who got benefits, Today, a lot of instruction is performed by adjunct faculty (contract workers). A similar thing has happened in corporate America. It used to be custodial, security and cafeteria workers were employees at my company. Around 25 years ago they became contractors. Today entry-level engineers and scientists are contractors as well.
In general, low-value work has been outsourced. Note that instruction is considered low value at modern universities, just as research is treated as low value labor at pharmaceutical companies (this was always the case in academia). All this happened as a cost-saving measure. If universities were flush with cash from government loans there would be no need for these measures.
But costs have risen despite these cost-saving (and I suspect quality-reducing) actions. Three sources of cost increased have been pointed out to me over the last 20 years.
The first is IT. IT systems contain expensive hardware and must be operated by expensive personnel. None of this existed when I was in school in the 70's. It is a large extra cost added on to what schools were doing then, with no improvement to the educational product. This is because the world is digital today, you need to have IT, just to keep the value you used to have without it. Adding IT doesn't increase the value of your degree product because all skilled workers (including the noncollege-educated ones) work with computers too. IT is like a tax levied on everyone, that is paid to the companies that produce IT equipment and services and the technicians who manage it.
The second is competition for lucrative markets. Foreign and wealthy students pay the full tuition, whereas nonrich domestic students often pay the sale price (i.e. scholarship). Research provides a lucrative stream of income for the university. To maximize these revenue sources universities will add services and amenities to try to attract rich or foreign students and make investments to become research centers. This can pay off sometimes, but if everyone is doing it. then schools are spending a lot more to chase the same fixed population of well-heeled students. Costs must necessarily rise.
The third is new functions that were not done in the past and which do not increase the value of the educational product. According to what I have read, there is a lot of paperwork that needs to be done in modern education that if the academic staff did it, they would have no time to do anything else. So, administrators were added to do this work. These people perform administrative functions that also exist in business and so are paid like their counterparts in business (i.e. they are not contractors).
I worked for 33 years in generic drug manufacture for Pfizer. When I left, about 15-20% of the staff in our bulk drug manufacturing plant performed tasks that did not exist when I started. These people handled all the paperwork need to fulfil new regulatory requirements added in the 90's and 2000's. This work did not affect the productivity of the manufacturing operations themselves. They did have qualitative effects: product quality is better documented, and the operations today are safer and less polluting than when I started. Doing this adds to cost.
Another 20% of the staff are technical process support people like I was. Our fraction was the same size when I left as when I started in the 80's. Because of our efforts the physical amount of product made in the same facilities increased by about half, and the number of workers making it dropped by about 20 percentage points. So basically, plant operators were replaced by administrators, but total output from the plant increased by 50%. So, the real cost per kg went down, despite the addition of all that administrative staff.
I suspect something like this happened in the university. But the productivity of student learning is limited by the raw material (student brains). So, productivity had not gone up, while cost has certainly has with the additional of all the administrative staff to do the educational equivalence to the quality, safety, environmental and DEI services our administrations do.
When you had all three of these it is a large increase in cost.