Onward and upward with the cost of college.

• Author: Slaper, Timothy F.

A few days before a "student strike" at Indiana University this spring--a strike to protest rapidly rising tuition and fees, among other things--a panel was assembled to discuss the cost of, and who should pay for, higher education. The panel consisted of an IU sociology professor, IU's Treasurer, a state legislator (also a faculty member) and an economist.

The three broad questions on higher education were: Who benefits? Who should pay? Is it worth it?

Regarding the latter question, several recent studies have questioned if obtaining a college degree is still worth it. All have responded with a resounding yes, with an occasional proviso. Studies have consistently shown college graduates have higher lifetime earning potential than high school graduates, but the magnitude of the payoff varies dramatically by college major. Such studies are somewhat retrospective: They look at past performance and current cost/benefit relationships and project them into the future. But is that reasonable? Will the rising costs of obtaining a college degree one day surpass the benefits? With tuition costs rising at triple the rate of inflation--as shown in Figure 1--will college degrees still make financial sense?

[FIGURE 1 OMITTED]

After decades of tuition increases outpacing inflation, colleges and universities are now operating under more intense scrutiny. Various stakeholders ranging from state legislators to nonprofit associations to concerned parents and students have been demanding more accountability from higher education institutions to justify their costs and document their benefits. Indeed, the Wall Street journal reports that while the 2013-14 sticker price for both private and public colleges and universities rose, it was the smallest increase in a dozen years. (1)

This article examines the three big questions that the panel tackled: Who benefits? Who pays? Are we getting our money's worth? To keep categories clear and distinct--what is a cost to students is revenue to the university--the term "cost" refers to the operating cost of a university. The term "price" refers to the cost of tuition and fees.

The Cost of Higher Education

Why has the price of higher education significantly outpaced inflation over the past several years? Before one can answer that question, one must be careful to differentiate between the private outlays of tuition and the broader public expenditures in terms of state and federal support and costs internal to the institution. Economists like to examine one thing at a time, if they can, and hold all other factors constant, "ceteris paribus." The first cost to be examined here is the cost of delivering higher education. Why are universities so expensive to run?

Many economists would argue that universities are only remotely disciplined by market forces, at least on the cost front. The athletics and premium facilities "arms race" is an example of universities being driven by (responsive to?) market forces. Universities can pass along increased operating and facility costs to the students, at least up to a point. What drives these internal cost increases?

Some recent studies have identified the rising number of administrators as a factor. For example, a Wall Street Journal article reported the executive administrative payroll at the University of Minnesota rose more than 45 percent from 2001 to 2012. This increase, in comparison, doubled the rate of student growth (22.4 percent) and nearly tripled the teaching payroll (15.6 percent) over this same period. (2) Another similar report (3) found that between 1993 and 2007 the administration category at the nation's leading universities (4) had the highest percent increase in spending per student (61.2 percent), compared to instruction (39.2 percent) and research and service (37.8 percent). Some reasons suggested for the increasing number of administrators include creating new offices (e.g., Diversity, Equity and Inclusion and Sponsored-Research Programs). University administrators have pointed to the need to address diversity issues and comply with federal regulations and mandates as the reason for the surge in full-time staff.

Figure 2 shows that the growth of "administrative bloat" has been concentrated in the four-year colleges and universities. Before storming the gates to protest administrative bloat--IU's Treasurer MaryFrances McCourt said she gets about 20 emails a week on this topic alone--it can't explain the dramatic rise in tuition and fees. Based on the report, "25 Ways to Reduce the Cost of College," cutting administrative bloat by 5 percent would have saved the average student at a public four-year university $107 in 2007. (5) If the analysis of the authors of the report, and their data, are correct, this would imply that cutting bloat by 20 percent would net a mere $430 per student. So while bloat may be one cause of rising costs--and one that could be relatively easily addressed--ratcheting back administrative bloat by 20 percent wouldn't even pay for one semester's books.

[FIGURE 2 OMITTED]

In a study released earlier this year, Martin and Hill (2013) tested two competing explanations about rising higher education costs. The first explanation states that cost increases are due to internal decisions of the university. This is more formally called Bowen's rule, but the term "internal drivers" is more straightforward. In this case, faculty earn a premium through reduced teaching loads and, thereby, reduce their teaching productivity--the number of students taught per professor. In the internal forces case, revenues are seen as largely unconstrained. University revenues can be raised from benefactors (alumni or wealthy donors), student tuition and, in the case of public schools, the state government. The university raises all the money it can and spends it on "quality education."

The other explanation is that external forces drive costs higher, called Baumol's cost disease. In this case, the cost drivers are fixed productivity--it still takes the same amount of time to give lectures or grade papers--and government mandates. In addition, the rising competition for university...