In the 2001-02 academic year, when Richard Vedder was beginning his work on the causes and consequences of rising costs in higher education, the average cost of a single year at a four-year university was $17,418 (including tuition, fees, and room and board). In other words, for every bachelor's degree awarded, somebody--whether the student, his or her parents, tire donor of a scholarship, or the federal student loan program--was paying something around $69,672. Since then the price of college education has risen sharply relative to the prices of other goods and services. Average tuition for the 2011-12 academic year was $23,066--an increase of 32.4 percent in only a decade, compared to a 27.6 percent cumulative rate of inflation over the same period. (1) With the cost of a four-year college education now approaching $100,000, Vedder's project has only grown in significance.
Further, despite the increase in costs, the quality of college education appears to have flat-lined. Based on historical trends in performance on the Graduate Record Examination (GRE), frequently taken toward the end of college by those students considering graduate-level education, Vedder (2004) concludes that the quality of education received by the average student, although difficult to measure, likely has not changed much over time. He also examines literature that asks whether education is intrinsically valuable or valuable primarily because it assists people in signaling credibly that they are sufficiently competent to be employable. His conclusion--that student performance on standardized tests is stagnant and that diplomas and degrees are valuable, but not because of the learning they represent--damns the whole educational system with faint praise. If not for better educational outcomes, why exactly are we directing more and more of our scarce resources toward the university system?
The nature of the current educational system invites another qualitative concern. Calls for all students to have the same experiences at both K-12 and postsecondary institutions of learning implicitly assume that the optimal basket of courses, interactions, and skill sets is the same--or at least quite similar--for every student. Yet the idea that diverse people, who will contribute to society in a wide range of ways, all require the same training is a spectacular leap of faith, and those who promote it have not yet met the burden of proof. Today's higher education system exhibits a failure to recognize either the purpose of postsecondary schooling or the potential alternative means of generating the same outcomes and social benefits. The traditional model is only one of many possible ways to encourage education, culture, and innovation. By exploring other alternatives, it may be possible to raise the quality of education and scholarly research while getting costs under control.
This article proceeds as follows. First, we describe the problem of rising costs in higher education. Second, we consider the array of potential alternative means for providing the benefits generally attributed to college educations and scholarly research. Third, we discuss the possibility and likelihood of reform. Finally, we conclude with an appreciation of how Vedder has helped us better understand these questions.
The Rising Cost of Education
Why is the cost of higher education rising so rapidly? The increase in the price of a college degree is explained at least in part by demand-side considerations. First, rising incomes mean that the populations of developed nations now have greater demands for all normal goods, including the services of institutions of higher education (Vedder 2004). Second, preferences have shifted toward more prestigious educational experiences, leading well-meaning family members to emphasize four-year colleges over junior colleges or trade schools (Vedder 2004). Third, the untested assumption that a four-year college degree has become essential for young people to succeed in an ever-more technologically sophisticated global economy has motivated public policies that subsidize higher education, further shifting out the demand curve. All of these factors contribute to the number of people applying to institutions of higher learning, thereby enabling universities to charge higher prices without risking declines in enrollment.
These "demand-induced pressures to raise tuition" are "aggravated by the non-market-driven nature of higher education" supply (Vedder 2004: 39). University attendance is, of course, not compulsory and, as such, is subject to some degree of market discipline (Vedder 2004). However, universities have been remarkably successful in avoiding exposure to the market test.
In a standard competitive market, the chain linking consumption decisions with production decisions is strong. If consumers embrace a product, the producer will earn a profit and thereby be encouraged to expand output. If consumers reject a product, the producer will be forced either to redeploy resources to some other productive activity or go out of business altogether. This loss side of the profit-and-loss equation is the burly, no-nonsense bouncer of the market; lose too often and your ability to participate on the supply side is revoked.
In the market for higher education, however, the chain linking production and consumption decisions is weak. Individuals who are not residual claimants of university profits make many decisions. The job security and compensation packages of administrators and faculty, particularly those with tenure, are tied to revenue only indirectly and only in the long run. They stand little chance of capturing any of the excess profits that might be generated by their efforts and, as such, face few costs if they pursue objectives other than the quality of the educational experience they provide to undergraduate and graduate students. Of course, most industries struggle to evaluate the extent to which any given individual employee contributes to the bottom line. The position of the average rank-and-file faculty/staff member might not be so different from the rank-and-file employee in most large corporations in this regard, if it were not for some significant confounding factors: the difficulty of monitoring faculty performance, the third-party payer system, and the extent of subsidization of the university and its many diverse programs.
Faculty performance is notoriously hard to evaluate. The high degree of specialization within the academy makes it difficult for faculty to evaluate each other's contributions to institutional research and teaching missions. Consequently, hiring committees, department heads, and administrators tend to put more emphasis on quantity than on the quality of publications. Evaluating the potential of a research product to influence the state of knowledge within a field is simply too difficult. Evaluating teaching performance is similarly challenging. The student course evaluation is the primary method of monitoring classroom teaching at most universities, but recent scholarship suggests that the intrinsic worth of student evaluations is overrated. A 2010 study of student evaluations at the United States Air Force Academy (USAFA) found that student evaluations are positively correlated with student performance during the current course, but negatively correlated with student performance in future, related courses (Carrell and West 2010). (2) This finding is consistent with research demonstrating that charismatic presentation of course materials is correlated with perceptions of learning, but not actual learning (Carpenter et al. 2013).
The already difficult task of evaluating contributions to learning and knowledge is further exacerbated by the third-party payer system. The third-party payer system creates a significant and multifaceted principal-agent problem within higher education. The undergraduate student--the principal--may fund his or her own education directly, but he or she is more likely to arrange payment by contracting with one or more go-betweens. According to Sallie Mae's 2014 report, How America Pays for College, 31 percent of educational expenses are financed through grants and scholarships, and 41 percent of expenses are paid by parents or other benefactors. Those who experience the product and make the primary purchase decision--the students--pay only 27 percent of educational expenses. Furthermore, over half of these student-paid expenses are financed by borrowing at rates far below those most students would be able to obtain on an open market given their credit histories and likelihood of repayment (Sallie Mae and Ipsos Public Affairs 2014). In other words, for every $1,000 dollar increase in costs, die average student is on the hook for only $270, and only $120 of that $1,000 comes out of his/her pocket. The rest is borrowed on favorable terms with more or less unlimited time to repay. This loose connection between the payment for and the provision of the service dulls the market impact of tuition increases and fee hikes. (30
Subsidies by state and federal governments and nonprofit organizations also obscure the market value of education and hamper competitiveness within the educational system. In 2013, 40.4 percent of public university revenue originated as federal, state, or local governmental appropriations, grants, or contracts. Private universities received 12.6 percent of their funding from these sources; in the for-profit university sector, that figure was 5.7 percent of revenues (Ginder and Kelly-Reid 2013). The tax-exempt status afforded universities is another form of subsidy. Like all nonprofit organizations, universities are eligible for a number of tax incentives that are not available to others. Similarly, many contributions to universities are tax deductible for donors. This acts as yet another mechanism diverting resources toward the university system and away from...