9.11.06

THERE THEY GO AGAIN. Joanne Jacobs recommends an Education Week post on the Democratic majority's plans to make college affordable.
Democrats will have the chance to keep their promises to make college affordable now that they have won a majority of seats in the House of Representatives. As for the No Child Left Behind Act, the leading House Democrat on education has signaled his desire to retain the law’s central accountability provisions.
That's likely to play well with the folks at Inside Higher Ed, who recently griped, Pell Grants Down, Tuition Up.

On the classic question of why college costs as much as it does, officials offered a variety of reasons, related to rising expenses for faculty salaries, health insurance, energy costs and other factors. Largely, however, they focused on issues of quality — and said that there are very specific choices colleges make, for good reason, that push college costs up.

A subsequent column suggested higher tuitions offered a campaign point for Democrats.

Republicans disputed the idea that voters would view higher education affordability as a “Democratic issue.” “I think generally, after you cut through some of the rhetoric that’s out there on these college access issues, and actually look at the record that these two parties have on higher education, it becomes a lot clearer that it’s the Republicans that have been the ones who are taking substantive action — whether it’s increasing Pell Grants, raising loan limits or reducing loan fees,” said Steve Forde, spokesman for Rep. Howard P. “Buck” McKeon (R-Cal.), chairman of the U.S. House of Representatives Committee on Education and the Workforce.

“Republicans have a strong record of helping to provide access to higher education for low-income students in particular by expanding grants and loans,” said Josh Holmes, spokesman for the Republican National Committee. “Republicans want to make tuition tax-deductible. We’ve already succeeded in passing a $4,000 tax deduction for middle-class families.”

But Lake speculated that voters who care about college affordability would be more likely to vote Democratic in part because the cost crunch is perceived as a situation in which government intervention is badly needed. Data from the College Board released last week shows that inflation-adjusted state and local appropriations per student at public four-year colleges were at the lowest level in 2004-5 that they’d been since 1993-4.

Nobody is going to confess to taking advantage of third-party payments, although a New York Sun column by Richard Vedder and Bryan O'Keefe (via Phi Beta Cons) suggests the effect is at work.

Why are colleges raising their tuition so much? Because they can, and because there are few, if any, incentives not to do it. Unlike almost all other economic activities, there is no bottom line in higher education, no measures of performance, no incentives to reduce costs or improve quality, and very little price competition. While car dealers offer rebates, free gasoline for a year, and all other sorts of inducements to get you to buy their vehicles, it is almost unheard of to offer a one-week tuition-reduction sale, or free books if you sign up to attend our school by November 1.

The prevalence of third-party payments and the nonprofit nature of most universities are also key ingredients for tuition inflation. Huge amounts of student loans, state scholarship programs, tuition tax credits, and state institutional subsidies mean that the customer is often not paying much of the bills up front, and thus pays relatively little attention to the price (tuition fees). The fact that colleges are nonprofit means that the cost reduction incentives that are so commonplace in the private sector are largely absent in the ivory tower. These dynamics, coupled with the fact that the "value added" from college attendance is not even measured at most universities, make intelligent comparison shopping between schools nearly impossible.
It's worse than that, according to a Cato Policy Analysis, "Making College More Expensive," (.pdf) that suggests a connection between increased federal spending and reduced state spending. One sidebar elaborates on my view that there is excess demand for prestige degrees. These degrees are even more expensive because of the third-party payments.
If the number of available spots in higher education institutions rises very little as tuitions rise, then the increase in demand caused by federal aid will result in higher tuition costs for students.
The main text suggests an additional tax shift at work.

A major complicating factor is that state governments are highly involved in the production and subsidization of higher education. Thus, the federal financial aid may be passed to state governments if state governments reduce their appropriations to higher education or reduce state financial aid. For example, the state of Michigan has been facing a budget crisis over the past two years. If state legislators know that the federal government is going to increase programs under HEA, the legislators may reduce appropriations to the University of Michigan, knowing that, at least for the less affluent students, the net tuition will not rise. The net effect of federal grants may be that the state appropriation is reduced and tuition at state universities rises so the state is able to capture some of the federal assistance in the form of a reduced higher education budget.

This is, of course, consistent with what has been happening. Although state appropriations for higher education at public universities have increased over the past 20 years, they have not been rising as fast as tuition. As a consequence, state appropriations have been a declining share of revenue at public universities while tuition and fees have been an increasing share.

The author's recommendation:
The federal government spends tens of billions of dollars providing aid to students to attend colleges and universities through a variety of loan, grant, and tax programs. Yet there is ample evidence to suggest that these programs are counterproductive and have the unintended consequence of increasing tuition costs. In addition, federal financing has the potential to threaten the independence of higher education in the United States and, thereby, the independence of political opinion from the federal government.

Congress should reduce or eliminate its intervention in the financing of higher education and instead focus on providing the legal structure that would allow for the creation of human capital contracts. This would result in the most efficient allocation of higher education and preserve the independence of our institutions of higher learning.

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