When the College Board released its annual report on the cost of college earlier this month, few were surprised to see that tuition continued to soar at a rate far above inflation. Huge rises have been the trend for decades. But what's behind these seemingly endless increases in the cost of getting an education?
That question has ignited a fascinating debate among heavy hitters, with Jim Surowiecki kicking off the discussion with a New Yorker article noting differences between higher education and healthcare:
Education costs, and student debt, are rising at what seem like unsustainable rates. But this isn't the result of collective delusion. Instead, it stems from the peculiar economics of education, which have a lot in common with the economics of health care, another industry with a huge cost problem. (Indeed, in recent decades the cost of both college education and health care has risen sharply in most developed countries, not just the U.S.) Both industries suffer from an ailment called Baumol's cost disease, which was diagnosed by the economist William Baumol, back in the sixties. Baumol recognized that some sectors of the economy, like manufacturing, have rising productivity--they regularly produce more with less, which leads to higher wages and rising living standards. But other sectors, like education, have a harder time increasing productivity. Ford, after all, can make more cars with fewer workers and in less time than it did in 1980. But the average student-teacher ratio in college is sixteen to one, just about what it was thirty years ago. In other words, teachers today aren't any more productive than they were in 1980. The problem is that colleges can't pay 1980 salaries, and the only way they can pay 2011 salaries is by raising prices.
But is Surowiecki's diagnosis of Baumol's cost disease correct? Not according to Felix Salmon, who pins the blame elsewhere in a recent blog post for Reuters. Salmon notes that "faculty compensation is never more than 40 percent of total spending" and "has remained steady or decreased slightly over time." The real trouble, he says, is the government, and The College Board agrees: "Except for private research institutions," it says, "tuitions were increasing almost exclusively to replace losses from state revenues or other private revenue sources." Salmon summarizes.
Tuition costs are going up just because state subsidies are going down. Every time there's a state fiscal crisis, subsidies get cut; once cut, they never get reinstated. And so the proportion of the cost of college which is borne by the student has been rising steadily for decades.
Others have weighed in as well, noting that students often pay much less than the "sticker price," which effectively allows colleges to charge more to those that can afford it. The downside being confusion about the true cost of attending that may put off students from more modest backgrounds from even applying.
Do you buy the argument that the government is the prime force behind tuition cost hikes?