Higher Costs of Higher Ed

Geoff Norman pages me (although I don't have a pager) and asks about this Freeps editorial  on the costs of higher education.  Reading it leads me in many directions. 

First, I am immediately suspicious of any bill that Congress passes that is titled The College Cost Reduction Act of 2007, and my first reaction is that it will accomplish just the opposite--it will drive college tuitions even higher.  That's in keeping with the idea that all too often, politicians aim high, and end up shooting themselves in the foot.

You have to ask two questions:  one, why is college tuition so high, and  two, why is it rising so quickly. In my opinion it's not that high, but it is rising too quickly. 

Take the level first:  Given that it costs about $13,000 to put a kid through one year of public school in Vermont, $13,000 for one year of in-state tuition and fees at UVM doesn't seem that outrageous.  (I ignore room and board because you have to eat and have a place to sleep whether you're at UVM, home, or somewhere else.  That's one of the first lessons I teach my first year econ students.)    And if students really are concerned about saving money, they can always go to Community College of Vermont for a few years.  Taking a full load of 15 credits per semester would cost about $5,400 per year,, saving the student $7,600 per year.  That assumes they would not have received any student financial aid from UVM or VSAC, a highly unlikely case for a low income student--which is most likely who the Freeps is (or should be) concerned about.

What about the rising cost of higher ed?  That brings us to point two.  First, the economic returns to higher education are high and rising.  The median earnings of a someone with at least a BA degree in Vermont is $39,000; for a high school graduate it's $26,000. that's a 50% wage premium.   More sophisticated national studies peg the premium even higher than that, and higher than it was three decades ago.

Second, we assume people make rational choices about costs and quality for nearly everything they buy.  People have a general idea about UVM's quality or any other college's.  They can look it up online in many places, read about it, or take a tour and listen to tour guides explain what it is parents are buying for their investment.

But what's the price of attending UVM?  It's not $13,000 for most in state residents or $27,000 for many out of state residents.  The fact is, most parents, especially middle income parents, have no idea what a college education is going to cost them.  They only know after the financial aid package for their son or daughter  is put together and is sent out with their acceptance letter in April. 

And that's the main problem.  Colleges have little incentive to keep costs down because unlike in the private sector, where lower costs mean lower prices, in the higher education business, there is little correlation between costs and price to an individual customer.   Take any dozen randomly chosen students at any college, and they will likely be paying twelve different tuitions.   And that is a recipe for cost increases.  So when Congress passes a bill to give students even more financial aid, it is implicitly telling colleges that they can be even less concerned about costs and tuition levels.

A couple of other comments about the editorial, which says

Yet rising cost is threatening to put a college education beyond the means of even middle-class families without the help of mortgage-size loans. It makes no sense for a country to boast the finest colleges and universities in the world if only a select few can afford to attend.

How, then, do you explain the record number of people attending college and graduating from higher education institutions?  It's hardly a "select few."  That term  may play well in a politician's speech, but it has no place in a logically argued editorial.

And it gets worse, because the editorial now quotes from an AP story:

The AP also reports that, "Many in the next generation will be so debt-burdened they will have to delay home purchases, limit vacations, even eat out less to pay loans on time."

So let me get this straight.  I'm supposed to be upset that someone has taken out a loan to improve their skills, training, education, and marketabilility--which means higher income--but that person has to delay a vacation, and even eat out less!  Wow.  What a sacrifice.  Maybe people have expectations that are too high. (Robert Samuelson, the Newsweek columnist, wrote an entire book on this topic.)

    Maybe students ought to take fewer vacations while they are in school (limit those spring breaks in Cancun) and take a sandwich with them to class instead of spending $8 for a lunch at the new Davis Center at UVM.  (Let's see:  $8 per day, 5 days per week, 30 weeks per school year.  That's $1,200 just for lunch.)  Is anyone out there, beside me in my second (non paying) job running the Vermont Council on Economic Education, thinking about teaching students (and editorial writers) about tradeoffs people face and helping them make better long term decisions?

Comments

[Anonymous]

I have a bit of a different take on this Art. It's my observation that lending standards for student loans have been liberalized dramatically in the past 30 years. Student loans and other educational loans (particularly Plus loans available to families) are granted without any rigorous analysis as to repayment ability. If people are granted easy credit they will borrow and they will spend. College administrators have been able to raise prices much more freely in a liberal credit environment because the students and their families (if they have a pulse, a valid social security number and anything but a horrific credit score) can borrow 100% of what the college charges them. You are correct that 12 different students are paying 12 different prices but for many the common denominator is that they borrowed 100% of their actual "price." Look I want a $1 million home but no lender will lend me the money to buy it. If I want the $1 million home equivalent of education for my child (one of the Ivys let's say), I can borrow 100% of the price (no matter whether it is full price or half price) with an application that is little more than my name and social security number. When the days of easy educational credit are over, pricing will be held in check.

[Gregg Ballou]

Come on People, listen to what Art is saying. Only the ignorant pay sticker price for college, and there is tons of free money available for higher ed. Personal choices are the root cause of poverty, not expensive this or that(w/the exception of taxes). Picking on the price of an Ivy education is typical of the 'Vermont anti anything prosperous syndrome' that helps keeps this place poor. The more money a school has the less they can charge individual students. The better the school the more likely you will be to get a job in ibanking to pay off whatever student loans were needed and buy your second home in VT. Harvard is 100% free to students whose parents make less than, I believe 60k a year. Ignore the sticker price and ignore 'common' knowledge of what higher ed can cost(Beware the guidance counselor). The payoff surpasses the cost of higher ed unless you wish to remain in VT and work crappy menial jobs.