The College Board reported last week that the average tuition fee at a fouryear state university rose 6.3% this fall compared with last year. Some in the higher education establishment argued that this is a sign of great restraint and belt-tightening, since the rate of increase the previous year was 7.1%. College presidents claimed that after scholarship and loan assistance, the true burden on students is much lower than what the "sticker price" indicates.
Despite this adulation, we do not see any reason to celebrate these new statistics. The truth is that college costs continue to rise 2% to 3% a year more than the rate of inflation — a disturbing trend that has continued for at least a quarter of a century. The percentage of one's income it takes to pay college costs is rising whereas it is falling for nearly everything else we consume. Moreover, there is no evidence that the quality of the product is any better, and, in fact, there are some indications that quality actually may be declining. For example, the Department of Education tells us a smaller percentage of college graduates are literate these days than a decade ago.
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.
Most university presidents claim that vast increases in government aid will solve the problem of rising tuition. There is little evidence, however, that increases in government subsidies have actually improved access for the poorest students. Instead of just asking for more government money, colleges should become more responsive to market forces. Here are some examples of free-market reforms that higher education could embrace or adopt: (1) Encourage for-profit universities rather than discourage them through barriers to entry like irrational accreditation requirements. (2) Give state government funds directly to students rather than to institutions. (The federal government has done this for years, first with the GI Bill and later with Pell Grants.) (3) Tie government assistance to colleges to improvements in productivity, manifested in smaller tuition increases. For example, increase Pell Grants and state scholarship monies MORE for schools that raise their tuition less. (4) And maybe, to make students more sensitive to prices, we should re-evaluate whether government should even be in the business of providing loans to college students. In the short run, reducing loan programs would burden parents, but in the long run, it would make consumers more sensitive to high tuition charges.
Not all the news from this report is bad. Community colleges are doing a far better job of controlling costs and seem to take seriously the notion that academic access is an important national goal. The average increase in two-year school tuition, 4.1%, only modestly exceeded the inflation rate. Maybe we should encourage more students to initially enroll in two-year schools, and if they succeed, transfer to four-year institutions. For that to work, however, the four-year schools have to start accepting two-year college credit less grudgingly. This strategy has another advantage — by sending students to lower-cost community colleges first, we probably reduce the costs of dropouts, for over 40% of students entering relatively expensive four-year schools fail to graduate within six years.
Higher education serves a noble purpose. It is a primary vehicle by which we maintain and expand the glorious heritage extended to us by Western civilization. But the nobility of purpose does not excuse inefficiency and high costs. It is time to exercise some tough love toward our colleges and universities.
Messrs. Vedder and O'Keefe are, respectively, director and associate director of the Center for College Affordability and Productivity in Washington, D.C. Mr. Vedder is author of "Going Broke By Degree: Why College Costs Too Much."
