Why Tuition Keeps Rising (Spoiler Alert: Government Intervention)

Tyler Durden's picture




 

Submitted by Omid Malekan,

Imagine for a moment that you are the owner of a popular restaurant located on a street with many restaurants. You do your best to provide the best experience to your customers while staying ahead of the competition by keeping your prices down. You try to avoid spending too much on labor, and do as much of the work yourself as you can, often putting in long hours. Although there is a good wholesale market nearby, you drive an extra hour to another market just to get your ingredients a little cheaper.

One day a wealthy patron who is a big fan of your cooking announces a new idea. Because he wants as many people as possible to enjoy your food, he is going to pick up the tab for most of your customers. You can just go on doing what you always do, but when the check arrives for many tables, this wealthy patron will pay the tab. The next day, your waitress complains that there are too many tables and you should hire more help. What would you do?

Normally, you would try to find a way to avoid hiring another person as it would eat into what little profits you make. But now you realize there is another solution. You can just raise prices. Since most of your patrons are not paying for their meals, your place will still stay popular and you won’t have to worry about losing business to your competition. So why not hire another waitress? While you are at it, why not hire a manger so you don’t have to be there all time, and stop driving to the further market?. Whatever increase in costs you suffer you can make up for by raising prices more and more.

Now imagine all your competitors also have wealthy benefactors picking up the check for many of their customers. You can all raise prices constantly without losing any sleep – or business.

This scenario is effectively what America’s higher education financing system has turned into. There are many reasons why college tuition is rising faster than virtually anything else, from more applicants than ever to state budget cuts for public universities, but all of those factors are allowed to persist because often times the person getting the degree is not the person paying the tab – not for today anyway.

Presently over 60% of all undergraduate students receive some sort of Federal aid for their education, and the amount of money the government has shelled out for student loans is now over a trillion dollars, double what it was just 7 years ago. Like the hypothetical wealthy patron in the example above, the government doesn’t ask for much when it gives out the money – neither from the student nor the University.  If our wealthy patron had said “I will pick up the tab so long as you keep your low prices” then we would have a reason to keep prices down. But by fully removing the value of what customers get from the equation, all incentives point towards inflation.

One of the toughest questions to answer in the rising cost of education debate is exactly why Colleges and Universities are raising prices so fast. Yes, demand has gone up, but that doesn’t lead to price spikes unless supply is kept low. After all, as our society has grown richer, demand for all sorts of things from cars to eating out have also gone up, but their prices haven’t spiked because supply has grown as well. So why hasn’t supply of higher education kept up – as evidenced by collapsing acceptance rates?

Its not an issue of their product, because knowledge is infinitely scalable. Think of your typical undergrad 101 Rhetoric or Chemistry class. Its not hard to keep hiring more instructors and offering more sections. It would be one thing if it was hard to find more instructors, but thanks to our current PhD. glut, the opposite is true, and the market is oversupplied with people who would make qualified teachers. Putting all of this together, we observe that at a time when demand for higher education is higher than ever, and the supply of would-be educators is higher than ever,  Colleges are choosing to keep the number of spots available to students relatively low, and raising tuition prices instead. But why?

One good way of answering questions of rising prices is to ask “how can they get away with it?” Going back to our hypothetical restaurant, we can get away with keeping supply fixed and constantly raising prices because our customers are not paying for their meal, a third party is. If not for our benefactor, even in the midst of success we might choose not to increase prices. We might instead decide to open another location to offer more of the same food at the same price, or try to prepare the food faster so we serve more steaks per day. But as long as the person getting the product doesn’t care about the price because someone else is paying, why bother? That’s just more work and more stress for us. We are better off keeping supply fixed, raising prices and then spending that money on things that make our life easier, like more waitresses. While we are at it, why not also use some of the money from our inflated prices to pay ourselves a higher salary. After all, its not like our customers will feel the difference.

This is exactly what’s happening at America’s major colleges and universities. As shown by the chart below, which was put together by the American Association of University Professors, since the 1970s positions for non-faculty professionals have seen the highest growth for jobs at American Universities.

Meanwhile, University Presidents and other executives have been giving themselves big raises while leaving the professors and their assistants in the dust.

The peculiar places tuition money has been flowing to is further discussed in this fascinating paper by the Delta Cost Project.

We could debate all we want about how much a University should spend on professors, secretaries, sports facilities or free unlimited Nutella, but that would be a waste of our time, just as it would be for the patrons of a restaurant to debate how many waitresses there should be.

Imagine if suddenly our wealthy restaurant benefactor declares he’s going to stop paying for peoples meals. Given our now sky-high prices, our tables would be empty and given all these new expenses, like more waitresses and shopping at the closer market, we’d go out of business. To survive, we’d have no choice but to get leaner and enter the murky waters of business uncertainty, where every decision is complicated and viewed through the lens of “what can I get away with?”

As long as the majority of the cost of college education is not born directly by students but rather by Government loans and grants, our institutions of higher learning will not be forced to adapt and find innovative ways of delivering quality education to more students at a decent price. They will go on keeping supply low, tuition higher and expenses growing. If we care about our children and want them to stop taking on more and more debt to get a degree for a tougher and tougher job market we need to break the current cycle.

The kindest thing our government might do for our kids is to stop throwing money at inefficient Universities in their name, or at least demanding more from those institution in return for that money.  Imagine for a second if college loans were given to the school and not the student, and tied to metrics of success, like whether the student graduates and how good a job they land afterwords. Much like our restaurant, in such a world the school’s focus would then shift to keeping prices down while offering good value.

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Wed, 07/09/2014 - 11:44 | 4939675 JustObserving
JustObserving's picture

But, but, but, the price of Volvos and French wine and cheese keeps rising.

Wed, 07/09/2014 - 11:54 | 4939718 CH1
CH1's picture

Must keep the suckers grasping for those magic certificates.

Wed, 07/09/2014 - 12:11 | 4939801 lordylord
lordylord's picture

"Must keep the suckers grasping for those magic certificates."

Cut it out CH1 with the anti-college blanket statements.  There is value in many college degrees even at today's tuition.

Wed, 07/09/2014 - 12:13 | 4939808 CH1
CH1's picture

That's my opinion, amigo. And based upon real experience.

Wanna learn something? Read a book!

Wed, 07/09/2014 - 12:16 | 4939827 lordylord
lordylord's picture

"That's my opinion, amigo. And based upon real experience."

Ok.  Based on my experience, if you choose a major that is in demand in the job market, work hard, take the hard classes, find internships YOU WILL FIND A JOB RIGHT OUT OF COLLEGE.  One that puts you firmly in the middle class with opportunities to make 6 figures in short time.   Yes, 90% of college kids screw around, but why worry about them?  So stop your bitching.

And about reading a book.  Yes, that is great way to learn, but college offers much more than a book. 

Wed, 07/09/2014 - 12:22 | 4939856 CH1
CH1's picture

Experience: I've taught at just about every level, including a major university.

Yes, there are some good teachers in the engineering dept., but the whole operation is vile and insanely expensive. The only reason it stands is the magic certificate combined with Professional Regulation laws... laws that forcibly prevent people from working without the magic cert.

You can learn better and FAR cheaper by reading books and hiring the occasional tutor.

As for the "college experience"... please.

Wed, 07/09/2014 - 12:23 | 4939870 lordylord
lordylord's picture

Your response tells me that you have no teaching experience at any univeristy or any real world experience for that matter.

Wed, 07/09/2014 - 12:25 | 4939882 CH1
CH1's picture

Your response tells me that you have no teaching experience at any univeristy or any real world experience for that matter.

LOL... I have some tax records that beg to differ.

Wed, 07/09/2014 - 12:26 | 4939893 knukles
knukles's picture

Cloward-Piven ahoy!
Full Forward Ahead!
Damn the Republic, Sink the Fucker!

Wed, 07/09/2014 - 12:32 | 4939927 lordylord
lordylord's picture

Buddy, your arguments against formal higher education are specious at best.  Did higher ed chew you up and spit you out?

Wed, 07/09/2014 - 12:41 | 4939971 CH1
CH1's picture

Wow, you really don't handle disagreement well.

Higher ed paid me very well, and I liked the people I worked with.

Wed, 07/09/2014 - 12:25 | 4939881 lordylord
lordylord's picture

A degree means that you have some minimum training/knowledge.  It makes you a safer hire than some guy who claimed to read a lot at the public library.  So save me.

Wed, 07/09/2014 - 12:35 | 4939940 CH1
CH1's picture

LOL, never heard of a test, or a conversation?

The cert only matters because of conditioning and laws that are backed with pistols.

I think the entire "higher ed" system is manipulative and abusive, but go ahead and serve it if you want.

Wed, 07/09/2014 - 12:37 | 4939960 lordylord
lordylord's picture

A company is not required by law to only higher college graduates.  Where is the pistol? It just so happens that a good college graduate is well-prepared whereas a guy sitting in the library all day may be a crap shoot.   Stop being daft.

Wed, 07/09/2014 - 12:47 | 4940013 CH1
CH1's picture

You're gonna go down swinging. Have fun.

A company is not required by law to only higher college graduates. 

Without the cert, you cannot work as an engineer (PE) or any number of other things. As in, "forbidden by law."

And go read some want ads - a huge % require a BS or BA minimum.

Where is the pistol?

All laws are an authorization of violence. Armed men stand behind every law.

Wed, 07/09/2014 - 12:30 | 4939899 lordylord
lordylord's picture

As for the college experience, I wasn't referring to sitting on the green or going to the frats.  I mean computer labs, chemistry labs, physics labs, private libraries, discussion among peers in a formal setting, mentor-ship from professors, research opportunities.  You sound like you have no idea what you are talking about.

Wed, 07/09/2014 - 12:38 | 4939958 CH1
CH1's picture

I mean computer labs, chemistry labs, physics labs, private libraries, discussion among peers in a formal setting, mentor-ship from professors, research opportunities.  You sound like you have no idea what you are talking about.

Labs are cool and friends are cool, but college didn't invent them.

And of course I don't sound like I know anything - I disagree with you!

Wed, 07/09/2014 - 12:42 | 4939978 lordylord
lordylord's picture

I like your answers.  They only deflect and don't directly rebut.  Good job.  This is a waste of time to argue with you any further.

Wed, 07/09/2014 - 12:22 | 4939858 lordylord
lordylord's picture

The hate on higher education is laughable at Zero.  Government should get out of the business of making student loans, but the comments on these boards are always anti-college.  Sounds like spite to me.

Wed, 07/09/2014 - 13:38 | 4940217 Bendromeda Strain
Bendromeda Strain's picture

What's laughable, pal is that your beloved skin didn't confer any magical reading comprehension powerz upon you. The article in question is bashing the exponential rise in tuition, and seeking to pin the blame appropriately. The fact that you ended up butthurt and in the arms of your stuffed mascot only reinforces the point that recent grads misapprehend that they received value.   

Wed, 07/09/2014 - 12:26 | 4939895 TBT or not TBT
TBT or not TBT's picture

Most engineering and physics material can still be taught using a chalk board mechanical pencils, and such.   In computer science, the computers have gotten enormously cheaper.  So why the fuck do prices for credit hours in such subjects keep heading skyward?    Because it is a great racket for the tenured, the unionized administrators, and Democrats.    All those faculty parking lots full of statist fuck bumper stickers, and all those western civilization hating courses, identity politics courses, global warmist save the seals courses, etc are your question answered.   The left cares deeply about BOTH programming the young AND making them dependent on government.  

Wed, 07/09/2014 - 12:35 | 4939941 rtalcott
rtalcott's picture

I agree...non-lab science and engineering should be relatively cheap...and even a LOT of lab work at the undergraduate level can be done cheaply...it does NOT take big bucks to learn fundamentals and that's why they are not stressed as much as they should be...experimentally look what Newton, Faraday etc. accomplished...same for the classic experiments in chemistry...

Wed, 07/09/2014 - 13:30 | 4940198 asking4it2k
asking4it2k's picture

Lets be honest here. About half of college students today should not be there. Some are simply not smart enough. Some would be better suited learning a skill/ trade.

A liberal arts degree is useless in todays economy.

Wed, 07/09/2014 - 11:46 | 4939679 Apocalicious
Apocalicious's picture

More middle management!

Wed, 07/09/2014 - 11:54 | 4939719 NoDebt
NoDebt's picture

Higher Ed is nothing more than an upscale government works program.  If you can't stomach delivering letters for the Post Office, you probably work at a state university.

Wed, 07/09/2014 - 12:39 | 4939956 Georgia_Boy
Georgia_Boy's picture

As everyone here already knows, this wealthy patron prints his own legal money, so he risks little anyway.  But even still, why bother?  The government bureaucracy must be getting something out of this that helps it expand its power and stay relevant (that's the first priority of any bureaucracy).  The answer is the government does not want to stop paying the bill, because the university system is the bedrock of socialist thinking in America.  It's an unholy alliance ... when you hear about the vast increase in full time non-faculty, think diversity trainers, student counselors and psychologists for kids with stds, recruiters, social media directors, "communications specialists" to place articles in MSM outlets, and of course lots of fund-raising people for more of the same.  Turning America into a socialist paradise takes lots of obsequious talking heads, and this serves the government's agenda, so the government is happy to fund them and tell us that they're doing this FOR THE CHILLLLDREN!!1!11!

Wed, 07/09/2014 - 11:51 | 4939683 libertus
libertus's picture

The whole system is completely broken just as the article says. Time to recognize that disintermediation and the internet are collapsing a traditional higher education model that was designed for the last century rather then the current day. I do not think that traditional higher education is capable of radical change because faculty and the administration wasnt to keep the party going as long as possible--damn the consequences. 

If you want real change you will need to creat it outside the system. Oplerno.com is a new way of doing things designed from the ground up. 

In 10 years I suspect that at least 30% of the current system will be gone. Collapse is happening now.

Wed, 07/09/2014 - 11:48 | 4939689 LawsofPhysics
LawsofPhysics's picture

I'll keep asking until I get an answer (I have kids that will be going to college soon).

 

What percentage of a college's total income is spent on administrative costs?  How does this compare to 20+ years ago?

Wed, 07/09/2014 - 11:50 | 4939704 rtalcott
rtalcott's picture

UNM hired a new prez 5-6 years ago...first thing he did was hire double digit new executive vp's....admin costs are HUGE.

Wed, 07/09/2014 - 11:58 | 4939748 ShrNfr
ShrNfr's picture

Well, you have to supervise all those compliance officers you know. And then there is the compliance officer of compliance officers. And then there is the ...

Wed, 07/09/2014 - 12:19 | 4939841 LawsofPhysics
LawsofPhysics's picture

My thoughts exactly.  Capital and resource mis-allocation.  Fire half the administrators and the college will function just fine. Pass that cost-savings on to students in the form of reduced tuitions and watch your application pool explode.

Wed, 07/09/2014 - 12:49 | 4940023 Georgia_Boy
Georgia_Boy's picture

When you lower prices and expand the available slots, you get more poor kids applying.  It's been written about a lot, that colleges prefer to cherry-pick the richer kids even as they hire moar diversity trainers.  Two kids don't typically pay the same amount for the same degree, figure that into the wealthy patron metaphor. So it's more plush dorms, less adjunct faculty, all part of the game.

Wed, 07/09/2014 - 16:35 | 4940866 LawsofPhysics
LawsofPhysics's picture

Bullshit.  More poor kids may apply.  What really matters is who you accept. 

 

I can promise you that a smart "poor" kid will work much much harder than a smart trust-fund brat.

Wed, 07/09/2014 - 11:51 | 4939706 jcaz
jcaz's picture

Let's have the college commission a study into that matter, we'll get back to you....

Wed, 07/09/2014 - 11:54 | 4939715 libertus
libertus's picture

Admin costs are pretty constant. 20% at least--its tenured faculty salaries combined by reduced teaching loads that is killing the system. This combined with the lack of transparency in terms of productivity (what students are actually learning) has created a bloated system that is ripe for disruption. 

Wed, 07/09/2014 - 12:05 | 4939773 jcaz
jcaz's picture

Not even close.

Tenured profs aren't making any more money relative to what they were 20 yrs ago-  at least as far as State schools go.

But your assertation that Admin costs haven't become larger as a percentage of the nut is dead wrong, and typical of an administrator trying to defend their position.

There are layers upon layers of bureaucracy present today that simply did not exist 20 years ago-  the legal departments alone have taken on a life of their own.

Trying walking around a college campus, open your eyes- it's not rocket science as to where the money is going.

Wed, 07/09/2014 - 12:15 | 4939822 Freddie
Freddie's picture

Many or most universities went from utilitarian buildings to Class A office space plus gold plated sports facilities including a football stadium in many cases.

Wed, 07/09/2014 - 12:11 | 4939799 Pheonyte
Pheonyte's picture

The truth is the exact opposite of everything you've written here.

Wed, 07/09/2014 - 12:16 | 4939829 LawsofPhysics
LawsofPhysics's picture

I saw a UC study that said that Faculty:Admininstrator ratio was something like 35:1 in the 90's, but it was now 1:1.

 

I don't believe the faculty who are actually doing the work that generates revenue (teaching, research, etc.) have seen a significant pay raise.  I also don't believe that these folks are any more difficult to manage now, compared to 20+ years ago.  Especially in this "electronic" age.  I see an increase in administrative costs as more evidence of capital mis-allocation.

 

Fire half the administrators and the universities will still function just fine, but you could then lower tuitions significantly.

 

My two cents.

Wed, 07/09/2014 - 14:40 | 4940478 MachoMan
MachoMan's picture

Healthcare definitely rhymes...

Wed, 07/09/2014 - 13:16 | 4940137 libertus
libertus's picture

I should be more specific with my words. Administration is the people running the place. Staff includes all the support services--they should not be included in admin IMHO. 

I find it really interesting that questioning tenured faculty privilage and compensation is verboten. I guess this protect class just does not how to work or compete in an open market. 

Wed, 07/09/2014 - 12:30 | 4939913 TBT or not TBT
TBT or not TBT's picture

And what percent of university employees political donations don't go to their cronies in the government party?

Wed, 07/09/2014 - 11:49 | 4939692 rtalcott
rtalcott's picture

Don't know what happened...BS Iowa State in Physics...1970-1974...tuition started @ $250/quarter and was a bit higher when I left...was a North American Van Lines driver in the summers...walked away with $4-5k/summer and that got me through the school year no problem...don't understand why it's that much more expensive now...I think I received a MUCH better education than the students here at UNM Albuquerque and they are paying a LOT more.

Wed, 07/09/2014 - 11:57 | 4939739 CH1
CH1's picture

That was before the system was optimized with loans and heavy-duty brainwashing.

They have the magic certificates, and they can charge almost anything they want.

Wed, 07/09/2014 - 12:23 | 4939869 Freddie
Freddie's picture

Also since that time - college became a birthright.  It did not matter if the kid cannot read, they had to have the college experience.  I would guess that 45% of the kids in college should not be there.  It is a social perk or a form of baby sitting for 4+ years.

Wed, 07/09/2014 - 12:39 | 4939967 rtalcott
rtalcott's picture

BIG problem here...(UNM)..they let anyone in and most wash out BUT it's a great scam...the first few years have to be the cheapest...all entry level courses...so bring them in and take the money for 2 years and then they are gone before they may become more expensive.

Wed, 07/09/2014 - 11:56 | 4939741 jcaz
jcaz's picture

Ya but there are a bunch of new laws of Physics since then......  BUWAHAHAHAHAHH!!!!!!!!!!!!!!

Same here- U of Iowa undergrad 1978-82,  never paid more than $1000 per semester,  covered that no problem by working at Jerry's Amoco.

Difference between then and now- the vast adminisitration level necessary to figure out how to spend the flood of money coming thru the front doors- bureaucracy out of control.....

Wed, 07/09/2014 - 12:00 | 4939754 CH1
CH1's picture

U of Iowa... working at Jerry's Amoco

LOL... I probably bought gas from you.

Wed, 07/09/2014 - 12:07 | 4939781 jcaz
jcaz's picture

Sweet!  We were the only gas monkeys in the state that got paid on straight commission-  I prolly stuck an icepick in your sidewall while I was pumping it and sold you a new tire!

Wed, 07/09/2014 - 12:50 | 4940039 CH1
CH1's picture

Hehe...

Nah, then I would certainly remember you. :)

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