Wednesday, November 1, 2017

Why are you paying so much in tuition?

USA Today warns us that "College tuition is rising faster than inflation" but that headline downplays the size of the increase. Over the last fifteen years, college tuition has outpaced not only inflation but growth in housing cost and even the cost of healthcare. A number of recent economic papers have seemingly converged on the main cause: government subsidies.

Stephanie Cellini and Claudia Goldin examine for-profit schools and compare tuition at those with and without students eligible for federal financial aid. Aid-eligible colleges charge, on average, 78% higher tuition than non-aid-eligible colleges, and the differences in some cases are "roughly equal to average student grant awards and our estimate of the loan subsidy."

Another study confirms that this is not isolated to for-profit colleges:
We find that each additional Pell Grant dollar to an institution leads to a roughly 55 cent increase in sticker price tuition. For subsidized loans, we find a somewhat larger passthrough effect of about 70 percent.

Thus, most of the subsidy is translated directly into higher tuition. But do these subsidies achieve their goal of increasing college enrollment? Grey Gordon and Aaron Hedlund attempt to estimate the answer:
The tuition response completely crowds out any additional enrollment that the financial aid expansion would otherwise induce, resulting instead in an enrollment decline.

Of course, this was all famously predicted in 1987 by then Secretary of Education William J. Bennett:
Increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.

24 comments:

  1. The nation’s economy demands that workers possess increasing levels of knowledge, skills, and abilities that are best acquired through postsecondary education. Without workers who have the right foundations, the United States will lose ground to countries that have prepared better for the demands of the 21st century workforce and, ultimately, the United States economy and security will be jeopardized. It is time for a new plan—what CAP calls College for All—to ensure that Americans are prepared to meet the demands of the new global economy.
    On January 9, President Barack Obama announced a plan that would go a long way toward making this goal a reality by making community college free for nearly all students. In a recent report, the Commission on Inclusive Prosperity called for taking even more aggressive action to ensure that every American has access to two-year or four-year programs of postsecondary education. Under this College for All proposal, the federal government would ensure that any student attending public college or university would not be asked to pay any tuition and fees during enrollment. Students and families will not need to complete the Free Application for Federal Student Aid to receive support from the federal government. Students who achieve significant economic gains from the education they receive would repay some or all of the funds provided through the tax system.

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  2. We learned our lesson about college tuition the hard way. When I graduated from college with my BS in 2002, I had borrowed (through federal loans) $25,000 to pay for the entire cost of the degree and supplies. When my daughter subsequently graduated from college with a BS in 2014, she had also borrowed the entire cost of her degree, which was $112,000, not including books and other supplies. The difference between these can only be 50% accounted for by her living away from home and my living at home. The remaining $26,000 has no rational explanation, especially when you add in the estimated amount it cost us in books and supplies. Despite hearing many people blame these costs on salaries and benefit packages, the difference cannot be fully explained by these costs, either. Indeed, public school teachers’ salaries have not kept pace with comparable workers, even when considering the recent shift from increasing pay to improving benefits, according to a 2016 article on Economic Policy Institute’s website (Allegretto & Mishel, 2016). Instead, they have dropped slightly less than 10% relative to comparable worker’s salaries between 1994 and 2015. The New York Times ran an article in 2015 on why college tuition is more expensive (this article states the costs over 35 years to have roughly quadrupled). In the Times article, the author states, “The astonishing rise in college tuition correlates closely with a huge increase in public subsidies for higher education”, going on to explain that this type of increase on average new car prices would put the average new car at about $80,000 (Campos, 2015). The article also addresses salary; it hasn’t risen to keep up with tuition rates, and in fact, have dropped to rates lower than in 1970 (Campos, 2015). Americans have been sold the idea that continuing education is the key to the American Dream. Unfortunately, college students today come out of school with a load of debt that will take years to pay, and fewer jobs available that pay a living (not a minimum) wage available to them.

    Allegretto, S and Mishel, L. (2016, August 9). The teacher pay gap is wider than ever. Retrieved from http://www.epi.org/publication/the-teacher-pay-gap-is-wider-than-ever-teachers-pay-continues-to-fall-further-behind-pay-of-comparable-workers/
    Campos, P. (2015, April 4). The real reason college tuition costs so much. Retrieved from https://www.nytimes.com/2015/04/05/opinion/sunday/the-real-reason-college-tuition-costs-so-much.html

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  3. This is an incredibly interesting and salient point with levels of student debt rising to levels that were unknown before our recent history. It is in fact considered the next logical debt bubble to burst after the housing market bubble burst in 2008. College tuition keeps increasing exponentially and at a much faster rate than the rest of the economy. Students are taking out more debt to complete their degrees which leads them to delay other purchases when they graduate like the cost of getting married or buying a home.

    The interesting thing, which is pointed out in this article, is that even as college tuition rises the resources put into each individual student decreases. It is a little known fact that most faculty positions at colleges are adjunct now (Yakoboski, 2016, Pg. 54) and it is very difficult to get on a tenure track. This is much less expensive for the colleges but probably does not improve student outcomes. For this reason, one would logically think that college tuition should decrease instead of increasing. The factor here that is leading to the increase is the amount of financial aid and grants available to students. The economic theory that is most often used to justify the increase is supply and demand to predict industry changes (Froeb, McCann, Shor & Ward, 2016, Pg. 100). It is much more difficult today to find a good paying job without a college degree but in fact college enrollment is decreasing instead of increasing as Generation X’s children reach college age.

    Prices do convey valuable information (Froeb, McCann, Shor & Ward, 2016, Pg. 104) about colleges though. The interesting part of that is that more than 90% of students do not pay the actual tuition charges due to discounts that are applied to their overall tuition costs (Mulhere, 2016). One of our local colleges, Utica College, made a huge tuition reset cutting nearly half of their overall price of tuition (Utica College… Improving Affordability, 2015). This made headlines at the time and was used as an example of how colleges can reduce tuition instead of increasing it. The reality was that it was more of a public relations ploy than it was a reduction of tuition. Very few of the Utica College students were paying the full cost of tuition as most of them were receiving discounts. What Utica College did was reduce their tuition while at the same time eliminating most of their discounts. Once a review of the program was completed it came to an average of $400 to $500 per semester instead of the several thousand dollar cut that they advertised.
    References

    (2015). Utica College Resets Tuition To Better Price, Improving Affordability. PR Newswire.

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial economics a problem-solving approach. Boston, MA: Cengage Learning.

    Mulhere, K. (2016). Private College Tuition Discounts Rise—Again. Money, 45(6), 16.

    Yakoboski, P. J. (2016). ADJUNCT VIEWS OF ADJUNCT POSITIONS. Change, 48(3), 54-59. doi:10.1080/00091383.2016.1170553

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  4. With tuition on the rise it will make it more difficult for certain individuals to attend College. This can be viewed as price discrimination since certain students will either pay more or less to enroll in college. This can be seen as unfair since Colleges usually look at your family’s overall picture such as assets and earnings, which determine how much a student will need to pay. For example student A comes from a very wealthy family, but has to pay for College by themselves and gets very little financial aid due to this. On the other hand we have student B who comes from very little money and doesn’t pay as much as student A lot due to financial aid. It makes sense tuition rates can be higher at other schools due to demand, but it’s definitely not fair that price discrimination takes place and for this reason some students cannot afford to attend College. Another example of price discrimination is in New York who currently adopted free education throughout its education system. Again New York is looking at your family’s income and if your family makes more than $125,000 a year you will not be eligible. If I come from a family that is fairly wealthy, but has to pay for college by myself how is this fair?

    The Free-Riding Dilemma can also come into play when looking at college tuition. Again we can look at student A that comes from a wealthy family, but has to pay for tuition by themselves, and we have student B who comes from no money and also has to pay for school by themselves. Student A excels when it comes to their education and earns a 3.5 at the end of the semester, and student B spends the minimum amount of time on their education and earns a 2.3. Student B will still spend less to go to college since they are in a lower income then student A, which is clearly spending more time towards school work.

    References

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial economics a problem solving approach. Boston, MA: Cengage Learning

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  5. The average cost of tuition and fees at a private, non-profit, four-year university in the 2015 school year was $31,231—up sharply from $1,832 in 1971-1972 (in current dollars). At public, four-year schools, tuition and fees cost about $9,139 in 2015. In the 1971 school year, they added up to less than $500 in current dollars, according to the College Board. (Schoen, 2015). In the blog post, it is mentioned that government subsidies are the cause of the increase in tuition prices. In our text, it mentions that the opposite of taxes is a subsidy.
    According to Froeb, by encouraging low-value consumers to buy or high- value sellers to sell, subsidies destroy wealth by moving assets from higher to lower valued assets. (Froeb,19). “The federal government has boosted aid to families in recent decades to make college more affordable. A new study from the New York Federal Reserve faults these policies for enabling college institutions to aggressively raise tuitions.” (Forbes, 2015)
    A possible solution to this would be to put an end to the government subsidies because then, colleges will not raise their tuition. If not that, the government can try to have price control. That is typically a regulation that allows trading at a certain price. In this instance the government should be able to regulate the cost of tuition.


    Sources
    Froeb, McCann, Shor, Ward. (2017) Managerial Economics. 5th Edition
    Schoen, J. (2015) Why Does a College Degree Cost So Much. https://www.cnbc.com/2015/06/16/why-college-costs-are-so-high-and-rising.html
    Worstall, T. (2015) Increased Tuition Subsidies Increase The Price Of College Tuition. https://www.forbes.com/sites/timworstall/2015/08/03/increased-tuition-subsidies-increase-the-price-of-college-tuition/#6b326d2645a2

    ReplyDelete
  6. Federal student aid was developed to help individuals who otherwise would not be able to afford a college education attain one. It has instead caused tuition prices to increase as more students attend college and the university it able to charge more. My younger sister is currently in her senior year of high school and has been accepted to many universities. Tuition has played a large role in her choosing a school, and it seems to simply be a numbers game. When I did my undergrad, my parents’ financial situation was different to what it is now. Whereas I received some federal aid, she will receive none. Tuition is listed at whatever price. Based on how desirable a student they deem you, (i.e. will make them look better for having smarter students) they are offering her tuition “packages.” All this simply means is they discount tuition for you so it is more plausible to attend their school. This is a blaring example of how high universities have marked up their tuition in order to better pad their own profits. If they are able to discount tuition so heavily for students who cannot receive federal aid, that means they are over-pricing tuition. Are there some students who so badly want to attend a specific college that they are willing to pay face value? And how much more are students who receive federal aid financing after the aid has been applied? In a society where it is generally expected to attain a college degree, the pricing scheme is putting educated people into massive amounts of debt, including those who cannot afford to pay the government back.

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  7. In our class Froeb text, it tells about subsidies and the dangers it brings to an economy. The text mentions how subsidies change the value of the assets it controls. In the case of tuition prices, these subsidies have directly affected recent increases in tuition rates. Tuition subsidies give a high asset or cost (college education) and make it available for lower value consumers to buy. To now maintain some kind of profits from the subsidies offered, tuition rates continuously are increasing. As the subsidies offered to families to make college more affordable, it cuts into the profits for the school from tuition charges. To counteract this, colleges and universities are now increasing tuition charges for ALL students; including the ones that don’t need or use the subsidies.

    A solution one could quickly derive is by foregoing & removing all subsidies regarding college education. By doing this, college’s profits wouldn’t be cut into and wouldn’t give colleges a reason to increase tuition nearly as much or as frequently like they have been. Besides general economic changes and factors that would call for an increase, if colleges were to still continue raising rates dramatically, similar to rent control in NYC, the federal government could come In and set up some kind of ceiling to control better the price of college education.

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