Evan Soltas
Nov 28, 2012

Price Discrimination and Tuition

In my latest piece for Bloomberg View, I take on the view that the cost of education is rising; I find that what's really going on is price discrimination according to income:

Conventional wisdom suggests that U.S. colleges and universities have become sharply more expensive in recent years.

"When kids do graduate, the most daunting challenge can be the cost of college," President Barack Obama said in his 2012 State of the Union address. "We can’t just keep subsidizing skyrocketing tuition; we’ll run out of money."

At first, the view that the cost of college is rising appears to have data on its side. Published tuition prices and fees at colleges have risen three times faster than the rate of Consumer Price Index inflation since 1978, according to the Bureau of Labor Statistics. (See the accompanying graph.) The most common fees come from health services, technology and course fees such as those for science labs and art studios. Room and board costs are counted separately.

Real tuition and fees have increased, to be sure, but hardly as significantly as the media often report or the data suggest at face value. The inflation-adjusted net price of college has risen only modestly over the last two decades, according to data from the College Board's Annual Survey of Colleges.

What has happened is a shift toward price discrimination -- offering multiple prices for the same product. Universities have offset the increase in sticker price for most families through an expansion of grant-based financial aid and scholarships. That has caused the BLS measure to rise without increasing the net cost... [cont'd on Bloomberg View]

I want to add a little more about this, particularly in light of a piece by Kevin Carey of the Chronicle of Higher Education which many people -- Andrew Sullivan of The Daily Beast, Noah Smith of the "Noahpinion" blog, and Daniel Akst of The Wall Street Journal -- see as entering into direct argument with mine.

Most importantly, I don't see my piece as in disagreement with Carey's. To distill my point: current sticker price increases reflect almost entirely cost discrimination, not increases in net cost. To distill Carey's: there's a lot of evidence that college spending increases are unsustainable and will require increases in net cost in the future.

I actually agree with Carey that the potential for more price discrimination is pretty limited -- there is certainly the possibility that the inflation-adjusted sticker prices rise further, but I'm not confident in the market's ability to bear, say, a $75,000/yr. or even $100,000/yr. tuition. And I am certainly aware of the consequences of the Pell expansion. (I've written about that before.)

And I'll go further than Carey to say that, if colleges cause net tuition to rise to the point of unaffordability, it'll be their own fault. The innate, minimum cost of education hasn't risen by much at all, by my reckoning, over the last 20 years. It may very well have fallen, given technology. (Remember: Baumol effects require rising income.)

Let's consider the likely sources for increases in net cost: (1) administrative bloat; (2) competitive construction on private university campuses; (3) the transfer of the cost burden from state aid direct to colleges onto tuition and state grants and financing to students.

(1) Administrative bloat also increases spending without the true cost of ed. rising -- that is, I would venture that public universities could fire a significant number of these people without affecting the quality of education. Between 1976 and 2009, the number of full-time-equivalent (FTE) administrators and professionals rose 260 percent across all degree-granting institutions. (The number of FTE faculty rose 93 percent, and the number of FTE students rose 86 percent.) In 1976, there were two faculty per administrator; in 2009, it was one-for-one.

(2) Bowen effects of misaligned incentives cause spending, according to this paper, which I believe and have seen personally, and which someone has linked to before but now cannot remember (sorry!).

(3) In the early 1990s, states provided public universities a rough average of $8,000 per student in support; in 2010, they gave only $6,360, according to data from the National Center for Education Statistics. Across the country, states like CaliforniaKansas, and Michigan are shifting the revenue model of their universities onto tuition. These do not represent true increases in the cost of providing students an education, but rather changes in how these costs are covered.

I'll also note there is evidence (1) that a lot of the increase in debt has to do with grad students and (2) that college-age / high-school-age kids are working a lot less than they once did; it's possible that debt is rising because they aren't saving in advance as they once did, though it might just be different people.