Today, the College Board put out its annual report on college tuition trends. You might have thought that, since the economy has been experiencing some deflation, with a year-over-year decrease in the Consumer Price Index of 2.1% from July 2008 to July 2009, tuition and fees should also be decreasing. You'd be wrong. The nominal all-in college price tag, including tuition, fees, room and board, has increased by 4.3% and 5.9% for public and private universities, respectively. Of course, if inflation -- or really deflation for this past year -- is taken into account, those numbers look even worse. With that adjustment, the average price increased by 6.5% and 8.2% for public and private universities, respectively. What's going on here?
Clearly, there's more to the story than the mere price level, and the story differs for public and private universities. I spoke to Sandy Baum, the author of the College Board report. She confirmed my suspicions.
Public Universities
One interesting observation is that public universities saw significantly higher increases price than private. This means that the public universities must be getting less money from state and local governments, so they must make up for that funding by charging students more. This reflects the fact that many state governments have been cutting education funding as a response to fiscal problems. According to the report:
Total state appropriations for public colleges and universities declined from $82.2 billion (in 2008 dollars) in 2007-08 to $78.5 billion in 2008-09.
Private Universities
Clearly, state budget deficits provide no excuse for the increase in price of private college education. But they're suffering a lack of funding as well, but from different sources. You've probably read about how badly many university endowments have been hit as a result of the stock market and real estate declines this year. Here's a chart from the College Board report showing that decline through 2008:
While the stock market has been doing better lately, that probably didn't do much for students. The price they have to pay was set last spring/summer when they enrolled. At that time, the stock market hadn't rallied.
Additionally, alumni donations are down. According to a report (opens .pdf) from Giving USA, charitable giving declined by 2% in 2008. In the first half of 2009, it's unlikely that there was much rebound, as the economy hadn't shown many signs of recovery at that time.
Some Good News
But the news isn't all bad. Students are actually paying less than last year. The report also includes an estimate of this net price for 2009-2010, based on subtracting grants and tax credits from the all-in price. Compared to the 2008-2009 figures, I found that net price paid actually decreased by 7.45% and 11.20% for public and private colleges, respectively. This means grants and tax credits have more than compensated for this year's increase in price.
Why is the last paragraph not the headline? College costs are decreasing significantly. Decreasing interest rates make college even more affordable. Some bad news, college costs for the wealthy are going up.
Correlation, but which way is the causation? Perhaps universities and colleges raise their tuition when grants and tax credits increase, capturing the extra money.
A college degree is worth a lot to a student, and US universities operate as a cartel with rigid hierarchy. It's certainly not out of the bounds of possibility to think that they could capture a large portion of student aid.
There was a story recently, somewhere, that made that same point. That the access to student loans, grants, tuition assistance, tax credits, etc, all play a part in easily increasing tuition rates.
Also, how is that money distributed? Are there more full scholarships/grants going to a relatively small number of people? The cost inflation affects everyone (unless on full scholarship), but I wonder what the distribution is for the offsetting grants and tax credits.
With that adjustment, the average price increased by 6.5% and 8.2% for public and private universities, respectively.
With more and more parents having to apply for financial aid, those that can still pay full freight are being asked to pay more. It's a way for the fortunate and/or prudent to subsidize the less fortunate and/or imprudent.
actually, jmo3 has it wrong. universities act as textbook examples of price-discriminating monopolists: the have perfect information about student ability to pay, and set prices accordingly. nice to see the free market in action. Of course, if the universities are setting prices below the actual cost to serve that marginal extra student, the analysis gets complicated a bit, but we needn't raise the dread "subsidy" word here, out of a fear that foxnews will start calling jmo3 a socialist.
Of course, if the universities are setting prices below the actual cost to serve that marginal extra student
They are setting prices below the actual cost to serve the marginal (but highly qualified) extra student. As I understand it, Universities without large endowments use the revene they get from marginal but affluent students to subsidise lower income students with high SAT/GPAs. That is one way of boosting your USNews ranking.
Example:
Kid A - competative SAT/GPA - will pay the full 50k out of pocket
Kid B - Middle class with competative SAT/GPA- family will be expected to pay 25k
Kid C - exceptional SAT/GPA but will only attend if asked to pay less than 10k.
School will go with Kids A and C though it will result in less revenue, the expense can be justified by the increase in the schools rank.
that's an interesting point. So in fact, colleges are not only trying to maximize revenue in the short run, but they're using highly qualified low-paying students to boost their ratings, and hence assure a supply of students in the future. Tantamount to any corporation building its brand by making extraneous expenditures. I don't think that "subsidy" quite captures this complicated dance, does it, as "subsidy" connotes social engineering to produce more of an undervalued, or non-marketworthy product.
I find it hard to believe that a university would ever set prices below marginal cost to serve, though, particularly as the cost of the "next" student must be very low -- just as it is for an airline to serve that marginal passenger (usually $30 or so for a flight).
What is the marginal cost of taking on an additional student, by the way? i imagine that colleges have "lumpy" supply curves -- that is, it's easy to add another student to a lecture course at minimal extra cost, but they need to add an extra econ 101 section, that spikes costs dramatically -- a need for new buildings, new lecturers (although that's finessed by the shady world of adjunct faculty.
Whatever the government subsidizes on the consumer side, hyperinflation follows. Health care. Corn ethanol. Sugar. Government payrolls.
On the capital infrastructure side, I don't think the correlation holds.