Untangling the Costs of Higher Ed

Michael Robinson, professor of economics, has been interested in the economics of higher education for many years, and has worked with the Office of Admission on econometric modeling. Now he discusses with Questioning Authority the rising costs of higher education and what that means for the ways colleges and universities operate.

Questioning Authority: Why have the costs of higher education risen above inflation for so many years? What issues has this created for colleges and universities in managing their budgets?

Michael Robinson: This is an example of Baumol's cost disease. There have been no changes in the way colleges produce education for many years: one professor, a small class, a classroom, lots of lively discussion. On the other hand, much of rest of the economy has seen huge technological advances: better machines in manufacturing, Internet management of inventories, changes in how computers are used. The wages of professional workers are driven by these increases in economy-wide productivity, so colleges are forced to increase faculty salaries to attract high-quality workers into the profession even though productivity in the educational sector is stagnant. James Surowiecki discussed this in a November 2011 article in the New Yorker.

A side problem is that selective colleges need/want to provide very high-end amenities to try to attract high-paying students, so there is little incentive to skimp on the beautiful campus or the nice gym, since they more than pay for themselves in tuition revenue.

QA: In his State of the Union address and other venues, President Obama has called on higher education to contain tuition costs or risk losing federal funding. Do you think this will influence colleges and universities making future decisions about tuition charges and operational costs?

MR: I think this is primarily political. President Obama is making a political statement to take ground away from conservative critics of higher education. The level of tuition is really not that important for issues of access to higher education; rather, it is the way in which financial aid is handled that is important. The whole conversation about the level of tuition is really about how much is paid by those in the top 10 percent of the income distribution and not the typical student.

QA: To what degree do you think the flurry of government and media attention on the cost of higher education is prompted by the economic recession?

MR: I think to a certain extent the recession has had an impact. Many state universities have faced large budget cuts due to the recession and, as a result, have had to increase tuition quite a bit. California public colleges and universities saw a 21 percent increase in tuition this past fall. However, tuition at these institutions is substantially lower than tuition at selective private colleges. Some of the attention also comes from Tea Party conservatives who see government subsidies to education as a big problem and want to blame rising tuition on those subsidies.

QA: Do you see a point where the cost of higher education could exceed what people perceive as the value of a college degree? Even very wealthy people?

MR: This is a complicated question. First, the actual cost of education at a college like Mount Holyoke is substantially higher than the sticker price being charged. So in terms of what you are buying, you are getting a bargain even paying full tuition, since the cost of education is about $20,000 to $30,000 higher.

The returns to a college education are extremely high with net present value of more than a million dollars. Harvard economics professor Caroline Hoxby estimates that the value of a college degree ranges from $1.8 million at less selective colleges to $2.9 million at the most selective colleges. So in some ways you could justify a very high level of tuition and still the cost-benefit analysis would say it is a good thing. This also suggests that the most selective colleges, even with their higher tuitions, are still a great bargain for students.

While these results are true for graduates from selective colleges, some economists think that it is not the college that matters but the students. What matters for future earnings is how smart a student is and not which college they attend. For example, students who could have gone to a highly selective institution, but instead go to a less selective state university, earn just as much as the graduates from the selective college. In this view, going to a selective college is not such a big advantage. These studies find that there are big effects to going to a selective colleges after controlling for student ability for the poorest students, but these students aren't really impacted by the tuition level under current aid policies.

I think one of the problems with using the average returns to college is that every student is not guaranteed the average return. If a student decides to go into elementary school teaching, a noble but fairly low-paying profession, she will likely not reap the million-dollar return from college. This might make risk-averse families reluctant to pay very high levels of tuition, even with knowledge of the large average returns. One idea (maybe not a practical one) would be to require students to pay a percentage of their future earnings as tuition, rather than paying tuition up front.

QA: What can colleges do to increase productivity and lower costs?

MR: Many liberal arts college advocates maintain that the small intimate class setting is the best way to do education; however, online courses probably offer the best way to really reduce costs. I think we will see increasing competition from online competitors and that many traditional colleges will expand their online offerings. I think one interesting new development is the Massive Online Open Course. These are giant courses given online for free and might really open the entire world up to more very inexpensive education.