November 10, 2003
EDUNOMICS:
Does financial aid cause tuition increases? (Christopher Shea, 11/9/2003, Boston Globe)
REPUBLICANS IN the House of Representatives have lately been asking a question that makes the higher education establishment very nervous: Does federal financial aid simply give colleges an excuse to raise tuition higher and faster than they otherwise would?When then-Secretary of Education William J. Bennett made the argument 16 years ago in a New York Times op-ed titled "Our Greedy Colleges," most higher-education economists rejected it as simplistic and ideologically convenient. But the thesis is getting a new hearing in these times of endlessly skyrocketing tuition and government budget deficits. According to a report by the College Board issued last month, tuition at private colleges is up six percent (to an average of $19,700) this year, while in-state tuition at four-year public colleges jumped 14 percent, to $4,700.
The federal government will provide about $65 billion in grants and loans to students this year, but there is unlikely to be much more additional money in coming years. Whether from necessity or principle, some Republicans now argue that holding the line on aid might be just the ticket to keep college costs down. (Last month, Republican lawmakers introduced a bill that would withhold federal grants from colleges that raised tuition at more than twice the rate of inflation.)
Colleges, however, say a failure to increase federal financial aid would hurt poor students. And most economists who study tuition seem skeptical of the idea that aid has gone from being part of the solution to part of the problem. "I don't think the evidence that that has occurred is particularly strong," says Ronald G. Ehrenberg, director of the Cornell Higher Education Research Institute.
Is there a theory of economics that holds that if you gave consumers $65 billion a year that could only be spent on widgets that the price of widgets would be unaffected? One that isn't propounded by an employee of the widget makers? Posted by Orrin Judd at November 10, 2003 4:12 PM
It's possible, but only under some fairly strong assumptions. The degree of the increase depends on assumptions you're willing to make about how price elastic education demand is, etc.
Posted by: John Thacker at November 10, 2003 5:44 PMPrice increases almost certainly occur; the question is whether the price increases outweigh the subsidy. That is, do the students, net, see any benefit at all, or do the colleges capture all of it?
Posted by: John Thacker at November 10, 2003 5:47 PMIt is long past time for an examination of why college costs continue to rise well above the rate of inflation, and especially now, when the rise is double-digit while inflation is almost zero. Is it the real estate? The liability costs? The cost of computing power? Perhaps the cost of distributing condoms? Maybe the cost of compliance with Title IX? Are schools making up for losses in their endowments? Someone must know - what about all the governors, who inevitably are asked to increase costs (for public universities) and to increase taxes (on their citizens)? Where is Larry Summers when you need him?
Posted by: jim hamlen at November 10, 2003 10:05 PMTime ran a good article a few years ago on college tuition: http://www.kodijack.net/CollegeCosts.htm
The basic upshot is that college education costs so much because we're willing to pay that much.
This also offers a cautionary note to people who support vouchers for public education. Just like colleges, private schools will surely increase their tuitions if vouchers become commonly available. If most private schools end up charging a hefty tution on top of what a voucher covers, will vouchers help children from poor families escape failing schools?
College funding is a strange business, where ordinary laws of economics are assumed not to apply. However, we can look at the behavior of colleges and assume they are acting like any other purveyors of products. We already know that several elite institutions were found guilty of colluding on financial aid awards.
The next bit of evidence concerns what we get for our tuition dollar. According to a recent NY Times piece:
Colleges are spending as much as $140 million to add features that include golf simulators, indoor batting cages, ropes courses, and climbing walls big enough for 50 people simultaneously. Students can now receive pedicures, manicures, and massages while at school. According to a recent New York Times article on the subject, one college is even planning to add a water park, complete with water slides, a meandering river and something called a wet deck -- a flat, moving sheet of water so that students can lie back and stay cool while sunbathing.
So I'd say that the plain old economic theories we're familiar with are adequate to explain the phenomenon. When more money makes the buyer price-insensitive, sellers can find lots of uses for the funds.
Posted by: Dave in LA at November 11, 2003 2:44 AMBut a voucher system will not have the same effect?
Posted by: Harry Eagar at November 11, 2003 8:45 PMNot if you use the tax dollars that are going to public schools now. There'll be no increase in dollars.
Posted by: oj at November 11, 2003 8:48 PM