In a world where parents go into debt to finance their children’s higher education and where alumni, corporations, and Congress are besieged with calls for more donations to colleges and universities, the time is long overdue to ask why college is so costly. Nobel-prize-winning economist Milton Friedman has estimated that colleges could operate at a profit, charging about half of what most Ivy League institutions charge. Why then does college cost so much? What is going on?
The average tuition at American colleges and universities rose every year throughout the decade of the 1980’s, at a rate much higher than the general rate of inflation in the economy. Private colleges led the way, charging not only the highest tuitions but also taking a growing percentage of family income. In academic year 1976-77, the average tuition at private four-year colleges was less than 17 percent of median family income but, by academic year 1987-88, their tuition was more than 22 percent of median family income. By academic year 1990-91, there were 255 private colleges where tuition alone was $10,000 per year or more. By no means were these all distinguished institutions.
Mitigating the full impact of these charges were: (1) the widespread availability of financial aid; (2) the fact that most private colleges charged less than $8,000; and (3) the fact that most students attended public institutions. Nevertheless, the sums which had to be paid represented serious sacrifices for many families, especially since travel costs, clothing, increasingly expensive textbooks, and other incidental expenses had to be paid for, in addition to charges for tuition, room, and board. Dartmouth is not unique in listing in its admissions and financial-aid bulletin the availability of home-equity loans which permit parents “to tap up to 80 percent of the equity in their homes as an educational resource.”
College and university officials have often responded to complaints about rapidly rising tuition with claims that rising costs have made these increases necessary. Like so much that is said by educational institutions, this claim sounds plausible at first, especially when backed up by statistics, but ultimately it cannot stand up under scrutiny. Even if not a single price except tuition had changed anywhere in the entire economy, “costs” would still have risen, as costs are defined in academic discussion.
Whatever colleges and universities choose to spend their money on is called a cost. If they hire more administrators, or build more buildings to house them, or send the college president on more junkets, these are all additional costs. If they hire more research assistants for the faculty or more secretaries for the administrators, these are all costs. Doing more research, raising salaries, inviting more high-priced speakers to campus, and many other things also increase costs. What colleges and universities seek to insinuate—misleadingly—by saying that costs have gone up is that the cost of what they have always done is rising, necessitating an increase in tuition. But colleges and universities have been greatly expanding what they do—and, as long as they spend the rising tuition on something, that something will be called a cost.
Expanding bureaucracies have been one reason for rising costs—or, to put it more directly, it is one of the things on which colleges spend their increased revenues. From 1975 to 1985, for example, while student enrollment nationally rose by less than 10 percent, college professional support staffs increased by more than 60 percent. (By professional support staff is meant people whose jobs require degrees but who do not teach students.) At Stanford University, the president, vice presidents, and their staffs added up to 47 people in 1977, but this increased to 83 people by 1988. Colleges and universities have also created new campuses and student centers overseas. Stanford opened overseas student centers in Italy and France in 1960, Spain in 1968, Germany in 1975, England in 1984, Poland in 1986, Japan in 1989, and Chile in 1990. Nor are overseas campuses or student centers limited to a handful of elite institutions. Innumerable colleges have them, either singly or collectively in consortium arrangements. The University of Evansville, for example, has its own 55-acre campus in England and the University of Dallas has its own campus in Rome.
At the University of South Carolina, the president has spent as much as $879 a night for his hotel rooms while traveling and $7,000 in one year for chauffeur services. The university has also paid $350,000 in travel and salary to the widow of Egyptian President Anwar Sadat, for teaching one class a week for three semesters. All of these are “costs.” A federal investigation of “costs” which Stanford University charged against government research grants turned up $3,000 for a cedar-lined chest and $2,000 a month for flower arrangements, both at the home of Stanford President Donald Kennedy, as well as more than $180,000 charged as depreciation on a yacht privately donated to the university’s athletic department. The taxpayers were also charged for part of the cost of a $17,500 wedding reception when Mr. Kennedy remarried in 1987.
While these odd examples are not intended to be typical, they do demonstrate the enormous elasticity of the concept of “cost,” as used in the academic world—and hence its meaninglessness as a justification for tuition increases. A much more common cost item is professors’ salaries, which rose faster than the rate of inflation, every year during the decade of the 1980’s. Added to this is the normal tendency toward expansionism in organizations not checked by the competition of the marketplace and the grim realities of a bottom line. At Vassar College, the vice president for finance said: “Vassar’s departments are consulted for projected costs for the following year. Usually included are proposals for new materials and projects.” The college administration then “tries to allow as much departmental expansion as possible”—and this in turn drives up tuition.
As a comprehensive economic study of American colleges and universities concluded, “the cost of any institution is largely determined by the amount of revenue it can raise.” This was said, not by a critic, but by a man described as “the supreme defender of higher education.” In other words, it is the amount of money that colleges and universities can get—from tuition, endowment income, donations, etc.—which determines how much their spending or costs will go up, not the other way around, as they represent it to the public. To say that costs are going up is no more than to say that the additional intake is being spent, rather than hoarded.
When a college expands its range of expensive activities first, and then calls it “increased costs” later, when seeking more money from various sources, this tends not only to confuse the issue but also to erode the very concept of living within one’s means. The financial problems of well-endowed Bowdoin College illustrate the process and the attitudes. Its own professors and administrators have blamed its ballooning deficits on a decade of expanding programs, jobs, and buildings. As the dean of the college put it:
People would come forward with plans that were good ideas—and because it was a period in which we could afford to grow, we just said Yes without being very deliberate about it.
According to the Chronicle of Higher Education:
Many faculty members did not even know of Bowdoin’s financial problems until last year, when they read about them in a newspaper, the Maine Times .Several administrators say they also were unaware of the magnitude of the problem until last year.
This situation was not unique to Bowdoin, or even to rich private colleges in general. A consultant looking into the finances of Oregon State University reached very similar conclusions: “It’s amazing how much in a university, processes are added on and added on, and no one takes a critical look at it.”
In short, when parents are being asked to draw on the equity in their homes to pay rising tuition, it is not simply to cover the increased cost of educating their children, but also to help underwrite the many new boondoggles thought up by faculty and administrators, operating with little sense of financial constraints. To quote an official of the U.S. Department of Education, many colleges “choose to increase tuition because they can get away with it.” While colleges claim that the increased spending is to improve education, this official saw it as going into “the swelling of the ranks of vice presidents and deans” and to other costly endeavors which make little or no contribution to quality education, which is “not a function of money.” The availability of federal grants and loans to help students meet rising tuition costs virtually ensures that those costs will rise. A college which kept tuition affordable could forfeit millions of dollars annually in federal money available to cover costs over and above what students can afford, according to a financial-aid formula.
Arguments have often been made that students are getting a good deal from college, because tuition does not cover the full costs of their education. Such statements are much more difficult to check than they might seem to be. First of all, education is not the only activity going on at research universities, and even at liberal-arts colleges, research is increasingly expected of the professors. This research is paid for not only by faculty grants but also by reduced teaching loads—which is to say, by hiring far more professors than were required before to teach the same number of courses. These additional costs may be carried on the books as instructional costs but they are in fact research costs. Almost anything can be treated as a cost of educating students—on paper. At the University of Texas, more than $11 million of student-fee payments were applied to paying for construction of a microelectronics research facility, located more than six miles away from the campus.
The research imperative has spread across all kinds of institutions and down the academic pecking order. Virtually everywhere, the education of undergraduates is a joint product, along with research and other activities. As any economist knows, there is no such thing as the average cost of producing a joint product—that is, there is no such thing as the average cost of producing pigskin, because it is produced jointly with bacon, ham, and pork chops. There is an average cost of producing a pig, but not its components, which cannot be produced separately.
Even if it were possible to separate out the cost of undergraduate education, there is no reason why tuition should cover it, since alumni and other donors contribute money for the express purpose of subsidizing education. Endowment funds often were contributed for the same purpose. When college and university administrators expand their empires by raising tuition, this is not necessarily due to the rising cost of education. Nor are the “extras” necessarily an enhancement of education, nor something reflecting student demand through the marketplace. In the public institutions, where most students go, it is largely a matter of adminstrators convincing legislators to contribute the taxpayers’ money.
It may seem odd that college-admissions directors are under heavy pressure to enroll more students, if the colleges are losing money on each student enrolled, as academic administrators so often claim. When Dartmouth vice president Robert Field announced that the college was accepting more transfer students, in order to bring in more revenue, the Dartmouth Review asked editorially: “How can Field make money on new students when every time he raises tuition, he claims tuition pays for only half the cost of each student?” This probing question goes to the heart of the economic issue, and its answer depends upon incremental costs. Once a college is built and its dormitories and classroom buildings are in place, the additional or incremental costs of adding more students is relatively low, so long as their numbers do not exceed the existing capacity. Within those limits, adding more students may well bring in far more additional revenue than any additional costs they represent.
The claim by college administrators that tuition does not cover the average cost of a college education is both meaningless and misleading. It is meaningless because, as already noted, there is no such thing as the average cost of a joint product, and it is misleading because there is no more reason why tuition should cover all the costs of a college than there is for magazine subscriptions to cover all the costs of producing a magazine. Advertisers often pay most of the costs of producing a magazine or newspaper, each of which comprises joint products—journalistic writings and advertisements—just as academic institutions produce both teaching and research. No one believes that magazines are doing a favor to their subscribers by offering subscriptions at prices which do not cover the average cost of producing the magazine. Nor do magazines make any such sanctimonious claims.
It is commonplace in the ordinary business transactions of the marketplace for joint products to be sold simultaneously to different groups, no one of which pays enough to cover the total costs of the business. A professional baseball team not only sells tickets to those who enter its stadium; it also sells television and radio rights to broadcasters who cover the game, and rents out the stadium to others who use it for rock concerts, boxing matches, and other events while the team is on the road or during the off-season. If ticket prices for baseball games rose to exorbitant levels, it would be no answer to the fans to say that they were still not being charged enough to cover the total costs of the baseball club. Yet colleges and universities use this as an argument against students and their parents who complain about exorbitant tuition.
In the ordinary transactions of the marketplace, competition from rival producers limits how much a given business can charge its customers. In the academic world, however, organized collusion among some of the most expensive colleges has stripped the students and their parents of this consumer protection. Each spring, for 35 years, the Ivy League colleges, plus MIT, Amherst, Northwestern, and a dozen other colleges and universities, met to decide how much money they would charge, as a net price, to each individual student, out of more than 10,000 students who had applied to more than one institution in this cartel. The lists of students were compiled before the annual meetings, and officials from the various colleges decided how much money could be extracted from each individual, given parental income, bank-account balance, home equity, and other financial factors. Where their estimates differed, these differences were reconciled in the meetings and the student then received so-called “financial-aid” offers, which meant that the net cost of going to one college in the cartel would be the same as the net cost of going to another.
The U.S. Department of Justice began investigating these and other colleges in 1989. With a legal threat of antitrust prosecution by the government, and a class-action suit on behalf of students, hanging over this group of colleges, pending the outcome of the investigation, Yale and Barnard dropped out of the meetings in 1990, and in 1991 the meetings were canceled.
A cartel or a monopoly maximizes its profit by charging not only a high price but also, if possible, a different price to different groups of customers, according to what the market will bear in each separate case. Seldom can most business cartels or monopolies carry this to the ultimate extreme of charging each individual customer what the traffic will bear, as the academic cartel does. But academic institutions are armed with more detailed financial information from financial-aid forms than most credit agencies require, and for decades have been comparing notes when setting their prices, in a way that would long ago have caused a business to be prosecuted for violation of the antitrust laws. In other respects, however, the colleges and universities use the same methods as business cartels or monopolies. Like monopolistic price discriminators in the commercial world, private colleges and universities set an unrealistically high list price and then offer varying discounts. In academia, this list price is called tuition and the discount is called “financial aid.”
The widespread availability of financial aid—often received by more than half the students at the more expensive colleges—changes the whole nature of tuition. Back when scholarships were awarded to a needy fraction of the students, this was clearly a matter of philanthropy and reward for academic ability. Today, varying amounts of financial aid are awarded up and down the income scale, and very little of it has anything to do with the quality of the student’s academic record or with philanthropy to the poor. Approximately two-thirds of the undergraduates at Harvard and four-fifths of those at Rice receive financial aid. The average family income of financial-aid recipients at Harvard in academic year 1990-91 was $45,000. These financial-aid recipients included more than 400 whose family incomes were above $70,000, of whom 64 came from families with incomes exceeding $100,000.
Harvard is not unique in this respect. At Marquette University, out of 119 students in the class of 1989-90 who came from families with incomes of $60,000 to $70,000 and who applied for financial aid, 71 were declared eligible for it, as were 74 out of 192 students from families with incomes above $70,000. Similar figures are common at other private colleges and universities. The president of MIT noted that financial-aid applicants at that institution “are distributed almost uniformly across the spectrum of family income.” The percentage of applicants who receive aid typically varies by income level and so does the amount of the aid received, so that the net price actually charged is adjusted to the most that can be extracted from each applicant’s family.
Ordinarily, price discrimination does not work in a competitive marketplace, because those charged extortionate prices will be bid away by competitors, until the price is competed down to a level commensurate with the cost of producing whatever commodity or service is being sold. But this does not happen among high-priced colleges which engage in organized collusion. The picture is complicated somewhat by the fact that the term “financial aid” encompasses both paper discounts from tuitions listed in college catalogues and actual transfers of money—the great bulk of this money being government-provided or government-subsidized. Philanthropic aid also continues, enabling a needy fraction of students to cover their cost of living, as well as tuition. Fundamentally, however, college-provided “financial aid” is a method of producing a sliding scale of tuition charges, like ordinary price discrimination elsewhere—and like successful price discrimination elsewhere, it is a byproduct of collusion. For example, when one student found that the financial-aid packages offered by Brown University and by Yale were inadequate to enable him to attend either institution, his efforts to get an increase were complicated by the fact that “each could alter a package only after consulting with the other.”
This collusion process has been made easier by the remarkable similarity of tuitions among those in the cartel—despite differences in urban or rural location, endowment income per student, local cost-of-living variations, the size of the student body over which the institutional overhead was spread, and other such economic considerations which normally lead to price differences. A Carnegie Foundation study found “widely different costs per student” among institutions. Yet in 1989-90, for example, the variation in tuition among the eight Ivy League colleges was less than 5 percent from the most expensive (Brown) to the least expensive (Cornell), even though Ivy League colleges are scattered from Manhattan to rural New Hampshire.
Officials of some colleges and universities admit not only to sharing information on financial-aid offers to specific students but also to sharing information on pending tuition increases and faculty salaries. This has all the appearance of a multidimensional “price-fixing system that OPEC might envy,” as the Wall Street Journal characterized it—and is a clear violation of American antitrust laws when businessmen do such things.
The time, then, is long overdue to begin applying the same legal standards to academia as to everyone else—and for the media, donors, trustees, and the public to begin scrutinizing colleges and universities, and viewing their pious statements with the same skepticism they apply to self-serving statements from other institutions.