The happy graduate
Americans tend to link a college education to financial success. This spring, as college seniors around the country are fitted for their caps and gowns I continue to wonder whether a college education is worth the price, or, to put it in the language of economics majors: is what we pay in time and money an economically efficient use of resources? It always strikes me as odd that while politicians, interest groups, and certain segments of society accuse and condemn oil companies, pharmaceutical enterprises and the like for perceived price gouging, colleges and universities are able to escape such criticism.
The net price of college tuition in America has consistently been rising at a rate far faster than national inflation. In the last five years, the cost of four-year colleges rose 31% above the general inflation rate. A press release published by House Democrats in 2006, pointed out that since the year 2000 tuition at public universities has increased by $2,000 (or 57%) and, at private universities by, $5,000 (32%).
The relative increase in the price of oil has had nothing on the skyrocketing price of higher education. Maryland Public Policy Institute’s Dan Lips compared the cost of college tuition with the price of gasoline from 1986 to 2006. In that time frame, after adjusting for inflation, tuition and fees at public universities rose 122% and private universities rose 80%. (I feel it is safe to say that this is a rather large increase.) Lips further calculated that while the real cost of a gallon of gasoline increased from $1.58 to $2.50 in 2006, if the price of gasoline has risen at the same rate as college tuition, consumers would be pumping gasoline at $3.50 a gallon (in 2006).
College students all face this reality, as they watch thousands of our dollars slip out of their accounts and into the hands of the university cashier. What is causing this drastic increase in price? Despite the numerous conspiracy theories propagated by those hostile to capitalism, the high price of gasoline is primarily due to market forces. College tuition, on the other hand, has some other factors at work.
To be sure, demand for college education is on the rise, more Americans are attending secondary schools than ever before. Further, there is increased competition for good faculty and the fast pace of technological advancement has required consistent university spending to keep systems current. Such factors alone cannot, however, explain the massive price escalation. In a somewhat different response than their reaction to oil prices last summer, the government is enabling these institutions to continue raising their costs by way of federal subsidies. The College Board reports that from 2005-2006, total federal college aid amounted to $94 billion. This represents 95% increase in aid since 1995. Yet while the government is pouring money into the problem, their actions act to merely aggravate the problem.
Federal aid allows for colleges to continue raising the price of their product with less consumer outcry. With a less elastic demand, colleges feel a minimized need to lower their prices to compete in the market. Ohio University economist Richard Vedder put it well, "Students receiving grants or subsidized loans are far less sensitive to tuition increases than they would be if they were paying their own way." Dr. Vedder argues that "where entrepreneurs in a free, unsubsidized market seek to cut costs and lower their prices to lure new customers away from businesses that are raising theirs, there is very little of that in higher education."
Although the presence of third party payers cause price increases, access to higher education ought not be exclusive to the wealthy. Yet, while the government allows those who would otherwise be absolutely unable to pay for the opportunity to attain a degree, the College Board reports that “changes in student aid policies have benefited those in the upper half of the income distribution more than those in the lower half.” Ironically, the majority of those footing the bill for such student aid, i.e. the taxpayer, do not have a college diploma. In fact USA Today reported that only 29% of Americans can lay claim to an undergraduate degree. As Dan Lips wrote, these taxpayers are “subsidizing students from upper- and middle-income families, who can go on to expect far higher lifetime earnings.”
All who have shown commitment, talent, and merit ought to be given an opportunity to attain a college degree and strive to reach their highest potential. This being the case, colleges must remain accountable for the prices they charge and the government ought not act as an accomplice, allowing colleges to continue to squeeze their students’ wallets- seeking to extract every last drop.
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