What causes tuition to rise?

Posted by Student on 2009/02/18 @ 0630 Comments (0) (show tags and categories)

It’s funny how a question might take five words to ask, and require chapters to answer. Here’s one such question: “what causes tuition to rise?” Certainly, there are several factors that drive tuition prices, including:

  1. inflation – year after year, our currency is devalued as the monetary base is expanded, thereby reducing the purchasing power of our currency. This is reflected in the cost of all goods, although tuition appears to increase at a certain multiple of the rate of inflation.
  2. prestige – colleges seek to increase their prestige, as this is a critical factor that differentiates colleges from one another, and colleges may justifiably expend more money on prestige-related expenses (faculty hires, luxury construction, etc).
  3. student achievement – the quality of students is related to who submits applications, whose applications are accepted, and which students decide to attend. In attracting the highest quality students, colleges might offer tuition breaks to certain students, which they would offset by charging all students a generally higher tuition.
  4. resource provisioning – related to all of the previous factors, it is critical for colleges to provide resources to students to increase prestige and student achievement, but the amount expended on resources will be subject to inflation.
  5. available student credit – the capacity of students to “afford higher tuition” is related to the amount of credit that is available for students to borrow. This credit is subject to legislative pressures, and less influenced by traditional financing metrics (e.g. collateral, credit history).
  6. education legislation – the ability of lenders to take risks on financially unproven debtors (i.e. 17- and 18-year old students) is related to incentive programs that must be artificially inexpensive for lenders, which is not possible through free-market forces and must be driven by extra-market intervention through legislation.

Likely, there are other factors to include in this model, but this is a start.

The core question involves “what causes what.” Do colleges charge more because they must do so to grow their prestige, or can they grow prestige because students are able to pay more? Does it cost more to pay for school because schools provide more resources, because those resources cost more, or is this fundamentally unrelated? The number of different models that can be formed using the factors listed above only grows as more factors are identified. For now, Student Loan Bubble will look at existing work to see what others have identified, but this is a theme that Student Loan Bubble will revisit from time to time.

In the following New York Times piece, Glater describes certain consequences of the year-over-year increase in tuition, and some of the forces that drive it. It’s not a “grand unified theory of tuition” but many of the previously listed factors are reflected in this article. I was particularly interested to learn that lending at public schools is inversely related to state funding of those schools, such that students have historically made up the funding deficit through loans. State citizens will be exposed to the cost of public school funding through the taxes they pay, and reducing this form of exposure increases the costs that are shouldered by individuals. I also thought it was interesting that certain forms of low-income grants have decreased in recent years, and I am curious to know more about that causes for that.

Read on, and if you can think of other factors that influence tuition prices, please post a reply to this article.

Excerpt from: http://www.nytimes.com/2007/10/23/education/23tuit…

“The average price of college is continuing to rise more rapidly than the consumer price index, more rapidly than prices in the economy,” Sandy Baum, a co-author of the report who is a senior policy analyst for the College Board and a professor at Skidmore College, told reporters at a news conference yesterday.

Ms. Baum added that the prices “are probably higher than most of us want.”

Those price increases reflect increases in the sticker price that colleges advertise, though, Ms. Baum said, the average student does not pay that full amount. At public universities, the average student gets about $3,600 in grants and tax benefits, lowering the actual cost to around $2,600. At private institutions, aid totals about $9,300, bringing the cost to $14,400.

But even the net price, after taking into account grants and other forms of aid, is rising more quickly than prices of other goods and than family incomes. In recent years, consumer prices have risen less than 3 percent a year, while net tuition at public colleges has risen by 8.8 percent and at private ones, 6.7 percent.

The changes in tuition at public institutions closely track changes in financing they receive from state governments and other public sources, the report found. When state and local support for public colleges declined over the last seven years, tuition and fees rose more quickly, and as state support has grown of late, the pace of increases fell, it said.

“We hope that state governments – which really set tuition prices at most public colleges and universities – will do their part to reinvest in higher education,” David Ward, president of the American Council on Education, said in a statement released by the College Board.

Private loans, those not guaranteed by the federal government, continued to be the fastest-growing form of borrowing, totaling more than $17 billion in the 2006-7 academic year. In the same period, students and their families borrowed $59.6 billion in federally guaranteed loans.

Long-term student loan inflation provided money to students, indirectly to colleges

Posted by Student on 2009/02/13 @ 0630 Comments (0) (show tags and categories)

A central component of the Student Loan Bubble thesis is the effect of over-abundant federally subsidized debt, which increased students’ access to cheap debt, and indirectly enabled colleges to charge more for tuition as a means of tapping into this debt. Richard Vedder and Andrew Gillen have written an interesting piece for Inside Higher Ed, in which they claim a 61 percent increase in the availability of this type of debt over the last decade, and dig into the ways colleges have spent that money.

Vedder and Gillen draw a parallel to the housing bubble by observing the similar financing practices that drove both bubbles. From the Student Loan Bubble perspective, the inverse observation is that the prospects for future growth in career income justified the risk of taking on student loans. This wager on future earnings downplayed the threat that young professionals might not be able to repay their debts, unless they truly earned more money through their career.

Both descriptions converge on the similarities to the housing bubble, but the conclusion is ultimately unsettling. Whereas over-extended home debtors are able to default on their mortgages, students have no home-like asset that can be repossessed by the bank. Vedder and Gillen suggest a somewhat bizarre strategy, whereby colleges purchase equity in students’ future earnings, financed by the college endowment. The suggestion is either deeply unsettling, or simply another way of saying that students will go into debt for the eduction, making repayments to the school instead of a bank. In all, it makes for an interesting read.

Excerpt from: http://www.insidehighered.com/views/2008/05/02/ved…

The 61 percent increase in inflation-adjusted federal loans over the last decade leaves virtually all their students capable of paying more in tuition. The schools can either raise tuition, using the additional money to help build a better (more prestigious) college , or could leave tuition unchanged in an inflation-adjusted sense. The decision they made is obvious from U.S. Department of Education data. Over the last 10 years, after adjusting for inflation, tuition is up 48% at public schools and 24% at private schools.

Giving schools more money to build better institutions may not seem like a bad idea, but keep in mind that their goal is to increase prestige. This means that they will not necessarily use the money to improve the education their students receive. For example, Inside Higher Ed recently reported that less than half of employees at America’s institutions of higher education are faculty, information reinforced by a new study released this week. Today’s universities are congested with vast bureaucracies that stifle innovation and waste resources. Princeton University recently constructed a fancy dorm that cost $70,000 more per bed than the median home price. This unnecessary largess should show that what increases prestige may have very little effect on the education of students. Moreover, much of the extra money for schools ultimately comes from the students, who have seen the average debt upon graduation steadily increase to over $20,000 last year.

The analogy to the housing bubble is nearly perfect. Low interest rates arising from expansionary Federal Reserve policies led to rising housing demand, rising home prices, and excessive lending to individuals with dubious credit worthiness. Similar things have happened with student loans. The federal government has provided subsidized, low interest credit, often to students whose prospects for graduating from college are marginal and whose credit histories are non-existent. Student loan defaults are rising along with tuition fees. Already, some private lenders are exiting the market and federal officials are starting to become increasingly worried about the availability of student loans. The government-induced housing bubble is paralleled by what could be thought of as a tuition-loan bubble.