Understanding the Cost of Public Higher Education: In the Case of Higher Education Costs, Diametrically Opposed Views Have Persisted over Time. Why?
McPherson, Peter, Shulenburger, David, Planning for Higher Education
Factual matters ought to be easily resolved by examining the facts, but in the case of higher education costs, diametrically opposed views have persisted over time. Consider this statement by a prominent legislator as reported in The New York Times in an article on public university tuition increases: "Colleges and universities have not shown a willingness to contain costs" (Arenson 2003, A8). In that same article, the legislator committed to introduce legislation that would withdraw federal money from big tuition raisers. Contrast that stance with the findings of a Delta Cost Project (1) study conducted under the leadership of noted higher education researcher Jane Wellman: Real full educational cost per student at public research universities increased at an average annual rate of only .2 percent from 1998 to 2005 (Wellman, Desrochers, and Lenihan 2008). The Delta Cost Project study found that universities did contain educational costs; what they were unable to contain was tuition increases. So, did cost increases lead to tuition increases, as the legislator maintained?
In general, the costs borne by public research universities are made up of two components: (1) the costs of student education, paid for by state appropriations, tuition, and some donations, and (2) the costs for research, clinical practices, student residence halls, athletics, and other activities that in general produce their own revenue. (We realize that there is some cross-subsidization, but this pattern generally holds.) Public policy makers are appropriately concerned about educational costs because state appropriations and students (through tuition) pay the bill. On the other hand, public policy makers generally encourage increased revenue from activities that substantially pay for themselves because they contribute to the economy of the community and state, despite any increased cost to do so. We hope this two-sector conceptual model will help public policy makers focus more clearly on the actual costs and needed revenues of each specific university function, rather than misunderstand the situation by looking only at universities as a whole.
Tuition Increases vs. Cost of Education Increases
Clearly, university tuition and fees have increased dramatically in recent years. Tuition and fees represent the price of higher education to students and parents. From 1996 to 2006, private (2) universities experienced average compounded annual tuition increases of 5.68 percent, while their public university counterparts experienced increases that averaged 5.98 percent. These rates are more than double the compounded annual 2.44 percent increase in the consumer price index (CPI) for that period. From 1980 to 1990, public university tuition increased at a 4.3 percent rate and private university tuition increased at a substantially greater 5.6 percent rate (Alsalam 1996).
Price changes are experienced by consumers, while cost changes are directly experienced by producers. (3) The mass media often confuse the two, especially in reporting on tuition increases. This confusion is frequently reinforced by elected officials who seem to assume that it must be cost increases that lead to tuition increases. Similar confusion is evident among some members of the current Congress; the Higher Education Reauthorization Act of 2008 includes mechanisms to compel or cajole the study and control of costs by universities whose tuition increases exceed certain thresholds.
This confusion may have its roots in the classical economics model of price and cost behavior in a competitive market. Long term, in a purely competitive market, cost increases and price increases tend to be precisely the same amount, and, at equilibrium, the market clearing price and the firm's per unit marginal costs are also the same. But the market for earning a baccalaureate degree is not the competitive market envisioned by Adam Smith and David Ricardo. The student shares the price of a college education with donors, governments, and others. …