The Peculiar Economics of Higher Education

Why does college cost so much? Students in the U.S. bear more of the cost of their higher education than in nearly any other industrialized country in the world; indeed the burgeoning for-profit schools place 100% of cost (and even more for pecuniary gain) on the student. The calls for reform come from various places, but until we begin to understand the causes, reform will only be low-grade band-aids on a gushing wound. We must begin to understand the prculiar economics of higher education.

Are colleges and universities business? Are students consumers, tuition a price, and scholarships "sales." They certainly can be, as is evidenced by the recently success of for-profit colleges like the University of Phoenix and Steven Henniger College. These for-profit schools operate with a bottom line and the student bears the full cost of education. In such circumstances, as in all business, there is a direct relationship between the costs borne by the supplier and the prices they charge. In the traditional model of higher ed, one in which the public steps in to cover part of the bill, the relationship between cost and price is less direct; well, at least much more complicated.

The first major difference is that the public and non-profit schools subsidize the costs of education. Whether through governmental grants and loans or private scholarships and donations, students simply do not "pay" full costs of education. Every customer at these institutions is sold a product below cost.

This means that the rising "price" of higher education can be caused by either (or both) of two factors: (1) increases in cost, or (2) decreases in subsidy. As the subsidy is withdrawn, the cost must be shifted to an alternative revenue source. Inevitably, this falls to the student.

As the Utah legislative session is fast approaching, the legislature is taking a firm line on cutting (yet again) higher education budgets. In the past decade revenues from tuition has gone from covering little more than a third of the costs to nearly three quarters. Thus the "price" has increases significantly, but the overall cost of college has remained relatively the same. The problem is not that costs increased, its simply who is paying for them.

In my view, the problem is simple: the legislature has simply listened to the loudest voices. As the shouts for public resources multiplied and increased in volume, students have simply gone on paying the bills. Students have relied upon institutional administrators to lobby the legislature to assure that the maximum level of funding is secured each year. There is at least one serious flaw in relying upon institutional administrators to secure the necessary funding and both students and administrators must realize this. The problem is first, that to the legislator the institutional administrator does not feel like a student. Second, the administrator does not bear the costs of failing to secure the funding, he or she can always raise tuition.

Tuition will continue to rise until (1) students start complaining, or (2) students stop paying. Since neither the students nor the state can afford to have its young adults to stop earning college education, students must find a louder and more individual voice in the process. Students must desist from acquiescing to tuition increases which out pace inflation. Legislators need to hear from students that enough is enough. Only students can effectively convey to legislators that higher education is not a business, but an investment by the state in its future. That high prices will ultimately drive up student loan defaults and drive down completion rates.