Taking Control of Spiraling College Costs

November 16, 2010 by LendKey Staff

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The following article summarizes the video “Taking Control of Spiraling College Cost” from a conference hosted by the Cato institute.

This is a topic of utmost importance not only to students but to our broader society as a whole. In the U.S. we have witnessed a continual upward trend in college costs for at least 30 years. The rate of these increases has far outpaced inflation. As noted in the video, the rate of increase for college costs exceeds the increase in medical costs.

In America, we look at the bill, scratch our heads and wonder why it’s so high while we get busy figuring a way to pay for it. There have been no riots in the US over this issue, but this does not detract from its importance. We should be reminded that our education systems are designed to develop productive citizens and integrate them into society. If the cost of that development and integration far exceeds the benefits derived then the system becomes faulty and we invite a host of future problems to our society.

It is a relief to know that this issue has now gained national prominence and leaders in the academic arena are taking action. This video is very important to help us recognize the challenges and solutions we face. The following video review guide outlines the material each speaker has submitted. (Students take heed, this is good material for an economics term paper)

Each individual speaker makes great points about why costs continue to increase and what can be done to help reduce these costs. Below I have listed the main points of each speaker in the order in which they appeared to help understand this critical issue that is affecting higher education today.

First Speaker: Robert Martin commented that colleges are costly based on four primary reasons.

1. The bundling of school provided services increases total costs.
2. Unfunded Government mandates required for schools to follow.
3. Baumol’s cost disease..
4. Bowen’s Revenue Theory of Costs.

Martin further explained the Bowen’s Revenue Theory of Costs through these five laws:

A. Colleges regularly compete with one another on the grounds of prestige and quality perceived.
B. There is no limit to the number of projects available that could provide perceived prestige and quality.
C. Colleges will raise as much money as they can through public and private sources.
D. Colleges spend all money they raise.
E. Expenditures will always rise to meet revenues.

Martin establishes the fact that education is an experience good. An experience good is one whose value is not easily recognized until after it’s use or consumption. Therefore reputation, an intangible quality, is the primary basis for college selection and this can lead to distortions of what value is provided by costs.

Compound this with the Principal-Agent problem that colleges face and it is no surprise that the cost of education continues to rise.

Second Speaker: Neal McClusky proposed that the primary driver for increased college costs is financial aid from third parties (state or federal). Neal demonstrates this through a diagram documenting twenty years of average college “sticker price” to the actual price a student pays after financial aid. The trend of financial aid enabling colleges to continue cost increases is established.

McClusky’s primary solution would be increased transparency over college budgets to enforce better efficiency. It is further added that past efforts to improve education have been met with mixed results, and we cannot assume additional regulations will simply solve this problem. The solution is really a reduction in financial aid to force colleges to manage their expenses more efficiently, and allow for consumers to decide what institution to attend considering such data.

Third Speaker: Kevin Carey explained that much of the funding for higher education is provided by individual state subsidies, and with it individual state issues that are not so easily resolved. He agrees that greater transparency is needed to ascertain true efficiency at individual institutions. Kevin adds a word of caution that this process should not be equivalent to pulling the rug out from under colleges around the country. The fallout from that disaster would be more consequential than current circumstances. Instead he proposes that any introduction of transparency and open markets for education will require bipartisan political will to succeed.

Fourth Speaker: George Leef explained that the current situation has originated from a combination of constituents all vying for advantages.

For example, education lobbyists are effective on Capitol Hill because it is always appealing for politicians to spend on education. Even if the politician has no idea what education spending goes towards, they feel no threat over losing office because it is very popular with voters in general. Actually, they will probably get re-elected by promoting the fact. But neither the work of the lobbyist or the politician have succeeded in improving educational opportunities for students.

Leef also adds that the nature of students attending college has changed over the years. Today, students see college as four or five years out of the house and away from Mom and Dad, in a super fun environment. The mentality of “who wants to get a job, this is too much fun!” has essentially taken over the majority of college students while they are in school. This affects the way a school will spend its money in order to appease the student body. As noted in earlier posts, studying time has reduced while leisure time and activities supported by the colleges have greatly increased. Big college sports, expensive amenities and creature comforts are great for attracting students just like any vacation resort would. But it does not do much for quality education.

The result is students going too far into debt for an educational experience they could have done without based on the jobs they are really qualified for.

Leef ultimately concludes that economics will force its hand on the matter. He projects limited growth in tax dollars for education systems that cannot produce educated citizens. Ultimately more critical national obligations will limit the growth of educational spending, and colleges will be forced to change.

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