Why Can’t Colleges Rein in Expenses?

May 3, 2007

Oops. I used the wrong “rein” in the title. I corrected the spelling but the URL will still contain the wrong spelling. Thanks, MBH!

There was an article in today’s Wall Street Journal about how colleges are trying to make themselves more affordable ($). Some colleges are doing stuff like:

  • freezing tuition for certain students
  • offering more grants instead of loans
  • adjusting financial aid formulas to reduce the amount families are expected to contribute, which will aid more affluent households

This is all fine and good but why can’t colleges just rein in their expenses? We all know college expenses are rising a lot faster than the consumer price index. According to the WSJ article above, college tuition and fees are expected to rise another 5.5% to 5.8% this year.

Why is that?

Is it a self-fulfilling prophecy that gives colleges the automatic right to raise tuition and fees simply because it’s expected? Are any of you familiar with the economics of running a college or university? If so, please share your insight with us.

20 responses to Why Can’t Colleges Rein in Expenses?

  1. I am near 3 universities. All 3 seem to be in a constant need to do new construcation. They rebuild old buildings and move things around so much, they look totally differnt every few years. They must be doing this jsut to suck as many students in. Buidings last a lot longer than they are letting then stand around.

    That’s probably 1 factor.

  2. TCS Daily had a take on this recently (http://www.tcsdaily.com/Article.aspx?id=050307A), writing that its cause is similar to the reason that health-care costs are rising so fast: multiple payers, assured payment, and heavy government involvement. Here’s an excerpt:

    “Assured payment results in waste and fraud. It has caused an explosion in medically unnecessary tests and procedures. It is why universities can provide their professors with cushy sinecures for precious little work. (How else could the University of Colorado afford a 6-digit compensation package for the likes of a Ward Churchill?) The hospitals and universities don’t have to economize and prioritize; they can have it all. The money will be there for them.”

  3. How about keeping up with inflation? That will take care of 3% annually right there. Most faculty are unionized and get crazy raises yearly 3.5-4%.

    Plus small colleges don’t have billion dollar endowments like Harvard. All their money comes from students,fund raising, and grants. Just like your house they have to keep up with the times to make it a good investment. Any college with a science department needs a major overhaul every decade or so.

    Wait until 2010 when most colleges will see a decrease in enrollment. Prices will either even out to stay competitive or jack up to try to bring in the same amount of money. It all depends on how well they have planned ahead.

    *Disclaimer: I work at a small private college*

  4. Kevin, despite that billion dollar endowment (actually 29 billion, but what’s a few billion among friends), Harvard’s tuition is among the highest in the country. In fact, many private schools with large endowments have very high tuition rates.

    There sure is a lot of renovation at every college campus. Why is it that the places that strive most to look “historic” always do the most renovation?

  5. I work at a university, but I don’t really have an answer. When I look around, I don’t see widespread waste and fraud.

    Where I am, the single largest budget item is faculty salaries to be sure, but our salaries are well below national and regional norms. Knowing that compensation is such a big budget item helps shed some light on things though. It means that health care expenses are a significant portion of the costs that the University must bear, and health care expenses have increased well faster than the rate of inflation. That money has to come from somewhere.

    Universities are also some of the remaining places that still tend to carry defined benefit plans, and they have retired faculty pulling pensions. Now some private companies have turned around and screwed their retirees when it came to their pension, but so far at least my university has continued to buck up to keep the pension appropriately funded. That money has to come from somewhere.

    Another factor in our state has been the state-wide income shortfall with the bursting of the dot-com bubble. There are a lot of capital gains taxes that used to be state income in the 90s that are not state income now. People had losses for several years in the early 00s that were not taxed, and which they can continue to bring forward to offset their current gains.

    Now when state funding is low, where do you cut? Universities have a 2nd line of income, unlike a lot of other programs. You can cut spending at the university, but the university can accommodate that somewhat by raising tuition. So when it comes to the hard choices, legislators find it comfortable to cut back on university funding. The outcry is just not as loud as when other programs are cut. But that pressure makes tuition rise faster yet, because money has to come from somewhere.

  6. Thanks for your thoughts, Don.

  7. A couple possible explanations:

    1. Baumol’s Disease. Education is labor intensive and productivity growth is low. This tends to mean that the relative price of providing education increases, compared to, say, the cost of DVD players.

    2. The value of college, in terms of how it affects students’ future incomes, has increased, as the wage differential between high school graduates and college graduates have increased. Students become more willing (in some sense) to foot the bill of a college education, because they know (in some sense) that they will earn more in the future, compared to if they don’t go to college.

    The TCS article probably has a point, also. In Ohio, there’s some government intervention going on, in terms of shutting down student loans to certain for-profit post-high school vocational “colleges”, e.g., the University of Phoenix. Basically, the state board of regents don’t like competition from these institutions, etc. This will raise the cost post-high school education, especially for poorer students, who probably want something more vocationally orientated than a typical 4-year college.

    One of the great things about American higher education is that it’s a system of second chances, and giving people the opportunity to learn when they’re ready to learn: your fate isn’t determined by a do-or-die exam when you’re a teen. For-profit education institutions, like the University of Phoenix, fits right into that mix.

  8. I go to William and Mary in Virginia, a small state school with a weak endowment. The mention of construction holds true here as well: new dorms last year, new integrated science & technology building this year (and renovating the old building attached to it), new business school next year, new school of education building the following year. Generally, I’d say these improvements are worth it in the long run. The last time there was major construction on our campus seems to be somewhere between the 50’s and the 70’s gaging by the non-historic architecture.

    I’m also an out-of-state-er so I enjoy paying nearly 34k/year next year alone for tuition, which is still a pretty good deal relative to other schools on par with W&M, however, those other schools (if private) tend to grant financial aid in much higher quantities.

    If we stopped blowing money on stuff like a “Director of Multicultural Affairs” and making all freshmen take worthless online risk management courses, there would be plenty of money saved (new since I’ve been here). Or cutting our presidents salary from 400k since he gets free housing on campus as well (and I’m sure he’s going to plenty of benefit dinners cutting his food expenses, too).

    I DO know how The College makes its money though: gouging people for parking passes and ticketing. $240/year for a parking pass, if you don’t have one and get a ticket: $105.

  9. “Baumal’s Disease” is part of it, and the healthcare issue is another part of it. Yet another is education is a seller’s market, especially if you’re one of the “selective universities” – there are plenty of local and foreign students willing and able to pay monster tuitions around the world.

    At some point, some entrepreneur is going to figure out how to make a for-profit private university model work for something beyond tech schools and will make huge bucks eating the lunch of the non-top-tier schools that don’t have solid “brands”. There probably be no tenure, no “moonbat studies” departments, and lots of e-learning.

  10. I’m starting back to school this coming fall. I have applied for my Financial Aid but my Expected Family Contibution (EFC) is well over 16k. This is of course based on last year’s income for myself and wife, which was about 50k on my tax return. But she is now working a job where she makes half as much. My check before taxes is about 1500 2x a month, then I have insurance and other pre-tax deductions bringing my check down to about 900 or $1800 a month take home. The wife brings home about $1200 a month.
    So we bring home about 36k a year and they want me to contribute 16k.
    44% of my money should go towards school ?!?! Living in the DFW area isn’t cheap. Maybe I should just work a bum job so I could get some free money

  11. LAMoneyGuy, while Harvard does indeed have a high base tuition, it also offers need-blind admission and meets 100% of demonstrated need. That is to say, those who can pay the hefty tuition, do, and those who don’t, Harvard provides for from the ol’ $29B endowment. Most small private colleges lack the endowment to adopt similar policies.

  12. I’m glad this has been brought up. How come the scrutiny over health-care expenses yet not as much for these high tuition increases? Health care professionals get ripped about their high salaries but nothing gets said about university personnel. About time this got some attention, especially since at least public universities get government funding.

  13. James-

    Generally speaking, neither faculty nor staff get paid especially well compared to the private sector. That’s my experience at a major university, anyway. Raises are difficult to come by and they are in small increments that don’t even keep up with CPI. Higher Ed costs definitely need to be examined but I don’t think the pay that university personnel receive is the problem. The big problem here seems to be that state funding doesn’t cover operating costs from year to year and they have to raise tuition to make ends meet. With that said, the university bears some responsibility in that WRT budget.

    As for the building spree, there is one going on here too. Some of it is absolutely necessary, while some isn’t. However, most building here is funded by private donors and does not come from tuition at all. Maintenance costs may increase on the new buildings and THAT would come from the general funds, but the construction itself is not the reason for skyrocketing tuition here (and it IS skyrocketing– it has douibled in 10 years).

  14. I remember when I worked at a UC school as a staff researcher, I was shocked when I realized that the College of Engineering had no less than 13 people in its payroll office. The College of Engineering had about 100 profs, about 1500 stipended grad students and about 500 staffers. While college payroll is somewhat more complicated than normal payroll since research groups pay their own staffers out of research grants, a properly computerized 13 person payroll office should be able to run the whole university, not just that department.

    And for all that manpower, they still managed to screw up my 403b when I was there…

  15. As usual, foobarista said what I was going to say. The cost of college is a pet peeve of mine. Could be because I have two daughters in college at the moment. (Ya think?)

    At some point, entrepreneurs will figure out that every Economics 101 class room does not need a $100k/year PhD in it, and that there are better ways to do it profitably. I saw an article about a web site that employs Indian scholars that will do unlimited tutoring over the Internet for $100/month using IM, Skype, teleconferencing, etc. How about open source textbooks available for free on the Internet? Wikipedia is heading that way already. It’s only a matter of time.

  16. Two reasons: 1) supply and demand, 2) improper comparison to inflation.

    1) Just about everyone needs a bachelor degree now, there a fixed number of schools.

    2) Inflation averages in physical goods and services. Production of physical goods can be outsourced and automated. Services cannot be. Schools are service-intensive and along with other non-outsourceable service areas, have above average inflation of prices.

  17. I saw on the news here in central Ohio that the tuition at Ohio State is set to go up next school year anywhere from 6% to 15% and for graduate business students, the cost is going up $13,000 PER QUARTER! Can you believe that?

  18. There’s a lot of misinformation in some of the earlier comments.

    Re: faculty salaries, six figures is the land of the “stars” in the humanities and social sciences (business, law, and medicine pay much better, for obvious reasons– if they didn’t, then no one would take those jobs). In the humanities, far more typical is the full prof with 25 years of experience and a couple of published books making in the high 60s to low 70s– or even as low as the mid-50s– and working 60 hours per week. In the past 5 years, there have been a lot of years with either frozen salaries (0% raise, in other words) or anemic 2% raises.

    Rest assured, universities are doing everything they can to cut labor costs: namely, they are resorting more and more to hiring PhD-holding faculty as part-timers, often making as little as $1500 per course. It’s not uncommon, in other words, for someone to teach 4-5 classes per semester plus summer, and make under $20k per year and with zero benefits. Why they are willing to do so, I’ll never know; but in fact this is a growing trend that more than offsets the “sinecure” phenomenon so far as costs are concerned.

    The “sinecure” at state universities is largely driven by trying to compete with the Harvards and Yales and Stanfords. The elite privates stay at the top by attracting the leaders in their fields, and keeping them– and a Harvard historian like the Neoconservative apologist Niall Ferguson (reportedly earning over $300k to teach a couple of classes per year) can move pretty easily, so it’s imperative to sweeten the pot from time to time. The state universities can’t match THAT salary, but see their elite-level salary range driven up in trying to retain their star faculty. But as I said, this phenomenon is certainly offset in the state systems by coupling “sinecures” with corporate-style part-timers and temps.

    (Anyway, in that situation it’s hardly fair to use the word sinecure: those top-tier folks weren’t paid to teach, but to publish. So long as they’re publishing, they’re doing what they were paid to do).

    Chances are there aren’t any Niall Ferguson types at your own local university; leaving aside the contingent faculty, far more common is the $42k assistant professor, the $51k associate professor, and the $68k full professor with 25 years of experience.

    There are some other things driving up costs (and some of it relates to faculty): medical benefits for staff and, recently, dramatically rising energy costs. Almost every university is seeing its medical costs go up by 10% or more every year. Generally, about 1/4 or so of that will be passed on to the staff; i.e., university faculty are seeing their insurance benefits get more expensive like every other full-time worker. That still leaves, in effect, a 7% or so cost increase for health-care every single year. For small private colleges, that’s devastating.

    As for energy costs: I taught at a small liberal arts college that saw a November gas bill of $14k go up to $38k the following November. Project that same percentage increase onto a bigger university, and we’re talking a lot of money. Even the $24k increase my college saw is 1/2 a faculty position, including all benefits: yes, that’s right, the average faculty member was entirely paid for, salary and all benefits, for under $50k per year.

    No matter how hard they try, less wealthy colleges can’t find a way to compete with their rich “peers” like Harvard, and contain their medical and energy costs, without passing costs on to the students. And state universities are under a special pressure because they are seeing their support from the state failing to keep up with those rising costs. Luckily, they can save some of the money by using contingent faculty (who are crazy for accepting such treatment, but that’s another issue), but much of it still has to be passed on to the students.

    I’d put it under the broader framework of what Jacob Hacker calls “The Great Risk Shift”: ordinary people are expected to pay the true costs of their own retirement, medical care, etc., and yes, university costs. Because make no mistake: it ACTUALLY costs far more in toto to educate a university student than the student is paying, even WITH the rising costs. The students are still being substantially carried by “handouts” from government and charitable donors (alumni, etc.). But the trend in university attendance as well as everything else is to pass on true costs to ordinary citizens, and the ordinary citizens don’t much like it! (But so far they haven’t taken the trouble to organize to fight against it).

    Incidentally, I was an American academic, an English prof making $42k per year after 9 years of experience and a couple of books. I had a fine life, no complaints, but it wasn’t the lap of luxury like it’s so often presented. But then I was just a 75-hour per week non-star, happy not to be contingent labor.

    I am, though, glad I had a chance to leave American academia for the greener pastures of Asian academia, where the society actually values their profs– my first year’s salary was roughly 3x what I earned in America, while my cost of living is about 85% of what it was in America. It helps that medical care is no more than 40% as expensive here as it is in America.

    Which raises another point: so far, few enough white Americans like myself are willing to leave for Asia, but ultimately mid-level American universities not only have to compete against their elite “peers,” but they also have to compete against Asia. So far as filling the classes is concerned, no one will miss me: my $42k salary can be shed by hiring part-timers to teach 8 classes for $12k/ no benefits. But that option will quickly move any university who takes it too often down the rankings, and will raise the question of what students actually want to attend a school that is quickly going down the rankings?

  19. Thanks for the helpful comment John. I was going to try to say a lot of those things, but you said them much better than I could.

    Re: overbuilding at Universities.

    I think it is true that many Universities overbuild, and more over that they build the “wrong” kinds of facilities, at least from the point of view of educational quality. Too many student centers and stadiums and not enough modern laboratories and classrooms.

    Still, this is a market driven behavior. Universities are in competition for students, and students make their decisions based on very little information, usually only a short campus visit and the US News rankings. It is much easier to wow them with a lot of shiny new buildings than with competent, well supported professors. This is compounded by the fact that US News rankings are largely driven by selectivity, and selectivity is determined by how many applications you can attract for each spot in the freshman class (again, better build that new campus center).

    Still, building programs don’t have a lot to do with tuition rates. As someone said earlier, building programs are largely funded by alumni giving. It’s much easier to get someone to give a huge chuck of cash if they get their name on a building, so I doubt much of this could be diverted to other areas of the budget (i.e. tuition reduction). Since new buildings are generally more easy to maintain and more energy efficient than the old ones they replace, I doubt there’s much impact on the bottom line from the maintenance costs for these new buildings.

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