Mises Wire

Don’t Confuse the Cost of College with the Cost of an Education

Alma Mater

For years, those who face the costs of educating themselves or their children hear a nearly incessant drum beat of how expensive a college education is, and how much debt they’ll likely be taking on. On the other hand, we’re told repeatedly that a college education is absolutely essential because people with a college degree allegedly make a million dollars over a lifetime more than those who do not attend college.

Most everyone agrees that tuition and fees are certainly increasing in terms of the price tag. There is far less agreement, however, on why the price of a college education is going up so quickly.

The answer lies in a mixture of government policy and the fact that colleges and universities today spend vast amounts of money on amenities and staff that have little to do with classroom instruction. Moreover, the tastes of many consumers of education have changed toward the more opulent, and many aspects of the so-called “college experience” which were virtually non-existent 30 or 40 years ago, are today considered to be necessities for college students.

And finally, many students spend vast amounts of money on college degrees that will never contribute much to actually paying off loans or contributing much toward the graduates’ actually earning a living.

Government Subsidies Enable Price Increases

One of the more basic observations of economists of all types is the fact that less of a good or service is demanded the higher the price goes. This is why the demand curve is downward sloping, and why fewer people will want ten-dollar hot dogs than will want two-dollar hot dogs, all else remaining equal.

On the other hand, if the government gives out grants and loans for buying hot dogs, or if people are hoodwinked into believing they’ll make a lot more money if they only eat more hot dogs, the price will rise quickly.

There is no doubt that overall demand for a college education has increased based on the idea that a college education is the key to wealth. The broad conclusion that a college education greatly increases one’s earning potential greatly over one’s lifetime ignores the fact that not all college degrees are created equal.

As this data shows, only certain college degrees are likely to bring back a good return on the investment. While economics and engineering majors are likely to pay off loans quickly and maintain employment over the long haul, people who spent six figures at a fancy university to get a degree in sociology of Latino studies are likely to struggle to pay off their debts.

Moreover, if you’re one of those people with a humanities degree, your electrician and your mechanic are often likely to make more money than you. And, they gained that higher earning capability after spending far, far less in terms of time and money on their education. Once we begin to look at things on a case-by-case basis, the advantages of a college degree can melt away.

So, much of the increase in demand for a college education is based on a false premise: the idea that any college degree with get you a living wage. What you study remains very important.

Nevertheless, going to college has for centuries been seen as a way to gain or maintain financial success, and the idea did not just enter the minds of the general population in the last thirty years, when tuition prices began to skyrocket.

What changed was the increased presence of student loans, and especially loans at low interest rates, thanks to government guarantees and loose monetary policy.

Last year, University of Colorado law professor Paul Campos, who is hardly an advocate of laissez-faire, attacked the claim that direct government funding of colleges is being cut, while also noting the role of student loans in increasing costs of college:

The conventional wisdom was reflected in a recent National Public Radio series on the cost of college. “So it’s not that colleges are spending more money to educate students,” Sandy Baum of the Urban Institute told NPR. “It’s that they have to get that money from someplace to replace their lost state funding — and that’s from tuition and fees from students and families.”

In fact, public investment in higher education in America is vastly larger today, in inflation-adjusted dollars, than it was during the supposed golden age of public funding in the 1960s. Such spending has increased at a much faster rate than government spending in general. For example, the military’s budget is about 1.8 times higher today than it was in 1960, while legislative appropriations to higher education are more than 10 times higher.

In other words, far from being caused by funding cuts, the astonishing rise in college tuition correlates closely with a huge increase in public subsidies for higher education. If over the past three decades car prices had gone up as fast as tuition, the average new car would cost more than $80,000.

The data can only show a correlation, but basic economic theory shows us the causation. The government subsidies to students have lowered the perceived cost of attending college. This, in turn, allows a larger number of students to pay the ever-increasing tuition bills. Put another way, the inelasticity of demand for a college education has increased significantly thanks to the fact that students can now just go get a low-interest unsecured student loan rather than have to save the money to use a high-interest private-sector loan.

Without these loans, students would be far more sensitive to increases in the cost of education, and colleges would have to find ways to cut costs in order to remain competitive in terms of pricing. With a nearly endless stream of government loans, however, colleges need never have to worry about cutting costs. Government subsidies will simply make up the difference, and price-sensitive students will go to college anyway. The downside comes later when students must then pay off large loans.

Increases in Cost Don’t Go to Classroom Instruction

Campos also points to the fact that we can’t blame the price increases on the cost of instruction going up. The amount of resources being devoted to actual classroom instruction, Compos notes, has changed little in terms of real dollars. What has changed is the cost of administration at colleges, where

a major factor driving increasing costs is the constant expansion of university administration. According to the Department of Education data, administrative positions at colleges and universities grew by 60 percent between 1993 and 2009, which Bloomberg reported was 10 times the rate of growth of tenured faculty positions.

Even more strikingly, an analysis by a professor at California Polytechnic University, Pomona, found that, while the total number of full-time faculty members in the C.S.U. system grew from 11,614 to 12,019 between 1975 and 2008, the total number of administrators grew from 3,800 to 12,183 — a 221 percent increase.

And administration isn’t the only place in which colleges are pouring money. Students are also paying for lavish amenities such as recreation centers and luxurious dorms where each room has its own bathroom, and much more.

In their defense, college administrators have trotted out the usual old saw that “budget cuts,” and not a country-club living standard on campus, is to blame for increasing tuition and fees for college students, but the immense increases in college fees that are necessary to support these new amenities would never be economically viable if it weren’t for easy access to cheap student loans.

Many People Make Purchases Based on Branding, Not Education Quality

Another factor behind rising costs for some students is the fact that students purchase costly programs not necessarily for the education they provide, but for the status of having attended a prestigious name-brand college. Just as people will spend hundreds or thousands more on a handbag or automobile for the purposes of conspicuous consumption, many students will do the same with their college educations, believing it will raise their social status.

There is precious little evidence, however, that going to an elite school with a prestigious brand name will necessarily translate into higher earnings for students.

Yet again, we find that what you study matters more than where you do it. So, it is entirely plausible that the student who studies accounting at the thoroughly unglamorous public university known as IUPUI in Indianapolis is likely to earn more than a psychology major at some elite East Coast university.

And, of course, one makes a logical error by assuming that successful Harvard graduates were successful because of their attendance at an elite university. People who get into Harvard are already highly driven over-achievers. Harvard students aren’t slackers who are molded into elite intellectuals and workers due to the amazing quality of instruction at Harvard. That’s not how it works.

This isn’t to say there’s something “wrong” with choosing to attend an elite college if the opportunity presents itself. Consumers make decisions based on a variety of subjective criteria, and it may be that for some of them, consuming the product known as “Ivy League college” is very important and well-worth the additional cost.

However, these people tell us little about the true cost of obtaining an education. Those who choose to attend costly elite colleges — when opportunities exist for attending more modestly priced programs — should be excluded from analyses that claim to tell us how expensive education has become for the average person.

Many People Are Willing to Pay Extra for the “College Experience”

Finally, it’s important to note that much of what drives demand for colleges, especially among the middle and upper classes, is a desire to get the so-called “college experience” which has nothing to do with the quality of instruction or one’s future earning potential.

In truth, living on campus as a college freshman, and taking advantage of all the entertainment, lifestyle, and social amenities offered to live-in students, is a luxury that is not essential to obtaining an education. Students who live off campus, of course, often report feeling “left out” or at a disadvantage in terms of finding the right social events.

These things are not without value, and many students may conclude for themselves that the “college experience” is worth the extra cost, but let’s not pretend that such experiences are essential to obtaining a college education.

Moreover, simply attending a costly four-year college in one’s freshman year is an unnecessary luxury overall, regardless of where one lives. As billionaire Mark Cuban — an Indiana-University grad — correctly notes in this video, from a financial point of view, it makes far more sense to attend one’s freshman and sophomore years at the least expensive college one can find where college credits will transfer up to more costly four-year schools.

These economic facts won’t stop many students, however, from insisting that they absolutely must attend an expensive liberal arts college in order to get the full college experience. (This woman just had to go to NYU and took out $100,000 in loans to get a degree in religious and women’s studies.)

The Cost of Education vs. the Cost of “College”

As with any consumer’s preference for attending an elite school, we cannot say that any particular student is wrong for attending a school that costs $25,000 in tuition per semester. It may be perfectly rational, from the student’s point of view, to attend a college because it has pretty buildings or the students are good-looking.

Being surrounded by beautiful people and beautiful buildings really is something of value. However, let’s not pretend that those amenities are essential to the process of obtaining an education or increasing one’s earning potential.

In the background of every political discussion over higher education is the assumption that a college education is essential to combating poverty and other social ills. So, if we’re going to engage in an honest discussion of the true cost of an education, we have to differentiate between what is being paid toward financial betterment, and what is being paid by some people toward a four-to-six-year vacation.

What a Free Market in Colleges Might Look Like

Student loan subsidies have so distorted the market for higher education that we can’t even tell the difference anymore. In a world of more market-oriented colleges, we’d be seeing colleges that work strenuously to reduce costs while increasing the quality of faculty instruction. Instead, what we find is a race to produce ever more luxurious amenities or funnel more and more money to six-figure-salaried administrators and staff to run a high-end rec center for students.

Colleges would focus on providing easy-to-attend classes for part-time workers (many of whom are low-income) who must attend college at the lowest cost possible. Students would focus on fulfilling basic requirements at lower cost schools and community colleges while waiting to access more costly lab facilities and other resources in the junior and senior years. (Many low-income students already do these things, but in the absence of subsidized loans, the total numbers using these strategies would be far greater.)

Certainly, those with the means would still attend costly luxurious schools, but most would recognize that those students are paying for something other than education. Far larger numbers of students, though, would attend colleges that specialize in delivering an education in a timely and cost-effective manner with few frills. The number of students attending amenity-laden schools would fall considerably, and many small liberal arts colleges would go out of business. Urban and suburban campuses, while less “sexy,” would benefit instead as students turned toward more economical easy-to-access colleges that are more focused on job skills and integrating students into the larger community that includes employers and industries that need employees.

As long as government student loans remain a dominant factor in the pricing of higher education, though, we’ll continue to see more and more growth in the cost of higher education which will continue to be a boon for the colleges themselves, while placing a heavy burden on students who don’t understand how little of what they pay actually goes to education.

Image Source: Wally Gobetz https://www.flickr.com/photos/wallyg/
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