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It's a Start, Yale. Now Do Something Serious.

By Richard Vedder
Sunday, January 20, 2008

It was a public relations coup for Harvard. So -- no surprise -- Yale decided to get in on the act, too.

On the heels of the its rival's December decision to increase financial aid to middle- and upper-middle-class students, Yale last week announced its own plan for reducing the cost of attending its storied New Haven campus. Like Harvard's, it appeared to be a bold move to meet rising parental concerns about soaring college costs. But don't be fooled -- while these universities have taken a positive step, what they're offering is no panacea for the higher-education cost explosion.

Under Yale's plan, students from families with incomes of less than $120,000 will see their costs drop by more than 50 percent, while those with families earning between $120,000 and $200,000 will see a 33 percent reduction. Students from families earning less than $60,000 will not be asked to contribute a penny toward their total cost of attendance, including tuition and room and board. The contribution from families making more than $120,000 will now average only 10 percent of their income. To accomplish this goal, Yale will increase the amount it spends from its endowment by 37 percent, to $1.15 billion a year.

Harvard's plan is similar. Families making $180,000 or less will only pay 10 percent of their income in tuition costs. For the family that will now pay Harvard $18,000 annually instead of $30,000, this is not mere tokenism. But neither is it the Holy Grail.

There's another interpretation of these moves that is far less complimentary to America's most prestigious universities. The growing public anger over skyrocketing higher education costs has prompted politicians to leap into the fray. Yale and Harvard no doubt see a very real possibility that in an attempt to hold down tuition costs, Congress may enact spending legislation aimed at well-endowed schools.

Republican Sen. Charles Grassley of Iowa seems to want to require these schools to spend 5 percent of their endowment principal annually, the same rule that applies to private foundations. And his idea appears to have bipartisan support in the Senate Finance Committee. House members such as Democrat John Tierney of Massachusetts are raising similar concerns.

So an unpopular Congress mired in gridlock and partisan bickering has one issue on which it can reach agreement. It's probably no coincidence that Yale's new endowment payout plan approaches the 5 percent threshold. Harvard no doubt hopes that its move will head off any congressional action, too. But don't count on it.

The annual cost of these moves is chump change -- about $22 million for Harvard and $24 million for Yale. In fact, these Ivies could have made a really bold statement, lowering tuition to zero for all students, and still have spent only a paltry amount from their endowment funds. Harvard and Yale could have become the civilian equivalent of the military academies, where students can get a superlative education at no cost.

Yet greed trumps vision, and wealth triumphs over American egalitarian ideals. Harvard and Yale still want dollars from the mostly affluent families that send their kids to Cambridge and New Haven, and apparently just can't bring themselves to go tuition-free. Besides, what would they do with all the financial aid bureaucrats if there were no need for financial aid?

There is a good case for making families pay something. Economic and equity concerns suggest that kids from high-income families going to Harvard and Yale (a large percentage of the total) should pay something for their education. People tend to place more value on what they have to pay for, so the zero-tuition solution may not be optimal.

Nevertheless, we can't ignore that some university endowments have grown enormously. In 1991, Harvard's endowment, in 2007 dollars, was barely $7 billion. It has grown nearly five-fold in inflation-adjusted terms in 16 years, thanks to risky investment strategies that poorer schools, or you and I, should not seriously contemplate.

As the endowment has risen nearly 10 percent per student per year, tuition charges have risen nearly correspondingly. Endowment funds, rather than making Harvard more affordable for applicants, have merely led to dramatic increases in institutional spending, some of it enriching faculty and staff. Department of Education data indicate that the average salary of a full professor at Harvard rose 62.5 percent between 1980-81 and 2005-06 (to $165,149 in 2007 dollars). By contrast, at Salem State College, Rep. Tierney's alma mater just 17 miles away, the average pay of full professors in 2005-06 ($69,591) was only 4 percent higher than in 1980-81. Moreover, Harvard faculty has increased rapidly (47 percent since 1989, while enrollment has grown only 2 percent) and research is getting more attention; instruction now absorbs a paltry 21 cents of each dollar the university spends.

An academic arms race is underway, requiring lots of spending. And Harvard has the most guns, although by some measures Yale and Princeton are equally wealthy. Princeton actually tops Harvard in the all-important U.S. News & World Report rankings. And to increase applicants (a factor in the ranking computations), the school has built the ultimate student-living facility, Whitman College (after eBay chief executive Meg Whitman, the donor), that cost $388,571 per room unit, nearly identical to what Donald Trump spent on his luxury resort Ocean Club Panama, and nearly three times what my university spent per room unit on its very nice newly finished dorm. Taxpayers may ask: Why should Whitman get a multimillion dollar tax break for building a luxury hotel for the children of mostly wealthy Americans?

The Harvard and Yale moves do nothing to deal with the root causes of rising college costs, which include:

  • The student loan explosion. When third parties are paying a lot of the bills, universities have few incentives to conserve on resources or to reduce their costs.

  • Nonprofit status. As nonprofit institutions, most colleges and universities have no market incentives to reduce costs vigorously, improve quality or use new technology -- for example, having students listen to lectures on their MP3 players -- that could lower costs and improve efficiency.

  • No bottom line. Did Harvard have a good year in 2007? Who knows? There are few measures of the value added in attending college, making it difficult for schools to even define goals, much less achieve them.

  • Resource rigidities. Academic tenure is the most famous. But there are many areas in which colleges and universities can't move quickly to adapt to changing academic needs.

  • Exclusivity. The need for accreditation, as well as other barriers, restricts new, for-profit institutions that may be more efficient and innovative from entering the higher education field.

  • Public support and control. The government-funded nature of higher education leads to politicization, bigger university bureaucracies and more expensive governance.

  • Price discrimination. Sticker prices are high partly because colleges and universities charge different applicants different amounts; the Harvard initiative is a good example of "socking it to the rich."

  • Overcompensation. There is a strong correlation between government aid to schools and faculty income levels, and staff salaries are rising sharply for top people.

  • Cross-subsidization. Large universities often shift funds to expensive graduate and professional programs that are not self-sufficient, thus raising undergraduate tuition.

  • Unclear ownership. Who owns the universities? Trustees? Alums? Taxpayers? Faculty? Administration? Turf wars over control increase inefficiency and raise costs. How much time, money and energy was spent firing former Harvard president Lawrence Summers?

  • Unwieldy governance. Universities typically make decisions by committee, which tends to be costly, cautious and non-innovative.

  • The information deficit. Parents, students and policymakers lack basic information about schools: their budgets, their use of resources, student performance. This encourages bad decision-making on everyone's part. Parents and students don't always make wise financial decisions in selecting a school, and policymakers aren't well-informed on whether a college truly needs more resources.

    It's clear that the new financial aid plans offered by Harvard and Yale will put even more pressure on similarly ranked schools -- both private, such as Princeton, and public, such as the University of Michigan or the University of Virginia -- to match them. Some of these schools have healthy endowments and are well-positioned to do so, while others might not be able to keep up in the financial aid arms race. But increasing financial aid alone won't deal with the fundamental problems of a costly and relatively inefficient higher education system. In the end, all Harvard and Yale have done is to make some nice, symbolic moves.

    vedder@ohio.edu

    Richard Vedder, director of the Center for College Affordability and Productivity, is a visiting scholar at the American Enterprise Institute and teaches economics at Ohio University.

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