Getting the Facts Right about Higher Education Prices
by Robert B. Archibald and David H. Feldman
Everyone knows that college costs are soaring. One quick look at the Bureau of Labor Statistics’ price index for college tuition and fees shows that. According to these data tuition costs are rising faster than even medical care.
Although this is now the conventional wisdom, it’s quite wrong.
We are not the first to point out the problems with the BLS measure of college prices. Yet this price series continues to figure prominently in many discussions because it serves a vital role in a narrative about higher education that increasingly passes for simple common sense.
The first part of the story is about university choices: Free-spending colleges have allowed programs to expand and tenured faculty to redefine their jobs toward unproductive research. They have also gold-plated the student experience with spa-like amenities. Rising state and federal grant aid encourages more attendance, and this demand allows schools to jack up the price.
Meanwhile, the easy availability of loans pushes an entire generation to take on an unwarranted and unpayable debt burden that will explode as the next financial bubble.
The logical end of this unfolding catastrophe is that the old university system will collapse within 20 years, disrupted by new technologies.
But a number of big facts don’t fit this story.
First, although the list price of a year in college is indeed rising rapidly, the price the average student has to pay is not rising nearly as rapidly. Secondly, much of the increase that students do pay is driven by decreases in state subsidies, not increases in the cost of providing the education.
Let’s start with the Bureau of Labor Statistics. In order to create the Consumer Price Index (CPI), the BLS gathers prices for hundreds of goods and services we buy. Those prices are supposed to capture what is actually paid, and for most items these “transaction prices” are exactly what the BLS uses.
For physician’s services and hospital services, the BLS does not use the “charge” you see on your doctor’s bill. If you have medical insurance, the “price” used by the BLS is the co-pay you put down plus any payment the physician receives from the insurance provider. If you have looked at a medical bill lately you will see that the insurance provider has negotiated a considerable discount on the price listed on the bill. Few consumers of medical care actually pay the full listed charge.
For the college tuition and fees price index the BLS collects list prices published in college catalogs, not the prices students actually pay.
The average student pays considerably less because of institutional grants from the schools, federal grants, state grants, private scholarships and tuition tax credits.
And because much of the price cut comes from institutional grants (discounts), the price used by the BLS is much higher than the revenue the college gets from the average student.
Over time the list price and the net price have diverged quite a bit.
This is because colleges and universities are increasingly using discounting to fill their seats and, for more selective schools, to seek out special talents and economic diversity in the incoming class.
In the figure below, we have plotted the real prices of college tuition and fees as measured by the BLS, the real price of medical care as measured by the BLS, and the real average net tuition at public and private nonprofit four-year institutions. (Anyone can access the college net price data from Table 7 in “Trends in College Pricing, 2014,” published by the College Board. All of the series use 1990 as the base. If the line slopes upward, then that price has risen more rapidly than the overall inflation rate. See their chart here.)
The two BLS indexes show the conventional wisdom: List price tuition and fees have grown substantially more rapidly than the price of medical care.
The story for average net tuition is very different.
For students attending private four-year institutions the real net price has barely budged since 1990, which is in stark contrast to medical care and to the conventional story of soaring college cost.
For public four-year institutions the net price has not risen as much as the BLS numbers would suggest. In the recent recession, however, public university prices moved up substantially so that they now closely match the rise in medical care costs since 1990.
Does this tell us that public universities suffer from runaway cost?
If you see rising tuition, the cause has to be found in one of two places – increased spending by schools or decreased subsidies given to them.
Data from the College Board tells us that the real cost of providing the education for each full-time student rose at an annual rate of only 0.44 percent from 2001 to 2011. Over the same decade real income per person (gross domestic product) in the United States rose at almost twice that rate.
Over the same time period the real value of the state appropriation for public four-year schools fell by roughly four percent per year for each full-time student. The rise in the net price paid by students at public universities is overwhelmingly driven by state cuts, not rapidly rising spending by wasteful public universities.
There is indeed a crisis unfolding in American higher education today, but it has little to do with dysfunctional universities and excessive government handouts. The real crisis is much broader than anything decided by college administrators. You will find it in the hollowing out of the American middle class, the stagnation of family income for much of the population, and the 30-year retreat of state higher education appropriations.
Sound bites about fancy dorms are easy. Generating wage growth for the median-income family is much harder.