Posted: March 21, 2007
n Going Broke by Degree: Why college Costs Too Much, Richard Vedder, Professor of Economics at Ohio University, has performed a useful service, assembling for public consumption many important facts about the rising cost of higher education.
Vedder shows that college tuition has risen faster than any other expense in the typical American family budget. In 1958, the average family worked 57 days to earn the $795 annual tuition at Northwestern University. But by 2003, Northwestern's tuition was $28,404, and to pay for it the average family would need to work almost 200 days. "By any criterion," Vedder writes, "the burden of college costs grew faster than the capacity to meet that burden."
Of the roughly $250 billion in university endowments, about $119.7 billion, or nearly half, is held by the top 25 schools, averaging about $4.8 billion each. The ten wealthiest universities in the country have an average endowment of $7.1 billion. Harvard's $22.6 billion endowment, 9% of the total, amounts to $1.2 million per student; at Princeton, the figure is $1.3 million per student; and at Yale, $978,000 per student. These universities may have management problems, but they cannot have financial problems, no matter how tirelessly they "poormouth" when soliciting alumni, foundations, and other donors. Universities with relatively small enrollments and vast endowments can afford to offer generous financial aid, or even waive tuition altogether. But the apparent stinginess on the part of the wealthiest schools shouldn't obscure the good work of the majority of universities and colleges with modest means. Aside from the top 25, the average endowment of the next 3,130 colleges is only about $40 million dollars; hundreds of schools have virtually none.
An average endowment in an average year generates only 5% in usable income. At Boston University, for example, our endowment of $780 million produces annual revenue of about $39 million. This does little to meet the needs of 26,581 full-time equivalent students and an annual operating budget of $1.6 billion. Yet each year Boston University provides more than $170 million in financial aid from its own resources. We use income from overhead generated by grants and contracts, as well as surpluses from other operations, to subsidize students. We also put 10-15% of our tuition income into scholarships for students with financial need. This practice is both common and salutary, enabling most universities to offer education to students from a wide variety of backgrounds. A more diverse student body is highly beneficial to all students, especially the wealthy.
Most Americans know that this is a widespread practice—Operation Robin Hood, if you will—and accept it as a contribution to meritocracy. But in Going Broke by Degree, Vedder objects to differences in the actual tuition paid as price discrimination. He unflatteringly compares universities to the 19th-century robber barons who used variable pricing to forge their monopolizing trusts.
This is a leap beyond evidence, but it is typical of Vedder's book. At every turn he unfairly compares the presumptive rectitude of modern business with what he perceives as the vices of modern universities. He assumes that universities need to learn from the business world about proper accounting procedures, investment strategies, and labor contracts. I'm in no position to speak for all universities, but I know that many are highly competent in these areas. Unlike businesses, however, they don't aim to earn a profit, but rather to provide the highest quality of educational services per dollar cost.
Vedder attempts to identify the causes of the dramatic increase in the cost of higher education. He rightly notes that many universities spend profligately on athletic programs in a vain attempt to raise revenue from television contracts and alumni donations. The folly of this approach has been well documented in The Game of Life: College Sports and Educational Values, by James L. Shulman and William G. Bowen (2001).
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Vedder also complains that universities have spent fortunes on dormitories and dining facilities that offer amenities that young men and women whose primary concern is (or should be) studying don't need. But Vedder seems not to grasp the realities of modern student life. An excellent education could be provided while housing students in barracks and feeding them in mess halls. But with such facilities, enrollment would plummet; even poor students wouldn't care to attend such institutions. Lackluster facilities would also make it impossible to recruit outstanding faculty. Providing reasonably pleasant dormitories, classrooms, and laboratories, and offering conveniences such as high-speed internet and a variety of dining options, are required by the higher education marketplace, where competition among institutions is intense.
Vedder rightly notes that tenure and legislation have contributed to the increase in tuition. Congress, for example, passed in 1967 the "Act to End Age Discrimination," which prohibits the mandatory retirement of faculty. Not only does this, in effect, discriminate against younger scholars, but it leaves universities with aging professors, many of whom no longer teach or research effectively but continue to draw high salaries. Now a college can fire a deficient professor in his 70s or 80s only if prepared to face a long, bitter, and expensive lawsuit.
Vedder is right to claim that many professors neglect undergraduate instruction. Fifty years ago, the average full professor at a research university taught nine hours a week; today, few are in the classroom more than six hours a week, and many no more than three. But he makes the mistake of calculating the typical professor's work schedule to be "1,200 hours a year—at least one-third less than the typical full-time employee in other professions." This may be true of faculty deadbeats, but most professors spend 40 to 60 hours a week on their research in addition to teaching.
Vedder is right, however, to question the value of much of that faculty research. Anyone who regularly examines the articles and books published in his field knows that only a small percentage are worth reading. The publication of worthless books and articles wastes the time of serious scholars.
But despite Vedder's accurate diagnosis of some academic ills, he mischaracterizes the finances of American universities. He claims that state and federal grants have distorted the market by encouraging parents to put up with long-term debt while colleges and universities cynically inflate prices to soak up all the available cash.
Tuition is less elastic than other costs. Car companies, for example, can slash prices to attract new customers. But colleges and universities rarely do, fearing that a reduction in price would indicate a reduction in quality. This is a legitimate concern, since parents often judge the quality of a school by its price. Parents unfortunately lack objective criteria by which to judge the quality of a college education. The most popular ranking system, produced by U.S. News & World Report, amounts to little more than an arbitrary survey of college administrators who don't even know the quality of their own academic departments, let alone those of thousands nationwide. This would become obvious if they were required to explain under oath the basis of the assessments they submit to U.S. News. There are more reliable measures, such as the amount of funding a college receives in peer-reviewed research grants, or the number of citations of faculty publications; but Vedder is right to doubt that parents can see past mindless rankings into the true quality of a university.
But college administrators don't exploit parents' ignorance to increase costs. There is a simpler explanation. Before the 1950s, intellectuals had little market value, and their modest salaries reflected it. Between 1900-1950, the average salary of a full professor matched the average family income. Sterling Professors at Yale in 1950, for example, earned about $12,000 per year. Professors of law and medicine could augment their incomes by professional practice, and some chemistry professors did so by consulting in industry. Otherwise, salaries were remarkably modest. But when Sputnik was launched in 1957, mathematicians and scientists—even humanists—came into high demand. Today, universities compete fiercely for top academic talent not only against one another, but also against the military, the government, and information-based businesses that prize mathematical and scientific competence and clear literate thinking.
Vedder complains that universities spend far more on research than they did 50 years ago, and that undergraduate tuition "subsidizes research." To the contrary, overhead recovery from research grants typically helps subsidize undergraduate education. He would have the U.S. save money by cutting funding for basic science. But this would threaten our national and economic security. China challenges American power not only by its export-driven manufacturing but by its massive spending on research and universities. For years, the U.S. has enjoyed an important advantage in basic science that has kept us at the forefront of technological discovery. It would be foolish to step backward just as the Chinese step forward.
Vedder praises institutions such as the online University of Phoenix, where tuition goes solely to providing instruction at a profit. Although affordable, these are universities in name only, parasitic on the larger academic world from which they recruit their part-time faculty. If traditional universities didn't exist, there would be no faculty for these virtual universities to hire.
Virtual education cannot substitute for personal interaction between faculty and students. A professor at an online university, for instance, has no way of knowing whether the work submitted was actually done by students. Learning to think on one's feet and to argue effectively are skills not likely to be developed in the silence of a virtual university. If Vedder is right and the personal give-and-take of a classroom is unimportant, universities might just as well hand students books and hold exams, and be done with it. No cost-saving measures can abolish the fundamental difference between training and education.
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Vedder is right to insist that parents must be offered relief in paying for college, but his proposals are not the answer; they would undermine the quality of higher education. A better alternative was offered by Senator Edward Kennedy and 30 co-sponsors in 1978.
Their bill would have established the Tuition Advance Fund, or TAF. According to this plan, the federal government would advance students three-fourths of their tuition at an accredited institution. The institution, in turn, would be required to limit tuition increases to the rate of increase in the Consumer Price Index. After graduation, students would be required to repay roughly 150% of the advance as a part of their tax obligation. (The 50% surcharge would cover the shortfall from graduates who failed to pay). The TAF would require Congress to appropriate funds for its first 15 years, after which repayments would begin to make the fund self-supporting. In 20 to 25 years, Congress's advances would be repaid and a permanent endowment established to fund higher education in perpetuity.
The TAF would satisfy both the Democratic concern for equality of opportunity and the Republican concern for self-reliance. It would shift the burden of financing education from the shoulders of the parents to students who are, after all, the beneficiaries. Most importantly, it would give the U.S. the means to develop our nation's most important natural resource: the intelligence of its citizens. The cost of exploiting that resource is high, but it is far lower than the cost America will pay for ignorance.