The fundamental reason of ever increasing college costs

Parent Cafe
1

I have thought about writing this for a long time given how often the issue of college cost has been discussed on CC.

An often criticism of college cost is that it increases at a speed higher than inflation (%CPI). Inflation is the average price increase of the basket of products and services. Since inflation is an average number, it must then be mathematically true that some products and services see more price increases than inflation, whereas the other products and services see less.

What are those products and services whose prices increase more? Baumol and Bowen (1966) was the first to point out that products and services with stable productivity would see their prices increase more than inflation. Examples of these sectors include education, healthcare, and other labor-intensive industries.

This stylized fact applied not only to higher education, but also to K-12 education, because they are all labor-intensive. The cost of public K-12 has been rising at a speed of about inflation + 1-2% for many decades. For my local public school district, the cost per student is now close to $15,000 a year. For this coming year, the budget is likely to increase another 5.9% with no student increase at all.

This stylized fact is not only present today; it has always been with us. During the 1904-1964, the student direct cost at Chicago-Princeton-Vanderbilt rose about 4 times more than inflation (Figure 1): http://www.ithaka.org/sites/default/files/files/ITHAKA-TheCostDiseaseinHigherEducation.pdf

In contrast, products and services with increasing productivity would see their prices increase less than inflation. For example, a laptop computer today costs no more than 20-30 years ago, if not cheaper. The increasing productivity sectors tend to require less human interactions, and may use more automation, in their production.

Take restaurant food as another example, restaurant food prices have been increasing at about 2% more a year than grocery prices for many decades. This is so because restaurant is largely a stable productivity industry. http://time.com/money/4152366/grocery-restaurant-prices-inflation/

So what would happen to college costs in the next 1-2 decades? I would bet my 2 cents on a stable increase of inflation + 1-2%. For undergraduate, the students still want residential experience, small class size, and personal interaction. These are all labor intensive and expensive. In contrast, for master degree, online degrees (if done well) may have some potential because master students may put less emphasis on residential experience, class size, and interaction if the price can be lowed.

What is your thought?

2

Perhaps many want, but most do not get, these things from their undergraduate colleges (assuming you mean the latter two in every or almost every course, as opposed to a few advanced level courses).

3

I meant that these qualities come with a traditional, residential college education, instead of potentially larger-scale online degrees.

4

Even colleges and universities that focus on traditional residential programs are branching out through use of technology. Full-time enrolled students increasingly take on-line courses for full credit, and often during summers when they’re living and working away from campus. While they may pay full price per credit hour, the cost of production of those credit hours is far lower than on-campus, in-classroom instruction.

Beyond that, many more students who are not enrolled full-time at the university can take online courses for credit. This, too, brings in revenue for which the marginal cost of production is negligible.

What happens to the revenue? Most may be “centralized,” i.e., go into the university’s general income. Some goes to the academic unit (college, department, school) that produces the credit-hours and tuition.

5

Not online degrees; most state schools continue to have large classes on campus. This was certainly the case decades ago and continues to occur today. I had the normal residential campus experience at my state flagship in the mid-90s: huge lectures for many classes, very little personal interaction with professors except in my higher-level classes and research in my major, and very few small classes. From what I’ve seen and heard of state schools, it’s still the norm to have hundreds of students in lectures, with smaller sessions taught by TAs. For the exact same educational experience as I had, today’s students at my alma mater pay at least six or seven times as much as I paid.

6

“While they may pay full price per credit hour, the cost of production of those (online) credit hours is far lower than on-campus, in-classroom instruction.”

I am afraid this may not be true at many universities; different universities do it in a different way though.

First, setting up an online course requires an additional overhead costs; e.g., video production costs and a one-time course preparation fee to the instructor, running at 50%-100% cost relative to teaching a semester course. This may turn into an immediate loss if not enough interest the fist time and the online course is subsequently cancelled.

Second, an online course still needs an instructor. In many universities, the pay for teaching a traditional course and for teaching an online course is either the same or very similar; otherwise, the computation of course/teaching load can become very tricky. Also, the number of students in an online course at a state flagship university is usually not higher than that in a traditional course.

There is potential saving and cost reduction associated with not using a physical space (class rooms) on campus. But this saving is possible only if the university is operating at near 100% capacity of its physical space because the cost is largely fixed. In addition, this component of cost, compared with instructional cost, is small.

In general, at least at the undergraduate level, online delivery is not used for the purpose of cost saving and to increase productivity. It is largely used to reach those customers who otherwise cannot be reached.

7

@prof2dad : I have to disagree. There’s a good reason why my department – and many others – turned to offering on-line credits for standard courses in the curriculum. Many students who were not full-time enrolled at the university, or were not enrolled at all, could take certain courses on-line and receiving regular “credit” for them. Of course there are production costs, but my point was in response to your assertion that there were no efficiencies. Once the initial investment is incurred, typically requiring faculty member time (perhaps summer pay), administration of the enrollment and provision services is handled by administrative and secretarial staff, perhaps with oversight by a graduate student. And the marginal cost of producing added “student credit hours” (for which the clients pay tuition), is very small.

Furthermore, once a course is established, it can be re-used in whole or in part. That, too, makes for efficiencies, i.e., lower costs for the marginal tuition dollar.

At my university, this activity was further incentivized by the way department/unit budgets are managed. The general unit budget has a few major components (professional salaries, administrative salaries, graduate student budget, etc.), one of which includes a “general discretionary” component which was generally referred to as “supplies and services.” We used that to cover costs such as professional travel, as well as maintenance of departmental equipment and supplies (computers, paper, copying machines, etc.). While some components of the operating budget of a unit are fixed and covered by the general fund (namely, salaries) the available money to support graduate students, supplies, and travel increasingly was NOT included in the unit’s budget. So in a scramble to cover these essential costs, the units looked for ways to create external revenue. And voila! There came on-line courses, for which the university “generously” gave over half of the revenue (tuition) to the unit.

8

Another way to see that online delivery may not be cost effective is to note that the majority of regular semester/quarter courses at major universities are still been traditionally delivered. You would think, if it is really cost effective, there would be far more courses online today, given so much social and political pressure out there on the issue of tuition affordability. In particular, we have been experimenting with online delivery for at least 20 years; it is not like we do not know how to do it.

The matter of fact is that for the past decade the most cost effective way for universities to keep annual tuition increase at 3.9% or 3.4% (popular targets) has been the use of more adjuncts. It is very sad, but it is an “effective” way to meet the target of 3.9% or 3.4% when it is hard to reduce the number of instructors because education is a stable productivity industry and it is easy to substitute less expensive adjuncts for more expensive tenure-track faculty.

9

It would be interesting to plot the cost of college against the average instructor salary(including both adjuncts and tenure track). That might tell us whether increasing teaching salaries are the main driver of college costs.

10

@prof2dad You need to recognize that most established and traditional colleges and universities must offer their full curriculum on campus. The fact that these don’t shrink doesn’t prove anything about the profitability of off-campus distance education. My response to your previous comments concerns the overall sources of revenue for colleges – revenues that can also be used to subsidize on-campus programs (including the costs of salaries, plant and equipment, and services).

To the extent that providing off-campus services such as I’ve described above transfers funds to the producing academic units (schools, departments, etc.), then these services can in many cases be produced in a highly efficient way, in which the marginal cost of producing a unit of marginal revenue (tuition dollar, registration fee) is vanishingly small once certain initial investments are made.

11

My theory is there are a lot a courses(ex. introductory calculus), which could be recorded once and reused forever. You might pay a faculty member a nominal cost to slightly change the exam questions from year to year, to prevent people from just memorizing old exams. Then, you need some TAs to proctor exams a couple of times a semester, grade the exams, and respond to e-mail questions. The marginal cost of enrolling additional students is such a class would be nearly zero.

12

“My response to your previous comments concerns the overall sources of revenue for colleges – revenues that can also be used to subsidize on-campus programs (including the costs of salaries, plant and equipment, and services).”

I do agree with you on this. This is the reason why I stated earlier that online delivery “is largely used to reach those customers who otherwise cannot be reached;” i.e., additional revenue. It is just that I think this has more potential at the master level than at the undergraduate level.

13

"a lot a courses(ex. introductory calculus), which could be recorded once and reused forever. "

Usually the copyright of the online course belong to the instructor, not the university. Whenever it is revised and reused, the instructor needs to be the same person.

14

Could be. But we made most of our off campus revenue teaching undergraduate general studies courses. We did have a professional MA, in addition to our academic MA, with the professional one for people who were mainly working in administrative positions. We generated a little revenue that way. I think the main attraction to online instruction in both cases is that the enrollees could maintain full-time employment wherever they resided, and take our online course during hours convenient to them. No commuting costs, no parking costs, no housing costs.

15

“Many students who were not full-time enrolled at the university, or were not enrolled at all, could take certain courses on-line and receiving regular “credit” for them.”

Some universities have enough this type of students to support online courses, whereas some universities (e.g., high retention rate and high graduation rate) have rather few students in this category.

“Once the initial investment is incurred, typically requiring faculty member time (perhaps summer pay)”

If the course is offered in the summer, it is summer pay regardless of whether it is delivered online or on campus. So there is no additional cost saving for salary. If the course is offered during the two semesters or regular quarters, at least in my school, no tenure track faculty I am aware of is willing to work overload for summer pay (for many universities, it range from 7% to 1/9). Our work loads are usually 50% research, 40% teaching (teach 2-2 or 2-1), and 10% service. We would rather spend more time on research and even hope we can buyout a course.

“the units looked for ways to create external revenue. And voila! There came on-line courses, for which the university “generously” gave over half of the revenue (tuition) to the unit.”

It is nice to know that you get so much revenue and so little cost allocation for online delivery. Our university is also using incentive-based budgeting. But it does not give that much revenue for online delivery or even summer teaching. Our school just adopted a new policy that prohibits any tenure-track faculty from teaching any summer courses. Here it kind of shows that the cost structure, cost allocation, and the size of target market for online delivery, and thus cost effectiveness, can vary a lot across universities.

16

Letting professors own the copyright to their online courses is absolutely ridiculous. As an engineer, either the company I work for, or in some cases the government, if that’s the end customer, owns all the IP I produce.

17

Online education will revolutionize higher education.

There are some types of education that require a physical presence (lab work and clinical work come to mind). But many other types can be done distantly and by videoconferencing.

The present state is not the end state.

18

One theory of the increase, one that I subscribe to, is that the huge growth in administrators has resulted in all sorts of costs, not just there salaries, but the services, programs, and meetings they demand to justify there existence. Admisitrators have increased at more than twice the rate of faculty and students w/o improving outcomes. The book The Fall of Faculty proves a good overview. Here are other discussions.

http://www.huffingtonpost.com/2014/02/06/higher-ed-administrators-growth_n_4738584.html

https://www.insidehighered.com/news/2011/07/14/new_book_argues_bloated_administration_is_what_ails_higher_education

http://www.chronicle.com/article/Administrator-Hiring-Drove-28-/144519

http://washingtonmonthly.com/magazine/septoct-2011/administrators-ate-my-tuition/

19

Fed Gov’t grants and loans have caused matching tuition spikes. One (not the only) reason for tuition rising so consistently fast. If tomorrow the gov’t gave 10K to every student for college, every school would figure out a way to raise tuition 10K to gobble it up.

20

“One theory of the increase, one that I subscribe to, is that the huge growth in administrators”

I knew this would come up. And, yes, it could be an additional reason.

But what I want to emphasize on this thread is that even without administrator proliferation, college costs will still increase at a speed higher than inflation. This is the reason why I also brought up the cost of K-12 in which it has a much smaller problem of administrator proliferation.

There is a “fundamental” economic reason about this rather big increase in prices relative to inflation prevailing in many stable productivity industries: education, healthcare, performance arts, restaurant food, etc.