Writing in The American Interest, Patrick Roberts explores the causes and consequences of changing public financing of higher education in Europe.

Class War, by Patrick S. Roberts

This is a hugely important issue as Europe struggles to find a way to do the seemingly impossible: marry mass higher education with retrenchment of the public sector. As Europe takes steps away from higher-education-as-complete-entitlement, national governments face the fundamental question; who should pay for higher education. Much of the benefit of advanced training goes to the individual, so there is a good rationale for expecting the individual who benefits to face a substantial portion of the cost. This is not particularly controversial in the US, but it is quite angst-producing on the other side of the pond.

Roberts cites Why does College Cost so Much as he explains the broader economic forces driving college cost on both sides of the Atlantic.

His final paragraph, which I quote in full, offers a very brief outline of a productive way out of Europe’s difficult transition.

There is a way that European governments can make a virtue out of the necessity of stinging students with new fees. The current troubles represent an opportunity to help forge a new social contract. As enrollments swell, an increasing percentage of society reaps the benefits of higher education, including skills to meet the demands of an information economy and the status imprimatur of a university degree. In return, students who benefit can be expected to contribute toward their education both while at university and later as taxpayers. This compromise neither robs European social democracy of its relative equality nor handicaps European universities relative to their peers around the world. Student protesters portray new fees as a break with the past, but in fact fees may be a bridge to a more equitable future in which university education is open to a wider swath of society.

Marketplace’s Chris Farrell weighs in on the ways the financial aid system’s complexities act as a barrier to lower income students.

Don’t Know Much About FAFSA

Controlled studies of the sort he cites offer a new window on how the complexity of our aid system reduces the chances that students from poorer families succeed in navigating the long process of getting into college.

Here is an interesting summary of the productivity debate in higher education. The author is Andrew Kelly of The American Enterprise Institute, and it comes from the June 27th edition of The American.

Are Productivity Gains in Higher Education Possible

I feel free to comment because our book helps form one pole of the argument, according to Kelly.

To summarize the argument very briefly, Kelly contrasts the explainers, like us, who identify the reasons why college cost should be expected to rise more rapidly than the overall inflation rate, against the reformers who think large gains are possible if only better management practices could be implemented at colleges and universities.

My only small beef with the article is that the difference between the camps seems artificial. Those of us who elevate cost disease and other systemic causes for rising cost are not necessarily pessimistic about productivity growth. We do see a more limited scope for change, barring unforeseen tectonic shifts in how people view quality in higher education. The “reformers” often come from what Bob and I refer to as “the dysfunctionality narrative,” in which wasteful practices, prestige games, and gold plating needlessly drive up cost. Bob and I are critics of this dysfunction story, and our evidence convinces us that the scope for waste reduction is much smaller than the “reformers” suppose. Nonetheless, we see plenty of scope for reducing the trajectory of cost increases over time, even if we do not see the “death of cost disease” anywhere on the horizon. Our book does not explore the possibility of meaningful productivity change in any serious or systematic way because that task is a large one that deserves its own book.

Peter Thiel, the cofounder of PayPal, argues that higher education is likely the next bubble that will burst all over the US economy. We take on that argument in a viewpoint article in Inside Higher Ed.

Here is our full argument: What Bubble?

Unfortunately, it’s getting increasingly difficult to have a discussion about higher education that is not a proxy for deeper political combat.

This story in the New York Times caught my eye this morning.

Top UK Academics form New University

Convinced that the maximum allowable tuition at public universities would not permit them to maintain a quality education, a group of prominent British academics are forming their own university. The new college will offer degrees in literature, history, economics, law and several other disciplines. The new school will apparently follow an American model of setting a high list price and then discounting it based on some method of determining financial need. The list price will be set at 18,000 pounds, or roughly double the maximum tuition at British public universities.

This is interesting for a number of reasons. First, it is an experiment in American-style higher education in a cultural setting where private universities are virtually unknown. As a tuition outlier, the school will have to compete with all the public universities with established reputations whose charges will be much lower. To get good students, the new school will have to do an excellent job of convincing prospective students that the quality of their offerings really will justify the price. Alternatively, they risk becoming an institution that serves predominantly wealthy families whose sons and daughters can’t quite muster an admission to Oxford , Cambridge, or St. Andrews. As the university system in Britain loudly and publicy bemoans its fate under austerity, the task of this new university actually becomes easier.

Next, this school will have to develop a system for determining need. In the US, this process is done at the national level using the FAFSA form. No individual school shoulders the administrative and security burden of acquiring sensitive financial information from families and processing it.

The new university plans to open its doors in 2012. Will it work in the UK context? It’s certainly an experiment worth watching.

Your thoughts?

We often hear the claim that college tuition is soaring because of rising demand. In simple language, colleges push tuition upward simply because they can. In this view, colleges and universities are like little monopolies that charge just what the market will bear. But does this idea hold up to close scrutiny?

If schools use their market power to exploit students, then surely the elite universities could extract more revenue per student than the schools that are merely good. Here’s the data.

On the vertical axis you can read off the average net tuition for each school in the US News & World Report top fifty private universities. Net tuition is the actual revenue per student that the school collects from its students after the school offers all of its internally generated discounts and scholarships. On the horizontal axis we measure selectivity. The most elite schools are the ones that have the largest number of applicants per offer of admission.

Despite having sticker prices (i.e. published tuition) in the 40K to 50K range, most of the private universities in the sample actually charge an average of less than $25,000 in net tuition and fees.  There is absolutely no evidence that the more elite schools use their elite status to charge more. In fact, schools with 9-12 applicants per admission slot, and this is the real elite, charge several thousand dollars less than schools that are much less selective. Excess demand does not lead schools to jack up the price.

The truth about college tuition-setting is that schools are deeply concerned with the quality and the composition of the student body, not just the revenue potential of the group. Harvard and Princeton likely could charge full freight to every student without suffering a single lost SAT point from the profile of their average student. But the student body would become much less diverse in so many ways. All selective schools leave lots of money on the table uncollected.

Chris Farrell, the economics correspondent for NPR’s Marketplace asked us to write about the tradeoff between targeting federal financial aid toward the neediest versus simpler universal programs that seem to do a better job of increasing college going among lower income families. Targeted aid seems fairer, since only financially needy students receive the aid. Targeting also seems more efficient since it costs less than a universal college grant program.  The problem is that targeted programs like Pell Grants don’t seem to increase the percentage of college qualified students from poorer families who actually go to college. Universal programs, like Georgia’s HOPE scholarship program, DO have a track record of increasing college attendance.

Should we replace the Pell program with some sort of Passport program that creates a college account for every eligible child? This is the ultimate in simplicity, and it would give the kind of certainty that allows people to plan for the future.

Here is our fuller argument: End FAFSA as we know it

What do you think?

Here is the audio of our conversation with guest host Stephen Smith about our book, and about higher education issues in general.

Midmorning, on MPR.

Callers naturally asked questions driven mostly by their personal circumstances and experiences. These experiences often provided a good entrée for us to make a more general point about cost, price, and value in the higher education market.

Some interesting observations from the provost of Johns Hopkins University

At What Cost? Charting the Future of the American Research University, by Lloyd B. Minor

Minor suggests that the American university has been well served by three characteristics: autonomy, freedom, and meritocracy. How will our research universities adapt in a world of increasing financial pressures?

Your thoughts?

Our Book Chat with David Leonhardt also drew an interesting comment from Dean Baker, the co-director of CEPR. Here are his comments in full:

Why Do Free Traders Never Talk about Free Trade when the Losers are Likely to be People Like Them

Baker notes that haircuts and higher education have followed a somewhat different price trajectory over time. From this he concludes that the “service price story doesn’t get us far.” Mr. Baker has missed the forest for the trees. Like most services, haircuts have risen in price faster than the inflation rate. The service price story (also known as Baumol’s disease) most certainly does work. As a group, service prices have risen 60% more than the overall inflation rate in the years between 1947 and 2006. By contrast, durable goods prices rose more slowly than the inflation rate over the same time period. By 2006 durable goods had fallen in price by 67% compared with the overall price level.

In our response to David Leonhardt’s first question, we noted carefully that personal services that rely on highly educated labor have seen the greatest cost pressures since roughly 1980. At about that time, the gap in earnings between people with a college degree and those without one began to widen. Any industry that uses a lot of highly educated labor has experienced cost pressures. And personal services have felt the pressure intensely, precisely because most of these services are largely immune to labor-saving productivity growth.

Our favorite example of a personal service industry whose costs have behaved much like higher education is dental services. We used this argument in our earlier article in the Times (College Costs, The Sequel), but Mr. Baker must have missed it. Though it is by no means unique, as the diagram below shows, the last sixty years of price information for dental services reveals an almost uncanny similarity to price growth in higher education. In our book, and in earlier papers in the Journal of Higher Education and Change Magazine, we carefully show that this is not a coincidence.

In the diagram below, we have superimposed the price series for barbers’ services, dental services, and higher education. The prices of barbers’ services track higher education and dental services quite closely until roughly 1980, when the rising return to schooling begins to separate services that use less educated labor from services that use highly educated labor. Mr. Baker’s data is drawn exclusively from the post-1980 time period in which the wages for highly educated workers had begun to diverge rapidly from wages of less well educated workers.

Mr. Baker goes on to argue that a lack of foreign competition is an important factor in explaining rapidly rising higher education costs. He says, “… one important reason that the cost of a college education rises so much more rapidly than other prices is that university professors are largely protected from foreign competition as a matter of conscious policy, unlike most other workers in the economy.” The underlying assumption is that “… university professor in developing countries would be willing to work for much lower pay than university professors in the United States just as auto workers in developing countries work for much lower pay that auto workers in the United States.”

This claim is just silly. It ignores the vast quality differences in the credentials of university professors in developing countries and university professors in the United States. In fact, a large number of professors in the United States are from somewhere else in the world. The best of the foreign professoriate is in fact in the US or other developed countries. There are few barriers keeping these people out.

As a matter of fact, there is lots of competition for professors and students, and this competition focuses on quality not on quantity. The best foreign professors and the best foreign students flock to the US and other developed countries. Higher education could lower cost if it were a mass produced good, but it is not. An effective professor has to be able to communicate with his or her students. An effective professor has to be able to understand and advance knowledge in his or her field. The barriers to entry in this field are not substantial. Few people with the talent and inclination to succeed in the professoriate are kept out.