Do Pell Grants “cause” tuition inflation?

I spoke about this, and about trends in college affordability, at a recent NASFAA meeting in Washington. You can see my remarks in the video linked at the bottom of this post.

But let’s address the question directly. The idea that federal subsidy is the root of all evil — in this case a major cause of price inflation in higher education — is well established in the popular writing about higher education. Former Education Secretary William Bennett put the case very directly in his famous NY Times op-ed piece titled, Our Greedy Colleges. The thinking behind this proposition is simple supply and demand. Government subsidy pushes up demand, so up goes the price. Stories like this make the economics professor in me cringe. People armed with nothing more than Econ 101 in their toolkit often think they understand quite a bit more than their slender training allows. Why would one presume that the simple model of perfect competition, which presumes perfect information, a homogeneous product, and small, profit-maximizing firms engaged in atomistic competition, fully describes the market for higher education? Got me.

This is a “market” dominated by heavily subsidized non-profit organizations that do not maximize profit, or even revenue. Selective schools leave tons of revenue uncollected because they actually care, and care deeply, about the composition of the freshman class. The most selective schools actually charge a net price that is lower than the schools a bit below them in selectivity. The admission process is not about attracting more and more customers. It’s as much about culling customers down to the “right” ones. In that sense, admission is a two way street. Imagine Burger King rejecting business. Universities do it all the time. But I digress.

At the level of the college or university, cost per student is roughly constant as the school adds enrollment. For smaller schools, the cost per FTE student actually would fall if the school enlarged a bit, so growth is not a force for rising tuition. At the industry level, there is no evidence that the long run supply curve of seats for students is upward sloping. Places at Princeton may be fixed, but the numbers of seats in the university system as a whole is fairly elastic. In other words, the long run supply curve is flat. This suggests that tuition increases over the last generation are not driven by rising demand. They are driven by large economic forces that are buffeting the entire national and global economy. We spend a lot of time talking about those forces in our book.

When the Federal government raises the maximum Pell grant, this creates a lot of good options for universities.

  • Allow the increased Pell support to meet a greater portion of needy students’ needs.

Many schools do not fully meet need, and this forces students who wish to attend those programs to borrow more. If this is what schools do in response to higher Pell maximums then access improves. Note that this choice would have no effect on the list price tuition the school sets. And it would reduce the net price to needy students.

  • Reduce the school’s own need-based aid, and plow the extra funds into endowment for the future.

If a school made this unfortunate choice, the added Pell support would not improve access at all. But again, it wouldn’t lead to higher tuition either.

  • Reduce the school’s own need based aid, and plow the extra resources into improved programming.

Again, this choice wouldn’t do anything much for access, but it wouldn’t cause tuition to go up. This choice might help retention and graduation, if the programmatic improvements were targeted toward those goals.

  • Lastly, schools might respond to an increase in the Pell Maximum by reducing their overall tuition discount rate. Since discounting is a major force propelling the “list” price upward, anything that reins in discounting would tend to reduce tuition.
The empirical evidence on the Bennett Hypothesis is inconclusive. Using mostly panel data, the studies of the link between Pell Grants and tuition are all over the map. Bob and I are the only researchers we know who have tested the proposition using Granger Causality. We find that changes to the Pell maximum do “cause” an effect on tuition, but the link is contrary to Bennett’s assertion. Increases in the Pell maximum tend to reduce tuition in the years that follow.
Here’s the video:

Worried? I’m Terrified

Here’s a link to a new Op-Ed by Dan Sullivan from Inside Higher Ed, October 31, 2011.

Worried? I’m Terrified

Dan shares our fear that many who advocate reform of higher education have misdiagnosed the central problems we face. One of the issues he tackles in this article is an important question facing all research universities. Is the modern university properly balancing the interests of undergraduate education and graduate training? This a controversial issue on many levels. Like medical schools, graduate programs must offer their students some contact with undergraduates in order to train the next generation of educators properly. But are the interests of undergraduates sacrificed on the altar of graduate training? A thorny problem indeed.

This is the question as Dan phrases it:

In my view the real elephant in the room is not the high cost of pedagogies of engagement — because as I have shown, they are both effective and efficient if you think systemically — it is the cross-subsidy of research and graduate education with undergraduate tuition that is now so deeply embedded in much of our system of higher education. Resources from undergraduate tuition (and, in the public sector, state subsidies for undergraduate education in addition) that could make possible the adoption of more successful undergraduate teaching and learning environments are instead subsidizing graduate education and research at large numbers of American universities which, in the aggregate, have a large fraction of the nation’s undergraduate enrollment.

Graduate students are a stock of cheap labor. They have long been used by universities to staff undergraduate tools courses, freeing the tenure track faculty to focus more on research. This is not a new issue. But it is an issue with increasing salience as we move to evaluate both the quality of undergraduate programs and the cost.

Again, here’s how Dan phrases the problem:

Research and graduate education are both critically important. They need to be funded on their own merits. As someone whose teaching and leadership career has been almost completely in selective liberal arts colleges I do not have practical suggestions for how to pull this off, but I believe the first step is to name the problem, and that is what I have done here.

I don’t have a full answer either. Graduate training is expensive. The teaching that graduate students provide is often thought of as a partial offset of that expense. But is the twenty-three or twenty-four year old in front of a class really offering the kind of engaged learning that contemporary undergraduates need in order to master the flexible mindset required of a labor market that is rapidly automating repetitive physical and mental tasks?

I taught at that age. I think I was pretty good at it. But I’m far better in the classroom now, and I teach at an institution that values deep engagement with students. Graduate-oriented institutions need to evolve substantially if they want to change the trajectory of first and second year undergraduates. These are the students who need to be challenged to push themselves beyond recall leaning and into nuanced questioning and genuine problem solving. This is the first step toward raising the four-year graduation rate without cheap tricks like cutting the college program to three years.






Class War, by Patrick S. Roberts

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.

Don’t Know Much about FAFSA

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.

Is Productivity Growth Possible in Higher Education?

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.

The Great Higher Education Bubble of 2012??

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.

Top UK Academics Form New University

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?

Do Colleges Charge “Whatever they Can”

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.

End FAFSA as we know it

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?

Midmorning broadcast, on Minnesota Public Radio

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.