Entitlement-Inflated University Costs May Soon Succumb To Market Forces
May 13, 2013 by Ben Bullard
Ever since the first round of ex-soldiers went to college for free on the post-World War II G.I. Bill, the U.S. higher-education network of public and private universities has had its own miniature Federal Reserve-style money printer, in the form of Federal student aid entitlements.
Pell grants, subsidized student loans and an array of other demographically restricted entitlements, targeted at students, have kept free market forces out of the pricing equation for both students and universities, a 50 year-old phenomenon that has incrementally — and artificially — driven up the cost of tuition at schools whose financial aid offices serve as pass-through centers for Federal student aid.
For the universities, the “extra” money brought in by inflated tuition — paid in full, by and large, through a combination of students, Federal aid and, to a lesser extent, university endowments — has been nice. They’ve been able to keep the focus on education for those students and faculty who’ve been serious about the reasons for pursuing a college or postgraduate degree, while simultaneously blurring the meaning of what college is really all about by enticing future students with lavish amenities.
In a column last week, Washington Examiner Senior Analyst Michael Barone made a compelling argument that this financial fantasy world — one that’s coddled the universities and deceived students into believing they’ve gotten real, dollar-for-dollar value from their Federal subsidies — has already gone bust:
Government helped to produce an ever-increasing demand for higher education. So higher education administrators saw no need to compete on price. Higher tuitions just gave your school more prestige.
Now the higher education bubble has burst. The Wall Street Journal reported this week that that the average “tuition discount rate” offered incoming freshmen last fall by private colleges and universities has reached an all-time high of 45 percent.
At the same time, their “sticker price” tuitions have increased by the smallest amount in the last dozen years. Tuitions for in-state students at public four-year colleges and universities also increased by the smallest amount during that period.
Applicants are negotiating bigger discounts than they used to. Market competition has kicked in.
What has happened is that in a recessionary and sluggish economy potential customers have been figuring out that a college diploma may not be a good investment — particularly if it entails six-figure college loan debt that cannot be discharged in bankruptcy.
Back in 2011, the cumulative total of outstanding student loan debt in the United States surpassed the $1 trillion milestone — more than Americans collectively owe on credit cards. What have students been getting for the money they owe, as well as the money the Feds are paying their schools on students’ behalf? More administrators. “The scariest number I’ve seen is that in the Cal State system between 1970 and 2008… the number of faculty only went up 3 percent, but the number of administrators went up 237 percent,” said Sean Flynn, a Scripps Economics professor. “The entire educational system has had massive amounts of money thrown at it and most of it has gone to things that have not improved the actual educational outcomes.”
Market forces are starting to kick in, as college costs finally soar too high to make attendance feasible for parents and students. Yet even with Federal aid “discounts,” the blot doesn’t mean tuition will be dropping. Rather, it’s likely to settle out and grow at a rate that resembles the rest of the Nation’s free market.
Hillsdale College, a private school in Michigan, bucked the Federal Aid carrot-and-stick game way back in 1985, ending all participation in Federal financial aid programs after a decade-long tussle with the Feds. Hillsdale did it in order to remain truly independent from Federal controls handed down in the form of contingency-based subsidies:
In 1975, the federal government said that Hillsdale had to sign a form stating that we did not discriminate on the basis of sex. Hillsdale College had never discriminated on any basis, and had never accepted federal taxpayer subsidies of any sort, so the College felt no obligation to comply, fearing that doing so would open the door to additional federal mandates and control. Our trustees pledged two things: first, that the College would continue its long-standing policy of non-discrimination, and second, that it would not accept any encroachments on its independence. The case went to court…To avoid the hassles of government control, Hillsdale College announced its decision to end participation in all federal financial aid programs in 1985.
Hillsdale College’s 2013 asking price of $21,390 is a lot of money for students and parents to shell out over four years (or more). But the college still offers financial aid from privately sourced endowments, defraying the expense for students who qualify under terms the college — and not the government — has established. It’s also notable that Hillsdale’s sticker price is substantially less than the Federal-aid inflated $29,056 that private U.S. colleges, on average, are charging in 2013.