Why College Costs So Much

With the cost of a four-year degree from Harvard, Yale, Cornell, Stanford or most of the other selective schools well above six figures, these institutions of higher learning have some explaining to do. Sticker shock apparently isn't a problem now for students and their families, based on a 10/1 ratio of applications vs. openings, but taking on a $120,000 mortgage on a person's personal/professional future is a weighty investment for most folks who want to know: What am I paying for?

Cornell professor Ronald G. Ehrenberg provides some answers, and some questions of his own, in Tuition Rising: Why College Costs So Much (Harvard Press) published this fall. The book is based on Ehrenberg's insider observations as vice president for academic programs, planning and budgeting for Cornell from 1995-98. Ehrenberg, of Cornell's Industrial and Labor Relations School, has conducted research and taught classes on the economics of higher education and university behavior for 25 years.

Tuition Rising goes to great lengths to explain why the Ivies and their peers throughout the country continue to increase the cost of attending their schools. The reasons range from simple supply and demand, to complicated power-sharing structures, to annual rankings published by U.S. News & World Report and other mass media outlets. Ehrenberg concludes that the end of tuition increases that outstrip the rate of inflation is not in sight, but warns that a downturn in the economy (anybody keeping an eye on the Dow these days?) could force parents to re-evaluate college choices and force the schools to make some difficult choices of their own.

While corporations develop ways to increase efficiency and cut costs to keep profit margins, Ehrenberg says, selective schools can't operate that way because their value isn't measured by economic profits. Administrators seek out all resources and "devour them," he says, spending heavily on hiring faculty to create smaller class sizes, new fields of study, the latest technology, more extracurricular activities, and research.

"Selective private institutions live in a world of their own," says Ehrenberg. They compete for the best and brightest students, and as the blue-chip recruits become concentrated at these institutions, the competition gets fierce and the arms race of spending continues through creating better living arrangements, better dining facilities and athletic facilities.

Selective private research universities and liberal arts colleges have drawn scrutiny because their endowments have soared in recent years (Harvard's ballooned to $11 billion in 1997 and is rising), while tuitions have increased to an average of over $30,000 at most such schools this year.

Their are external factors at work as well. Alumni make demands with their contributions; local governments and public interest groups can affect construction permits and lead to financial payments in lieu of taxes; and the rankings by US News & World Report and Business Week force schools to increase spending per student to influence their respective positions.

At Cornell, Ehrenberg explains, there are 13,000 undergrads, and 6,000 graduates in a school with a budget of $1.5 billion in 1997-98. Revenue breakdown shows that 33% comes from tuition and fees, 7% from endowment income and interest, 21% from sponsored programs (primarily support for research), 13% from New York state for statutory colleges, and 10% from enterprise income generated by housing, dining, campus store, and utilities.

Tuition dollars are used in many areas, yet money taken from any revenue source directly or indirectly affects the others as institutions perform their financial juggling acts.

Most selective schools are governed by trustees, administrators, faculty, staff and, increasingly, students all with competing needs and desires. Trustees have the fiduciary responsibility, while the faculty control educational matters. Administrators are the enablers - to retain their effectiveness they have to maintain ties with the faculty and avoid the us vs. them mentality.

The central administration has to develop financial relationships among the various colleges which determine whether the colleges will cooperate in university-wide objectives such as controlling costs, says Ehrenberg. The more a central administration can gain control over the allocation of the school's resources, the greater power it has to encourage cooperative behavior and efficient operations. "The notion that we can treat each of these institutions as a single entity pursuing university-wide objectives and striving to keep costs down seems in many cases far-fetched," Ehrenberg writes.

This differs from the policies of public institutions, Ehrenberg says, which are run by trustees who report to a state government that controls tuition costs and the size of an appropriation. The governor has the power to order a tuition freeze, and many states are committed to keeping tuition low to maintain accessibility.

Rankings play an integral role as well. The number of college guides has now risen to over 300 and their rankings affect the search for both faculty and students. U.S. News uses groupings that have raised the bar of competition, Ehrenberg say, pointing out that such beauty contests can be deceiving, and manipulated. The rules keep changing as well, creating a constant movement in positions.

Between 1988-98 Cornell fluctuated between ninth and 15th in U.S. News' list, rising to a high of sixth in the 1999 listings. This improvement was achieved, in part, by a recalculation of spending per student (a determining factor in the evaluations) using funding for research and public service endeavors. While most institutions criticize the rankings as arbitrary and urge parents to ignore them, they do await their release anxiously each year and strive to improve their standings by spending more than the next guy.

Brian Casey, executive officer to the office of the provost at Brown University, says that while the rankings are important because of the attention they get from the public, "they are remarkably crude ways to compare universities." Brown is very different from Cornell or Stanford, Casey says, in that it has only one college and a small enrollment, yet it is placed on the same list with these schools. "It's not helpful because you can't really compare these schools. And, there is a feeling that the rankings can be manipulated, which the definition of their criteria continually change.

Also, the schools' share of financial aid grant dollars has risen much more dramatically than the government's share, which has not kept up with inflation. From 1987-88 to 1997-98 the rate of increase in tuition, about 5.9%, outpaced the rate of inflation by more than 2.5% per year while exceeding the growth of middle class family income, says Ehrehberg. With the need of financial aid recipients growing, the portion of increased grant aid that comes directly from tuition revenue rose to 20%, Ehrenberg reports. This means that those who can pay the full freight are providing a greater subsidy for those who can't. At Brown, says Casey, the costs of financial aid are significant with some 40% of students receiving some type of assistance. "There are considerable resources in this, but it's something all schools want to do," he says.

Herman "Dutch" Leonard, of Harvard's John F. Kennedy School of Government, also points to financial aid as a key factor in determining tuition rates. "There is a lot of financial aid, but selective schools have always said they will allocate a percentage of their costs for a large number of students. So the sticker price rises and we raise the rebate for those who cannot pay," he says.

A consent decree signed in 1991 between selective schools and the U.S. Department of Justice was a blow to cost control, Ehrenberg contends, by preventing the institutions from voluntarily agreeing to limit competition by reducing recruiting expenditures.

The schools previously met in an "overlap group" to review common applications and agree on financial aid packages, but those confabs ended when the feds stepped in and ended the alleged collusion. Thus we have an expensive fight for students and more attractive financial aid packages, says Ehrenberg. Funding can come from the endowment, annual giving or tuition dollars, but if it's taken from the first two sources, Ehrenberg says, funds for other areas are cut, which puts pressure on tuition to pick up the slack.

The cost of doing research at institutions like Cornell has risen dramatically as well, especially in the physical sciences and engineering, says Ehrenberg. State-of-the-art labs are needed, which are both expensive to build and operate. While the National Science Foundation pays for most direct costs, the universities foot the bill for indirect costs such as new buildings, administrative tasks, utilities and maintenance. Government is taking a closer look at the indirect expenditures claimed by institutions, meaning they pay more of these costs at the expense other programs.

In the non-academic areas, selective institutions are spending heavily on information technology endeavors such as wiring the campus for computer communications and continual updating of the hardware, distance learning, and storing all of the books, journals and other educational materials. Ehrenberg points out that Cornell spends more than $80 million a year on information technology; 8% of total expenditures on the Ithaca campus.

The Title IX gender equity act passed by the feds in 1972 has contributed to higher costs as well, says Ehrenberg, by ordering schools to provide equal opportunity for women's athletics through the addition of more women's. But, he says, "...it is conscious choices by the institutions to achieve gender equity by adding rather than subtracting, and building new facilities rather than sharing existing ones, that leads to an increase in costs."

The bottom line, says Ehrenberg, is that cost increases at selective institutions are driven by a desire to "be the best they can be. Competitive pressures have caused them to focus on pushing back the frontiers of knowledge and providing a high-quality education that includes the best student living, dining and athletic facilities, which exacerbates the cost pressures."

Ehrenberg and others firmly believe that students at selective schools get what they pay for. "The benefits are tremendous, especially alumni networks and employment opportunities," Ehrenberg said in an interview. "I saw this with my children who attended Cornell. And the advantages are great for getting to the next stage of education, be it graduate school or law school. I believe students get a quick return on their investment, although there are those who refute this."

There is a "gold standard," agrees Leonard. "You can be set for life with a degree from Harvard or another selective institution." Leonard recalls that 20 years ago the dean of the Harvard Medical School, worried about college costs, told a commencement class that they had "graduated with a mortgage but without a house." "I strongly disagree," says Leonard. "I think they have an asset worth much more than a house. It is a very worthy investment."

Be that as it may, selective institutions can take steps to reduce that investment without affecting the payoff. Wells College, a small all-women's school in upstate New York, bucked the trend and cut its tuition by a third in 1999 and has reaped some benefits. Enrollment has is up 33%, the school has drawn the attention of coveted middle income families and reduced tuition rebates. Alumnae are impressed as well; the all-women's college in Aurora recently completed a fundraising campaign that exceeded the $50 million target by $8 million.

While acknowledging that any comparison between Cornell and Wells, with an enrollment of 468, is a stretch, Ehrenberg says that such moves to reduce tuition could put the pressure on selective school to hold the line on their rates to compete for the middle class market. Also, says Ehrenberg, selective schools may have to consider merit scholarships in addition to need-based aid since many lower-echelon schools are offering these awards.

Significant improvement among public institutions could create more competition as well, Ehrenberg says, pointing out that 80% of all college students attend public schools. "If more people start looking in other directions, the selective schools will have to take measures, including lower tuition, to remain attractive.

"The key people are the trustees," Ehrenberg says in discussing his findings. "They have to tell the president and the provost to hold down tuition or it won't get done because there are too many pressures on the schools. But there won't be much incentive to do that as long as the institutions provide substantial amounts of financial aid."

The government can do its part as well, Ehrenberg contends, pointing out that federal grant aid should keep up with the rate of inflation so that the schools aren't forced to use their own tuition funds to replace that aid. Fewer restrictions on indirect costs for research would help, as would regulatory reforms to reduce the costs of compliance with environmental and health and safety requirements.

No single institution will unilaterally reduce its rate of spending growth and risk a drop in the rankings, Ehrenberg states, "but if all the institutions valued reducing the growth rate of tuition relative to the rate of inflation, there could be a social benefit from banding together," he writes. That could cause problems with the Justice Department, and may incur loud dissent from faculty who oppose spending cuts.

Other suggestions posited by Ehrenberg include greater control of the budget by the central administration, sharing resources among the institutions and a concerted effort to increase efficiency and hold down costs.

Universities can't be complacent because of record numbers of applications, says Casey. But, he points out, schools understand that students expect quality academic programs and services. Faculty research is important at Brown, he says, pointing out that as the federal government has pulled away from its support the schools have to pick up the costs.

In the end, though, nobody is prepared to state with conviction that schools like Cornell, or Harvard, or Brown, are ready to hold the line on tuition. "As long as lots of high-quality applicants keep accepting offers of admission, there is little incentive to hold down costs," Ehrenberg states.

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