07/28/2013
Aloha YAL at UHM!
Hope you're enjoying summer! With the semester approaching, I thought you 'd be interested in an excellent piece of research about government spending in higher education.
In recent years, tuition fees have increased dramatically, mirroring the meteoric rise in undergraduate enrollment rates. Students are flocking to universities, attracted by the promise of better quality employment prospects and a more competitive salary for degree holders. But the real winners here are not who you think.
The research below illustrates the severe effect federal subsidies have had in driving the cost of college to unprecedented levels. The increase in government funding has both distorted the real cost of a college degree and spiked college revenues dramatically--making universities the clear winners at the expense of students.
If you have any questions or comments, I'd be happy to direct you to author, policy analyst Jordan Bruneau, who'd enjoy your feedback!
Best,
Steve
STEPHEN SWEET
PH: 202.215.7491
charleskochfoundation.org
Top Story
College costs and their drivers
It is no secret that college costs have increased exponentially in recent years. According to data from the National Center for Education Statistics, the average cost for a year of college (including tuition, fees, room, and board) from a 4-year degree granting institution increased to $23,066 in 2012, up from $3,167 ($9,284 in inflation adjusted terms) in 1980 (see fig. 1 below).
Fig 1: Average annual college cost for a 4-year degree granting institution
Average annual college cost increases almost $20,000 since 1980
Even faster than healthcare inflation
This 628% cost increase since 1980 is four times greater than the 178% rise in inflation, as measured by the Consumer Price Index (CPI), over the same period. College costs have even outpaced healthcare costs, which grew 454% since 1980. This inflation represents a compound annual growth rate (CAGR) of 9.0% for college, 4.6% for the CPI, and 7.7% for healthcare (see fig. 2 below).
Fig 2: College, Healthcare, and Consumer Price Indices
College price index inflation outpaces healthcare and consumer indices
Increased demand driving this unprecedented increase in college cost
Traditionally, increasing prices are caused by increasing demand. As we can see by looking at enrollment numbers, demand for college has skyrocketed over the past two decades reaching 21 million enrollees for the 2011/12 year, up from just over 12 million in 1981/82. This represents a 74% increase over this period (see fig. 3 below).
Fig 3: College enrollment
College enrollment up 74% over past two decades
Better employment prospects and higher wages make college more attractive
The accelerating trends in better employment prospects and higher wage premiums are likely driving this increase in demand for college. Those with a bachelor’s degree fared significantly better during the Great Recession and its aftermath never seeing their unemployment rates rise above 5%; whereas, those with only a high school education faced unemployment rates above 10%. The unemployment rate premium between bachelor degree holders and high school graduates is 5.1%, up from a historical average of around 2.2% (see fig. 4 below).
Same story for wage rates. The average bachelor’s degree holder now makes $60,000 a year compared to just above $30,000 for the average high school graduate. This wage premium is accelerating and unprecedented. Bachelor degree holders now make 83% more than high school graduates, up from a premium of just 53% in the early-1980s (see fig. 5 below).
Fig 4: Unemployment rates: Fig 5: Wages:
Bachelor degree vs. high school grad. Bachelor degree vs. high school grad.
Government subsidies exacerbate the high demand for college
While increased demand for college as a result of better employment prospects has likely contributed to the dramatic college cost increases, there are many sectors of the economy that have seen similar increases in demand without similar spiraling inflation. What makes college costs different?
College is unique from most other sectors of the economy because it is a recipient of vast government subsidies in the form of grants to institutions and students. These subsidies make college look cheaper than it actually is by hiding the true cost to the student. For example, if a year of college costs $40,000, but the government gives both the student and the college a $10,000 grant, then the effective price for the student is only $20,000 instead of $40,000. As a result of this artificially low price, demand increases, furthering the inflation. If it weren’t for these grants, students would be faced with a $40,000 price tag decreasing overall college demand and controlling cost inflation.
Federal grants to students and institutions have increased at an even faster pace than college costs - to a combined $55.8 billion in 2012, up from $4.4 billion in 1980. Federal grants to students, mainly in the form of Pell Grants, have increased to $29.1 billion in 2012, up from $2.1 billion in 1980, a 12% compound annual growth rate (see fig. 6 below). Grants to institutions have grown at a similar pace. These grants have allowed students to pay less for college than the actual cost, further increasing demand and costs.
Fig 6: Federal grants to students and institutions
Grants have increased even faster than enrollment since 1980
Colleges are clear winners in this scenario
While government seems like the clear loser in this scenario, paying ever increasing grants to students and institutions, and students can be seen as either winners or losers, receiving subsidized education yet facing spiraling inflation of the costs they do pay, colleges seem like the clear winners. They do not necessarily care who pays them, the student or the government, so long as they get paid in full.
Increasing college costs mean that colleges are increasing their revenues. Where is this money going? A significant portion is going to pay for additional staff. Because the number of students has increased dramatically, it should be expected that staff should increase as well. However, staff is increasing at a much faster pace than the already fast pace of student enrollment. This increase can be illustrated by looking at the staff-to-student ratio. These ratios show that the proportion of faculty, administrators, graduate assistants, and non-faculty professionals have all risen by double digits in relation to the number of students over the past 16-years (see figs. 7 & 8 below).
Significant rise in the “non-faculty staff”-to-student ratio
The most striking rise is seen in the ratio between non-faculty professionals (defined as those positions not central to the college’s mission) to students. There are now 37.4 non-faculty professionals per 1000 students, up from 30.3 per 1000 in 1995. This represents a 23% increase over this period.
Because non-faculty professionals are usually tasked with duties not central to the college’s mission, the increase in their numbers relative to students may indicate that colleges are expanding their operations beyond the traditional college structure as their increasing revenues have allowed.
Fig 7: Faculty & non-fac. staff/1000 students Fig 8: Grad. asst. & execs./1000 students
Non-faculty staff per 1000 students up 23% Graduate asst. up 13%; executives up 11%
