May 5, 2004

The college tuition scam

By Thomas Lifson

The higher education industry has ruthlessly exploited its privileged role as the assigner of prestige to young adults beginning their professional lives, in order to grab a larger share of national income. Tuition has increased substantially faster than inflation for the last half century, rising from 6% to 9% a year over any 17 year period, between 1958 and 2001, ranging from 1.2 times to 2.1 times the underlying general inflation rate.

 

At the same time, the industry engages in unconscionable practices, including rampant price discrimination —— charging different prices to different customers, based on management's preferences for certain kinds of customers over others. If a car dealer, steel producer, or grocery store gave massive discounts to some groups of customers, based on demographic and wealth characteristics, they would quickly encounter public outrage and legal consequences. But by calling its price discrimination 'financial aid,' the higher education industry cloaks its actions in the garb of charity.

 

Make no mistake: higher education is one of the biggest industries in the United States—region>, and its economic practices have a massive impact on the economy, and on the personal financial welfare of most American families. An undiscounted 'rack rate' four year run at one of the first tier private colleges or universities will set back family wealth about $200,000, when you figure in the incidentals. Yet parents eagerly compete for the chance to write four figure checks twice a year, if the payee has a brand name like Harvard or Swarthmore, based on the assumption that the brand luster will attach itself to their beloved offspring, providing an extra boost in the job market, and a set of personal connections that will pay off over a lifetime.

 

College and university administrators have mastered the techniques of poor—mouthing, portraying themselves as the victims of unrelenting 'cost pressures' (mostly comprising salaries to themselves and their faculty constituents), and in need of an increasing stream of subsidies from the public purse. In addition to the tax exemption protecting their massive property wealth and (in the most elite institutions) financial endowments, they benefit hugely from public subsidies in the form of tuition 'aid' in the form of grants and loans. Although portrayed as being directed to worthy youngsters, these taxpayer—funded financial flows actually go to the colleges themselves, enabling the price—raisers to blithely continue to jack—up their charges much faster than inflation. One of the cornerstones of John Kerry's campaign so far is his promise to massively increase the flow of public monies to higher education.

 

Oh, in case you haven't noticed, the higher education industry is one of the cornerstones of the left wing in the United States. Checking the public voter registration rolls for college faculties (except in a handful of explicityly conservative institutions) routinely uncovers ratios of Democrats to Republicans on the order of ten to one.

 

In order to understand how pernicious the price scam is, let us consider the nature of 'financial aid' or 'scholarships,' putting aside the question of a college's endowment income. In fact, all but the top hundred or so private colleges and universities do not enjoy substantial endowment income, and rely on tuition for the funds to keep operating. Greatly simplifying, let us hypothesize two groups of students. The 'A group' come from an upper middle class families, and pay the full $36,000 per year in tuition. The 'B group' comprise various racial minorities, athletes, residents of underrepresented regions, exceptionally—intelligent youngsters, or those possessed of some other attribute prized by the management. The B group gets a $10,000 discount, euphemistically called a 'scholarship.'

 

If the two groups were equally large, then the parents of the A group in effect each write a $5,000 check to the parents of the B group. By paying higher than average tuition (i.e., full price in a system which commonly offers discounts), they make a non—tax deductible charitable contribution. These transfer payments from one group of families to another are tolerated only because parents fear the consequences of denying their children the best possible shot at gaining entry to prestigious and lucrative careers.

 

The existence of funds from an endowment does nothing to change the underlying nature of the inter—family funds transfer process. The existence of checks coming in from investment flows does not alter the fact that one family subsidizes another. The funds in question are fungible.

 

Higher education has been a notable laggard in the application of productivity—enhancing technologies. And why should it do otherwise? Increased productivity always discomfits the incumbent employees, who must be pressured to change their familiar ways of doing things. Increased productivity also means firing, laying off, or not replacing retirees, all of which require a bit of steel in the management's backbone, since resistance is certain. It is much easier to just increase tuition. Again.

 

We live in the midst of an information technology revolution. Higher education is in the information business. Any other business whose underlying technology was radically increasing productivity, while driving costs down, would come under price pressure, driven by lower cost alternative suppliers. But because of the role of prestige in assessing quality, and because of the ever—increasing public subsidies, tuition continues to spiral ever upward.

 

This cannot go on forever. Alternative methodologies for delivering education far more efficiently are flourishing. Private for—profit institutions, such as The University of Phoenix  and DeVry University have found a lucrative niche in the adult education sector. But it is only a matter of time before for—profit institutions enter other segments of the industry. The state of California has just begun directing thousands of students to spend their first two years of undergraduate education at far more cost—effective community colleges, before being admitted to the expensive (and more prestigious) University of California System.

 

In the long run, the halls of academia will pay a price for their arrogant exploitation of their own prestige. In tandem with the increasing cost of college, a yawning gap has opened between the concerns of ordinary Americans and the motivations of higher education insiders. While academia blithely imposes an agenda of 'multiculturalism,' 'queer studies,' and PoMo (post—modern, post—colonialist) studies, the rest of the country realizes that we live in brutally—competitive world, where Chinese, Indian, or Korean producers will happily under—price and outperform us in global markets, if we allow ourselves the unaffordable luxury of an increasingly irrelevant and overly expensive system of higher education.