In our first podcast conversation, we briefly noted our concerns about the mounting cost of college. We’re both fathers who’ll one day be on the hook for college tuition and related expenses. So we wanted to return to that issue today.
In today’s conversation, we make note of some of the factors that influence prices in higher education. We also cover whether we can expect this trend to continue and whether college remains a worthwhile investment. We approach this latter question from two different perspective, our own and a theoretical median American’s. We also discuss whether society is asking college institutions to do too much and why campus and faculty lounge politics are so heavily skewed leftward.
Notes on Content Related to the Episode
It’s generally accepted that college costs have skyrocketed, but it’s important to get a handle on the actual data:
A 2022 NBER study found that “Enrollment-weighted average tuition at four-year public universities increased by nearly 200% between academic years 1987-88 and 2018-19, with increases particularly marked in the years around the Great Recession and then slowing in recent years. Because approximately 70% of students at four-year universities in the US attend a public university, the potential burden of increased prices is consequential.”
However, the sticker price of tuition can be deceiving. There is economic research (Ibid) that suggests higher tuition prices can have “progressive” effects on low income access to R1 universities. Essentially, students from well-off families subsidize the costs allowing net tuition to be lower for low/moderate income students. These benefits are more pronounced at more prestigious institutions. However, the absolute share of students from low-income backgrounds is low at R1 institutions even though the relative share has improved.
“the net tuition paid by students from the lowest-income families (less than $30,000 in family income) at four-year universities increased by only 4.5% between 2008-09 and 2018-19, while tuition increased by 32.6%” (Ibid)
Since the 1995–1996 academic year, the “sticker price” at four-year institutions rose over 70% (source). Fortunately, need-based and merit-based financial aid drove down the percentage of students who pay the full sticker price—only 26% of in-state public and 16% of private nonprofit college students paid the full price in 2019–2020, compared to 53% and 29%, respectively, 25 years earlier.
However, money to fund that difference between sticker price and price paid comes from somewhere, and what doesn’t come from the university still constitutes more dollars (mostly public grants) chasing the value of increasingly uncompetitive degrees.
The above data confirm prices have risen. They show the costs are distributed differentially across students of different socioeconomic status. Let’s look closer at why costs have risen:
From a very low resolution perspective, it looks like tuition prices increases over the last 3+ decades are at least partially a product of something called cost disease socialism. The basic idea is that social policy has constrained supply (i.e. the accreditation system and prestige maintenance of acceptance rate/enrollment) while subsidizing demand (i.e. federal grants and loans). Plus we’re talking about a college degree where demand is inelastic, meaning people will almost pay anything to obtain a degree. This is a recipe for driving prices through the roof in a vicious cycle.
Now, we can’t wholly blame social policy. Economic and cultural factors and private decisions figure prominently too. We could put a lower premium on the value of higher education credentials. Prestigious institutions, flush with cash and huge endowments, could have also have opted to expand enrollment.
The ways universities, especially public institutions, obtain funding has changed some since the 1980s. State appropriations have declined while federal grants and private fundraising has increased in importance. This has worked out well for prestigious private and flagship public institutions but other non-research and lower-tier public institutions face more challenges, meaning they are more dependent on keeping enrollment high and getting students to pay tuition and fees.
Returning to some market/culture-related talking points: Obviously, expectations are extremely high. Young students expect schools to be more than institutions of higher learning. They want fancy playgrounds or borderline resorts populated with range of the world’s interesting people. Plus, the competition among institutions for high performing and wealthy students is quite high too. Colleges are compelled into an arms race of sorts to develop campus resources and opportunities outside of the classroom. This has increased administrative bloat and tightened the screws on professors/teaching faculty.
We’ve addressed a little bit of why costs have gone up, but will this trend continue?
The new data coming in suggest the price increase has already plateaued and the real cost is declining in some places.
Demographic change and our current cultural mood suggest a decline in demand has already set in and may continue. This will affect lower prestige and small institutions first. So I’m not sure how much the sticker price at an IvyPlus-type school or flagship state university will change in the near term.
Administrative bloat is a real problem. Trimming the fat here will be painful and hard, but it has already started. To really make a dent in these costs, it may require resetting some of the expectations of young adults and re-organizing the typical bachelor’s degree tract rather than just cutting obviously extraneous offices. For instance, four years looks unnecessarily long.
Finally, is college worth it?
So to answer this accurately, we need some sense of expected value. To do this, economists estimate a wage or wealth premium associated with a degree. Some of this is going to be confounded by the selection effect though. Selection effect here refers to smarter and more affluent kids are both more likely to go to college and to go on to future economic success. In such cases, how much of the economic outcome can we actually attribute to the educational process? Some people (like GMU economist Bryan Caplan) argue that college is just a signaling mechanism and provides little to no direct economic value.
Another way to get at this is to model the return on investment (ROI) of obtaining various higher ed credentials. For the most part, this modeling confirms a lot of people’s prior beliefs about higher education.
Field of study, school prestige, and time-to-degree are important influences on the ROI outcome. For instance, A bachelor’s degree in engineering at a flagship state school that was finished on time is almost certainly going to have a positive ROI.
However, the trends in the college wage/wealth premium are not salutary. Something is eating into the value of a degree.
Consequently, the expected value of going to college is not straightforward. It depends on one’s individual attributes and abilities. We should disabuse ourselves of the idea that having a college degree is always better than not having one.
It is also important, albeit somewhat awkward, to consider the non-material benefits of college. College helps substantially with social finishing and professional networking. However, these benefits are also hard to disentangle from selection effects.
Higher education and culture and politics
A lot of discontent has spilled out into public discourse downstream of rising tuition costs and the declining wage/wealth premium of a college degree. It is also increasingly acknowledged that college degrees may not send the same economic signals they once did. We mint many more degrees at every level than in the recent past. Relatedly, grade inflation is another now widely acknowledge phenomenon. There is also tumult about the asymmetric political valence of higher ed institutions.
Elite overproduction - too many prospective elite members relative to elite slots in current power structure:
Low-income, highly educated urban professionals are often a well-spring of disgruntled political opinions.
Our Social Media Era has increased social comparison opportunities, which possibly intensifies status competition, a net zero-sum game.
Increasingly college graduates are sorting into left-wing political identities and voting exclusively and reliably for democrats. Given their greater material and cultural capital, this has generated some amount of class resentment. This has shifted political coalitions and exacerbated polarization.
The “Big Sort” is a related phenomenon. Similar people have increased the efficiency with which they live together. The lack of sorting incentives polarization within the in-group and estranges different groups from each other.
Why is higher education so left-wing?
It has been argued that all social institutions are more liberal because liberal people are more motivated by political issues. It is essentially an argument about correlated difference in personality. This argument is somewhat reminiscent of Jon Haidt’s ideas about how Moral Foundations Theory maps onto American politics.
There is some amount of institutional cultural lock-in driven by hiring practices and social ostracization that plays into this imbalance as well.
Resources/Recommendations
a16z podcast: Crisis in Higher Ed & Why Universities Still Matter & Fixing Higher Education & New Startup Opportunities with Marc and Ben
Freakonomics Radio: What Exactly is College For? (There is a whole series of college episodes worth listening to)
Does college pay off? FREOPP’s latest analysis says… it depends by Preston Cooper
Emmons et al. (2019) find that income premiums for college graduates have also decreased, though not as much as for wealth premiums.
“The Determinants and Causal Effects of Admission to Highly Selective Private College” - Chetty paper
Baumol Effect Wikipedia - an example of cross elasticity of demand (price of related goods affects good of interest)
“[T]he tendency for wages in jobs that have experienced little or no increase in labor productivity to rise in response to rising wages in other jobs that did experience high productivity growth.”
Constrain Supply & Subsidize Demand = Cost Disease Socialism
Cultural Commentary on College:
Disclaimer
This podcast is for informational and entertainment purposes. The opinions expressed are solely our own. We are not providing professional advice (financial, medical, etc) of any kind.
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