Tuesday, October 24, 2006

The College Board Report on Prices in Higher Education

In 1997 I served as a congressionally appointed member of the National Commission on College Costs. A good part of our discussion was trying to develop a lexicon which explained how college pricing works. No student in American universities pays the full cost of education - subsidies are provided through a number of venues - including endowments, public subsidy (either through discounted prices in public institutions or financial aid in the privates) and grants from other sources. We tried to establish a clear understanding of COST (what resource inputs are applied to providing a college education), PRICE (what students generally call tuition), SUBSIDY (the money used to reduce the price - which can be granted on the basis of ability to pay or need and without reference to need), and NET PRICE (the actual amount that students pay after subsidy is applied).

Here are some things that the Washington Post said about a report from the College Board which talks about college prices - (I have put my comments about their coverage in RED) The College Board said the increase in tuition and fees at public four-year colleges, although still higher than the national inflation rate, slowed for the third year in a row. Increases at private four-year colleges have also cooled off in recent years, although the average yearly price of attending a private college is $22,218, far more than the state school average of $5,836. That is actually a function of the amount of subsidy given to students in the public sector. That subsidy is given primarily to students regardless of financial need - thus a lot of it goes to very wealthy students.

At least two Washington area institutions are emblematic of the trend. At the University of Maryland, in-state tuition and fees for undergraduates were unchanged this year. At George Washington University, the increase was only 3.9 percent, about equal to national inflation. GW spokeswoman Tracy Schario said it was "our lowest increase in more than two decades." State budgets were fat this year and thus politicians rather than thinking about the appropriate long term price of a college education were quick to grant goodies to non-need based students. In California the chair of the Assembly Education Budget Committee - forced a reduction in price of $6 per unit - that resulted in a reduction of costs for very wealthy students and an increase for very poor students (because the cut also reduced the student's eligibility for other forms of need based aid). When the chair was told about that he said (even though he is a liberal democrat and supposedly a champion of the poor - "so what!"

But the smaller increases this year at many colleges were made possible by major price increases earlier in the decade. They were also made possible by a pretty robust rate of growth in state revenues so that prices at public institutions could be held constant.Middle-class parents have discovered, to the pain of their wallets, that the general inflation rate and the college inflation rate are out of sync. Why would anyone but a moron expect that the market basket of things which colleges and universities buy - which ultimately affect price - have any direct relationship with the general consumer price index. Is the price of cabbage supposed to move in tandem with the price of either professors or technology - two items that make up the cost structure in higher education? Overall, the College Board reported, state school prices are up 35 percent from five years ago, even after adjusting for inflation. More importantly than the 35% is how does this relate to the ability of an average family to manage costs. An odd thing about this is the comparison to housing. In the last five years in California the price of housing has risen by considerably more than 35% - but most politicians are gleeful about that rise. People have more money in their pockets as a result of that - because of all that new home equity (although there are substantial issues about how affordable housing is in the country - especially in California).

The question these types of stories do not deal with is either NET PRICE or long term policies which would allocate the components of prices that families pay for higher education among current, past and future spending. The real question that these kinds of reports chould address is not what the nominal price that students face in public and independent institutions but rather what the net price has been over time. There both public and independent institutions have made a determined effort to assure that a broad range of students has an opportunity to attend college. When state budgets are fat -there is a natural inclination by politicians to spend like drunken sailors and to artificially hold down prices in the public sector. A lot of the "buy" in a college education is just like a house purchase - where the net future value of the purchase is not fully recognized at time of purchase - thus some of the price for higher education might best be borne by prior income (how do we encourage families to save before their children get to college), current income (how much of these costs should or can be borne out of current income - the differences among income classes helps to define equity in society), and future income (how much of the current costs should be shifted forward to students who will gain from the increased value of their skills which a higher education provides - you would not buy your house for cash - so how much of your education should be amrotized and how should it be amortized? ) Were I able to influence the debate - that is where I would take it. A lot of the discussions about higher education come to the simple minded conclusions of the college board study - released today. In the long term only looking at current raw prices - does not assist either families to plan for their education nor educational institutions to have a better understanding of how to control or at least moderate changes in their prices.

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