Inflated Inflation

There was an excellent article in IHE today by Kevin Carey, Facing up to Debt, about the increasing role of student loans in higher education along with some of the causes and consequences.

I strongly recommend that you read it. My reasons for blogging about it are to (a) bring it to the attention of anyone who did not see it, (b) add my own thoughts about the article, and (c) document the remark about increases in excess of inflation that I posted as CCPhysicist, at 5:35 pm EDT on July 14, 2008.

I can clearly document the hyperinflation of tuition and fees. Jump to the bottom half of this rather long article if that is all you want to see.

But first, a few comments about the article:

I thought it was an extremely perceptive article, particularly the point about grouping LOANS in with scholarships as if they were actually financial AID rather than a financial BURDEN. (There were some examples of those burdens in the comments, but there were also some examples where people made very bad guesses about the correct legal approach to questionable lender behavior rather than listening to someone like Suze Orman or checking the "hardship" provisions in the bankruptcy law.) Loans should be listed as a separate category and the government should stop pretending that it is helping students with this approach. Do students realize they are promising to pay $125 per month for every $10,000 they borrow? For 25 years? The new GI Bill cannot come soon enough, given what I have seen among my Vet students. Forcing them to borrow money is obscene. Forcing them to borrow money under the onerous bankruptcy rules passed by the "Contract for America" Republican Congress in 1998 is even worse.

Michael Bugeja, director of the journalism program at Iowa State University, made a solid point about a possible bubble in the higher ed sector of the economy. I say "possible" because the top 20% of household incomes, those making over $100,000 per year, could (and I should put scare quotes around 'could') live on the median household income of $48,000 and be able to pay cash for a SLAC education. Of course they can't, or won't, but the top 1% of the population contains a lot of people who can afford to send their rich kids to such schools - if they manage their income properly. But if you take loans out of the equation, many SLAC students would end up at state universities and many state university students would end up at a CC. (I know for a fact that many of our CC students turn down admission to a university simply to save money during their first two years.) And quite a few CC students would not attend anywhere if not for loans.

I also agree with most of the sentiments in the sentence I took exception with in Carey's article. He wrote "Traditional colleges and universities, protected from competition by regulatory barriers and buoyed by public subsidies and rising demand, have managed to avoid most of the difficult choices inherent to becoming more efficient and restraining price." [Emphasis added] I assume he meant public colleges and universities.

Although I don't quite view accreditation as a regulatory barrier, it along with reputation do act to limit competition. Institutions that became large mainly because they existed and had fairly open access at the end of WW II, as well as having the intellectual and state financial resources to build a large research (not to mention athletic) enterprise to provide the sort of reputation that attracts students, do have some huge advantages in this market. Many large R1 state universities, and even some large mid-tier ones, can compete academically with much more expensive and highly selective private universities. This makes their (to me) sky-high tuition look cheap compared to $50,000 per year. And rising demand is certainly a factor, as we have seen with fuel costs.

But I do take exception to the claimed role of public subsidies. One of the things that became obvious when I dug up the data needed to include some R1 universities in my look at college budgets was that state contributions were now a tiny fraction (typically less than one third) of the instructional budget at these schools, but still provided a large fraction at our CC.

Inflation corrected data:

I found it interesting that federal student loans started in 1965, since my information concerns the situation soon after that when loans were fairly rare and generally quite small. (Mrs Pion had loans of less than $1000, which is less than $5000 in current dollars.) My comparison of 1970-71 data to comparable 2008-09 data is based on the detailed CPI information (pdf file) available from Robert Sahr at Oregon State. [His massive web page, which also explains how he bridges between periods with different CPI bases, is thick with cool data such as his pdf graphing gasoline prices in current dollars.]

I took the historic numbers from the orientation information I still have, thanks to the excellent collection maintained by my parents and "gifted" to me a few years ago. They have been scaled by the ratio of the CPI factor for 2008-2009 (1.039) to that for 1970-71 (0.191). That ratio is 5.44. Inflation is a rude taskmaster.

All numbers in this table are in current (actually 2008-2009) dollars.

	Then	Now	Increase
Tuition and Fees	3207	10263	x 3.20
Room and Board	5320	7076	x 1.33
Total	8527	17339	x 2.03

Since I made my "factor of 2" statement in the comments on IHE based on a top-of-the-head WAG of the inflation factor and my freshman year budget, that is pretty close!

However, my reason for taking the time to write all of this up was not to verify the miraculous quality of my WAG, but to point out that the factor of 2 in the total budget hides completely the actual reason for the huge rise in real-dollar costs: Tuition. One can easily attribute the 33% increase above inflation for room and board to some added value. Although the mortgages should have been paid off ages ago, some dorms have been rebuilt from the inside out and all of them have had those new fangled inter-tube thingies added and some even needed upgraded electrical systems to handle computers and microwaves. I've also been told that the food service is even better than it was in my day, and I don't even want to think about the maintenance required to keep students from tearing it apart.

But a factor of more than THREE in tuition even AFTER INFLATION has been accounted for? And that is at a university that has the lowest employee-student ratio among their comparison institutions! Granted, some of it is due to an equally spectacular increase in the cost of health insurance, but can it really be explained by the shift from 1/3 tuition and 2/3 state to almost the reverse over that period of time?

	Then	Now	Increase
Student	3207	10263	x 3.20
State	6414	5000	x 0.80

No. (Again these are all current dollars and this estimate is much cruder than the one above, which was based on actual predicted costs from the institution.) The cost shift from state to student is only about $1400. (It might actually be $1500 due to state budget cuts this year, but that error is in the noise.) If state appropriations had been maintained at constant dollars, tuition would have "only" needed to be $8863, an increase of a factor of 2.76 above inflation! But if state budget cuts were the only thing going on, keeping the total cost of instruction fixed at about $9620, tuition would only have had to rise from $3207 to about $4620, a factor of 1.44. (Or maybe $4700, with a state appropriation of $4900. As I said, an error of +/- $100 or $200 will not affect these conclusions.) In any case, that would have meant the state would be supplying just over 50% of the cost of instruction. Nothing like what we actually see.

[Question: So what would that university look like? I think it would look a lot like our CC, only with no adjunct instructors and slightly higher faculty pay but still lots of research. I can say this because their state appropriation alone is greater than our total cost of instruction. Double that and you have enough money to make up for getting rid of all adjuncts plus some for salaries and research support. However, if our CC tried to operate without adjuncts and didn't get university-level appropriations, our tuition would have to make up 2/3 or our budget just as it currently does at that R1. Interesting.]

Clearly, most of the real-dollar tuition increase is to provide added value in the form of the salaries and other expenses needed to maintain a world class faculty and research enterprise, not compensate for a decrease in state appropriations.

Further, as you can see from this analysis, the state subsidy is no longer a huge factor as it was in the past. The difference between a total educational cost of about $22,000 ($15,000 in tuition and fees and about $7000 in room and board) and what is charged at private universities (and some public ones!) is still significant. Even without the state subsidy, that education would look like a bargain.

I think it is more correct to say that the universities have used relatively modest cuts in the real value of state appropriations to justify much larger increases in tuition. Part of that game is using graphs of the fraction supplied by the state rather than constant dollars for each component. It would appear that only a small part of the change is due to cuts in appropriations. This is not to deny, however, that universities cannot make use of the same economies that other industries do, but look no further than the cost of computers to see where they have benefited.

Closing Note:

While researching the current costs at Ye Olde Alma Mater, I discovered that they have their own problem with the credit crisis. They have lost the ability to sell loans to a state agency, because that agency is unable to finance those loans. No comment here on that since I don't have time to look up the older references or check the situation on my own campus.