Why Do Colleges Compete by Becoming More Expensive?

The author of Liberal Arts on the Brink observes that American universities and colleges are busily competing against other as their core industry sinks ever lower.
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It is ceaselessly (and correctly) observed that college tuition has gone through the roof and something must be done to get the cost of higher education under control. In the 10 years between 2000 and 2009, while the median income of American families grew a modest 16 percent, the cost of attending college shot up 63 percent; more than 70 percent for in-state students at public universities. Even during the terrible year 2009, when family income actually fell more than 2 percent, average tuitions rose nearly 4 percent at all institutions; more than 4 percent at public universities. Today, the list price for a student from an average American family to attend a prestige college or university for 7 1/2 months is only slightly less than her family’s entire income in 12 months.

Free marketers champion for-profit universities as the answer. If they are, it is an odd answer: 80 to 90 percent of the for-profits’ income comes from federal tax dollars—$26.5 billion in 2009. Another odd “solution” presently in play is to radically cut state aid for state universities which, of course, forces the universities to increase tuition even faster (and to try to replace in-state students with out-of-staters, for whom tuition is typically two to three times higher).

The question that doesn’t seem to get answered is why in Heaven’s name do colleges continue to jack up the price of education? Are they too obtuse to recognize that they are getting close to pricing themselves out of business? In a word, the answer is desperate competition —between the prestige colleges to maintain their reputations (and their U.S. News rankings) by attracting the brightest students with the highest test scores from the best prep schools, and between all of the rest of the colleges to attract enough warm bodies to fill their lists.

How do the colleges compete? By spending more on such things as luxury dorms, elaborate sports facilities, and increasing their recruiting staffs (and sending them around the world in search for full-pay foreign students). And, above all, by discounting tuition with financial aid they cannot afford to give. The net result is that the colleges’ expenses go up, their revenues go down, and tuitions are driven even higher.

Here, then, is the paradox: students are paying higher tuitions because the colleges are competing so hard to attract them. Competition between soap manufacturers or auto makers for consumer dollars can drive down price, but competition between colleges for students drives price up. For colleges, the tragedy of the commons is at work.

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