How Not to Expand Access to College (or further the General Welfare)

Not a Federal Agency (Yet)

In a recent post on BloombergView, Professor Stephen Carter critiques plans by former Secretary of State Hillary Clinton and Vermont Senator Bernie Sanders to reduce the price that some citizens pay at some colleges and universities.  As Carter explains, both plans seek to reduce the costs of attending public colleges and universities, thereby increasing access to higher education and reducing the debt burdens of those who matriculate.  The more ambitious (and more expensive) Sanders plan would provide states with federal grants of $47 billion annually on the condition that such states: (1) increase their yearly spending on higher education by $23 billion and (2) reduce tuition and fees to zero for all students, including those from wealthy families. The more modest Clinton plan would cost a mere $350 Billion over ten years and provide additional aid, in the form of grants, to students who are unable to pay their own way, thereby reducing the costs that such individuals must incur to attend public colleges and universities.  The plan would couple such aid with a requirement that recipients work 10 hours per week.  While the Sanders plan focuses solely on public universities, the Clinton plan sets aside funds to support a small number of private institutions that serve numerous low-income students.  To adopt such plans, a future Congress would have to exercise the power "[t]o lay and collect taxes . . . . to pay the Debts and provide for the common Defense and general Welfare of the United States."  See U.S. Constitution, Article I, § 8.

Professor Carter begins his critique by questioning "the underlying assumption that college is too expensive."  Among other things he notes that a college education is an investment in human capital, and that, for those who complete college, the median return on such investments has "outstripped the rising cost." (See here for a prior elaboration of this point on this blog.) The real problem, Carter says, is that many students who pay such tuition, perhaps taking on debt to do so, never graduate and are thus unable to realize this return. Indeed, as previously explained on this blog, many state flagship universities have four year graduation rates of 25 percent or lower.    Even if college is too costly, Professor Carter says, both plans may well exacerbate the problem, by increasing the demand for such education and thus further increasing college costs.  Carter also suggests that, if enacted, either plan may include implicit price controls to combat increased costs, controls that Carter sagely considers counter-productive.  Indeed, a summary of the Sanders Plan expressly provides that state institutions would have to "meet a number of requirements designed to protect students, ensure quality and reduce ballooning costs," while simultaneously (and inconsistently) "reduc[ing] their reliance on low-paid adjunct faculty."  Secretary Clinton's plan is a little more vague, promising simply to require schools to "control costs" while simultaneously increasing spending on programs designed to increase graduation rates.

Professor Carter is right to be skeptical of these plans, particularly their motivating assumption that public colleges (the target of these proposals) are generally inaccessible to families of modest means. If anything, Carter is too kind to this assumption. After all, and as previously explained on this blog, many such institutions provide generous grant-based financial aid to low income students.  Indeed, some public colleges offer packages that are significantly more generous either the Sanders or Clinton plans, which focus on subsidizing tuition and fees while ignoring room and board.  That is, some public universities provide low income students free tuition, free fees and free room and board, allowing these students to graduate debt-free.  (See here, here, and here, for examples). Others heavily subsidize college costs, ensuring that students graduate with debt far below the actual cost and value of the education that such students receive.  (See here, here and here).   The University of Washington, for instance, has already replicated the result sought by the Sanders plan, providing low income students free tuition and fees, with the result that such students need only assume loans to cover room and board --- the type of expense students would incur whether or not they attended college.  Ditto for Arizona State, Texas A&M and Rutgers-Camden.  The University of Virginia caps student debt for in-state students at $14,000 over four years.    Some such schools also provide significant grant aid to students from middle class families.  Rutgers-Camden, for instance, provides grants equal to one half tuition and fees to students from families with incomes between $60,000 and $100,000 per year.  (See here).  Berkeley offers grant-based aid to students from families earning up to $140,000 annually.  (See here).  Various other institutions offer significant financial aid to middle class families as well.  (See here and here, for instance).

To be sure, students from wealthy families do not qualify for such aid because their families' income and/or assets exceed relevant thresholds.  Such students must pay full tuition and fees plus the cost of room and board.  The Clinton Plan would do nothing to help these individuals, and this omission from her plan is to be commended.  As W. Taylor Reveley III, President of the College of William and Mary recently put it, when speaking of tuition and fees at William and Mary (a public institution): "[I]f you come from a family who can afford to pay full freight, you are still getting excellent value for one of the best undergraduate educations in the world.”  Reveley of course is absolutely correct: tuition and fees at William and Mary, ranked 34th among national universities according to U.S. News, is $16,919, while tuition and fees at the University of Virginia, ranked 26th, is $14,526. By contrast, Tufts (27th), Boston College (30th) and Brandeis (34th) charge triple these amounts or more. Nonetheless, the Sanders plan would shift the cost of educating wealthy individuals at public universities entirely to taxpayers, while providing no additional assistance to students who attend more costly private institutions.  So far as this blogger is aware, Senator Sanders has not explained why American taxpayers must foot the bill so wealthy children can attend public universities for free.

In sum, the current landscape of higher education pricing for students of modest means hardly justifies centralized intervention and a resulting one-sized fits all solution that both candidates advocate to some degree.  Indeed, if enacted, the Sanders plan in particular risks preempting state institutions from offering free room and board and thus ensuring that students graduate debt free, as some schools currently do.  After all, schools generally rely upon tuition revenue to fund part of such aid, and the Sanders plan would eliminate this source of revenue.  Moreover, the Sanders Plan's ban on tuition and other forms of over-regulation that Professor Carter sagely predicts will place public institutions at a decided disadvantage vis a vis private institutions, who will be free of such federal micromanagement.   As previously explained on this blog, the decentralized nature of America's system of higher education, including competitive federalism, is its main strength.  Transforming America's public colleges and universities into quasi-federal agencies in furtherance of a new federal entitlement will undermine this strength.  If, as both candidates assume, the Nation can afford to spend many billions more each year on education, it would be far better to allocate such resources to K-12 education, preferably via a system of vouchers that would empower students and their families to exercise meaningful educational choice in a free market.  Such reform would help better prepare millions of students for college, enhance college graduation rates and do far more than either candidate's plan to advance the General Welfare.  

On the Cause(s) of and Cure(s) for Low College Graduation Rates

In a thoughtful essay Thomas K. Lindsay explores several causes of insufficient graduation rates at the nation's public universities and suggests some possible cures.  As he notes, Department of Education Data demonstrate that fewer than half of the nation's college students graduates in four years.  Even after six years, more than 40 percent still have not obtained a degree, he says.  (Go here for some recent Department of Education data showing that, for those students who entered college in 2006, about 41 percent had not graduated after 6 years.) As Lindsay points out. these low graduation rates impose various costs.  Perhaps most importantly, the annual cost of attending college is significant, particularly when one includes the opportunity cost in the form of income that students forgo.  Lindsay quotes a study concluding that: "the average added cost of just one year at a four-year public university is $63,718 in tuition, fees, books, and living expenses, plus lost wages each of those many students could have been earning had they finished on time." Lindsay also points out that students who have not graduated thereby delay their entry into the workplace, reducing their own lifetime earnings.  

Lindsay attributes these low graduation rates to several factors. First, he cites evidence suggesting that students themselves are either unaware of graduation requirements or, if they are aware, fail to take the courses necessary to satisfy such requirements.  Second, Lindsay contends that some colleges and universities have de-emphasized the role of the faculty in academic advising, relying instead on what he calls "professional advising offices."  Compared to faculty, he says, such professional advisors have inferior knowledge about the "strengths and weaknesses of their advisees" and also lack the sort of "deeper understanding of which courses contribute best to a meaningful college experience."  More reliance on faculty advising, he concludes, will improve students' selection of courses and thus increase graduation rates.   Finally, Lindsay contends that some colleges do not offer "the courses required for graduation . . . with sufficient regularity to make a four year stint possible." He concludes by admonishing students and their parents to "get the message" about the importance of graduating in four years and urging universities "to devote more effort to making the four year degree a practical reality once again."

Lindsay has identified a significant shortcoming of American Higher Education, a shortcoming states and the industry itself should be working to address.  Here are a few reactions to Lindsay's thoughtful piece, most of which simply supplement what he has said.

1.  Graduation rates at public universities vary widely among the states, to say the least.  According to this 2012 article in the Washington Post, the 2008 four year graduation rates at state flagship institutions ranged from less than 25 percent (the Universities of Alaska, New Mexico and Nevada) to 85 percent (the University of Virginia).  Moreover, this site maintained by the Chronicle of Higher Education reports that overall four year graduation rates for states's public universities range from 8.2 percent, 14 percent and 20 percent (Alaska, Idaho and Arkansas, respectively) to 68 percent, 69 percent and 70 percent (Washington, Iowa and Delaware, respectively).  Thus, while some states have a large amount of work to do, others are already doing something right.  Perhaps the nation's system of competitive federalism will induce those states who lag to adopt reforms that help close the gap with leaders like Delaware.

2.  Advanced Placement Credits earned in high school can be an important tool for improving graduation rates.   According to this study, for instance, students who enter college with such credits are more likely to graduate on time than similarly-situated students who do not.  Unfortunately, some high schools offer few if any advanced placement courses, thereby hampering the ability of their graduates to complete college in four years.   Indeed, according to this source, slightly more than 40 percent of the nation's high schools offer no advanced placement courses at all.  Moreover, states and even individual universities within a state differ in their policies governing the acceptance of such credits. States that wish to improve the rates at which their citizens graduate from college (including those who attend colleges in other states), should consider expanding the number of high schools that offer Advanced Placement courses and accept such courses, where appropriate, for college credit.

3.  In my view Lindsay overstates the cost that students incur for an additional year of college, for two reasons.  First, like many others, Lindsay includes the cost of room and board in his calculation of this cost. However, and as previously explained on this blog, individuals must purchase food and housing whether or not they attend college.  Thus, policymakers and commentators should not include room and board in the "cost" of college, except to the extent that students attending college incur higher costs of such room and board than they would have incurred had they instead entered the job market without attending or completing college.  Second, the study on which Lindsay relies apparently employs the "sticker price," that is, the price that universities charge to those students who receive no financial aid.  As previously explained on this blog, however, many universities, including public universities, offer generous financial aid, including in some cases free tuition and room and board.   Thus, while colleges must themselves incur the (social) cost of educating such students, many students do not bear such costs themselves.  Thus, the average cost that students incur for an additional year of college is likely less than Lindsay supposes.  Nonetheless, even if one ignores the cost of room and board, the cost of an additional year of college is still substantial.

4.  Finally, there is one additional factor that may explain the failure of some students to graduate in four years, namely, the absence of meaningful employment opportunities upon graduation.  As explained previously on this blog, job growth during the current economic "recovery" has been slow to say the least.  As between remaining in college for an additional year and graduating into a dismal job market, many students will choose the former.  Put more technically, the opportunity cost of an additional year in college is likely lower for many students than the study Lindsay invokes supposes. Thus, policies that facilitate the creation of good, high paying jobs will likely encourage some students to graduate more quickly.

How Tenure Reduces Tuition

A recent article in CNNFortune repeats claims that eliminating tenure for law school faculty (and presumably university faculty generally) will reduce schools' costs, thereby allowing schools to reduce or stabilize tuition.  In particular, the article states as follows: 

"But with signs mounting that the law school predicament is not a blip, administrators are looking to address their biggest fixed cost -- the full-time faculty. . . .  While salaries and secure employment are not inextricably linked, they are related. With tenure comes the security of consistent paychecks, regular raises, and no abrupt layoffs -- and most universities bestow tenure, or near-guaranteed employment, to guard against firing teachers for expressing controversial or unpopular views. But decades ago, the American Bar Association, which accredits law schools, took it a step further by tying accreditation with tenure protection for most full-time professors. But last month, amid complaints from graduates who cannot find sufficient work, the professional body decided to float two proposals that would sever this link. . . . [C]hanges to faculty tenure -- and compensation -- are inevitable as law school tuition costs barrel ahead."

 

This assertion echoes similar claims that eliminating tenure would reduce the cost of higher education in general and at law schools in particular.  (See here and here.)

However, and as previously explained on this blog, those who claim that the institution of tenure increases labor costs and thus tuition seem to have things backwards. Both common sense and basic economic theory predict that, other things being equal, eliminating tenure will actually increase costs, as schools increase faculty salaries to retain high quality faculty and thus maintain the quality of the education they provide.  Moreover, schools that failed to increase salaries after eliminating tenure would see faculty quality suffer and thus reduce the quality of the education they provide, without an correlative reduction in tuition. 

 

Presumably universities pay whatever total compensation they deem necessary to attract and retain desireable faculty.  Such compensation generally includes a mix of salary and non-salary compensation, the latter of which can include such benefits as health insurance, paid vacation, free parking, or free day care, to name just a few.  Tenure, of course, is a form of non-salary compensation, economically indistinguishable from the benefits just described.    Actual or prospective employees will interpret the elimination of tenure in the same way they would interpret the elimination of health insurance or free parking, that is, as a reduction in compensation.  As a result, schools that eliminated tenure would thus effectively cut faculty compensation and thus attract and retain less qualified faculty, thereby reducing the quality of the education provided.  Students at such schools would thus pay the same tuition for a lower quality product, the economic equivalent of higher tuition for the same product.

 

Of course, schools that eliminated tenure could maintain faculty quality by increasing salaries, thereby offsetting the elimination of a non-salary benefit.  Such salary increases, however, would increase schools' overall costs, and schools would presumably pass such costs on to students.  In these circumstances, then, eliminating tenure would increase and not decrease tuition. 

 

Some may still contend that the elimination of tenure will empower schools to fire incumbent faculty, hired long ago, thereby reducing labor costs. (Though of course universities would have to hire new faculty to perform the varies duties once performed by fired faculty.)    However, this contention does not withstand close scrutiny.  To be sure, like any other firm, a university can reduce its nominal costs by breaching its long term contracts.   For instance, a university that has borrowed $100 million to construct a new building could reduce its costs by repudiating that debt and thus attempting to avoid its obligation to pay annual debt service.  While such a tactic might reduce costs in the short run, it will have the opposite effect in the medium and long run, as firms pay damages for breach of contract to disappointed creditors and find it more expensive to borrow in the future, as future creditors demand an interest premium as compensation for the risk that the firm will default again.  In the same way, a school that breaches its contracts by firing tenured faculty will find itself liable for contract damages.  Such a school will also tarnish its reputation for trustworthiness, thereby making it far more difficult for the school to make credible promises to prospective faculty, staff and administrators, who will demand higher salaries to offset the risk that the university will breach such promises.

No doubt pundits will continue to debate what accounts for the cost of higher education.  (See here for one important contribution.)  It should be clear, however, that tenure reduces that cost.



 

 

Are Public Universities Like UVA Charging Monopoly Prices?

Actual Monopolist.  See United States v. Standard Oil, 221 U.S. 1 (1911).

Not a Monopolist

Earlier this week Peter Morici, an economist at the University of Maryland, opined that public universities like the University of Virginia are exercising monopoly power to drive up prices, thereby depriving numerous students of access to a high quality education.   As he puts it:

"High-quality universities have become too expensive and increasingly inaccessible because their presidents and other top leaders have failed to recognize and address the challenges and opportunities posed to their institutions by new technologies. . . . Too many well qualified applicants [for admission] are turned away, because the US population has grown much more rapidly that the residential model of higher education can accommodate. Monopoly power permits these institutions to unnecessarily run up costs, charge unconscionable tuition and afford faculty cosseted lives, whose teaching and research is becoming increasingly less relevant and responsive to our society’s needs."

Morici goes on to argue that schools should make better use of new technology to reduce the cost of providing a college education.

As a result, he said, the Board of Visitors at the University of Virginia got it right when it demanded that Teresa Sullivan, pictured above, resign.

While Morici's argument is directed to the situation at UVA, it has implications for many other public institutions of higher education as well.  Moreover, Morici's claim that UVA and similar public institutions are exercising monopoly power and gouging their citizens or, for that matter, out-of-state students, does not withstand cursory analysis.  On the contrary, every indication is that the University of Virginia, like some other Virginia universities, is providing a high quality education at a reasonable price (or lower).

1.  Schools like UVA seem to be doing something right.  As previously reported on this blog, the school received over 28,000 applications for admission to the undergraduate program, with an entering class of about 3,500, last year, a record.  Thousands of these applications came from out-of-state and around the world, despite the fact that UVA's out-ot-state tuition is over $38,000 per year.  Each of these applications is voluntary; no one compells anyone to apply to or attend UVA.  UVA is not the only public university experiencing record applications.  For instance, for the seventh year in a row, William and Mary received a record number of applications --- 13,600 applications for an entering undergraduate class of just under 1500.

2.   To be sure, the mere fact that consumers are purchasing a product voluntarily does not thereby exclude the possibility that they are purchasing from a monopolist.  There is, however, no indication that UVA is exercising monopoly power, unlike John D. Rockefeller, founder of the Standard Oil Company, pictured above.  As the Supreme Court explained in Standard Oil v. United States, 221 U.S. 1 (1911), the hallmark of monopoly and the exercise of monopoly power is output reduction and pricing above the cost of production.  However, in the past four decades, UVA has quadrupled its output, from just over 5,000 students in 1960 to over 20,000 students in 2010.  Recently, the school announced that it is increasing its enrollment further, adding 1,500 students over the next five years.   Moreover, the school's "sticker price" is $12,224 in tuition and fees per Virginia resident., far less than the actual cost of educating a UVA student.    (The state of Virginia provides a subsidy of over $8,000 per in-state student at UVA, and UVA's endowment and annual giving provide further support as well, thereby allowing UVA to charge prices that are below cost.)   A firm  that is increasing output and charging consumers less than its costs of production is not exercising monopoly power.

3.  Indeed, the "sticker price" at UVA overstates the actual cost of attendance for many students.  For instance, under the school's "Access UVA" program, students from families earning $75,000 or less pay a price of zero to attend UVA, that is, receive a UVA education (including room and board) for free.  Morici does not mention Access UVA and similar programs in place at other public universities when he claims that high tuition is depriving students access to college.

4.  Of course, out-of-state students pay much higher tuition and fees than in-state students, as noted above.  But here again, it is difficult to attribute this higher price to market power.   Like other nationally-prominent universities, UVA participates in a highly competitive market for out of state students.  An out-of-state student who can gain admittance to UVA can likely gain admittance to many other top quality schools, such as Notre Dame, Boston College, Emory, Georgetown, William and Mary, Cornell or the University of Pennsylvania, just to name a few.  An institution with so many competitors is hardly a "monopolist." 

5.   If UVA really is exercising monopoly power, then that exercise creates a market opportunity for other institutions, including for-profit online universities.  Such institutions could enter the market and attract customers who might otherwise attend UVA by charging lower tuition for a high quality product.  Indeed, such institutions, such as the University of Phoenix, already exist.  If more reliance on online education is the answer, then applications to UVA, William and Mary and other Virginia schools will begin to fall, as students forsake these schools for the likes of the University of Phoenix.  So far, the opposite seems to be occuring, thereby further contradicting Morici's argument.

President Obama's Upside Down Tuition Rhetoric

In his recent State of the Union Address, President Obama decried what he called "skyrocketing" tuition at American Universities and called on Congress to withdraw federal support from Colleges if such increases continue.  As the President put it:

"[L]et me put colleges and universities on notice: If you can’t stop tuition from going up, the funding you get from taxpayers will go down." 

The Administration subsequently explained that it will ask Congress to cut the availability of student loans in those states where public universities raise tuition more than the Administration would like.  This is upside down.  To be sure, tuition has risen significantly over the past few years.   However, colleges that have raised tuition have had little choice.  Across the nation, states responded to the recent recession by reducing financial support for higher education.  (This article describes this phenomenon in North Carolina.).  Colleges and Universities in such states have responded by raising tuition in an effort to maintain the quality of the product they offer, and tuition at such universities is still significantly below the cost of the education provided.  Moreover, many such universities have set aside significant portions of the proceeds from such increaes to support need-based financial aid that ensures the very sort of access President Obama claims to support.  California, for instance, recently set aside 1/3 of the proceeds from a tuition increase to expand the pool of resources available for need-based financial aid. 

In sum, state budget cuts have caused colleges and universities to raise tuition to protect the quality of the product they offer and generate sufficient funds for financial aid.  Instead of deterring future tuition increases, cuts to the Federal Loan Program will punish the very students harmed by increased tuition and likely cause schools to raise tuition even more to generate the financial aid necessary to ensure sufficient access. 

Tuition at Some Public Law Schools Rising Rapidly/Will The Public Law School Disappear ?

Law.com reports that tuition at some public law schools has risen dramatically this year, as schools attempt to offset reductions in state appropriations and endowment income.

The article, by Karen Sloan and entitled: can be found here:

http://www.law.com/jsp/law/LawArticleFriendly.jsp?id=1202432727154

Sloan reports the following tuition increases taking effect this fall:

1) Indiana Bloomington, 25 percent;

2) UC Davis, 19 percent;

3) Iowa, "nearly 20 percent;"

4) Texas, 16 percent;

5) U. Colorado, 16 percent.

The article also notes that some public law schools have held down their tuition increases, citing UVA and the University of Michigan as examples. Both schools, however, already charge in-state tuition much higher than the schools listed above. In state tuition at Michigan is now $43,200 per year, while in-state tuition at UVA is $38,800. Compare that to Indiana, which is just under $25,000, Iowa, which is at $21,400, and Colorado, at $25,400. Virginia receives no state support whatsoever and thus presumably is pricing at what the market will bear. Michigan, according to the article, receives only 3 percent of its budget from the state. (No doubt the proportion of state support is falling at other "public" schools as well.)

Sloan also notes that some schools are concerned that higher tution will reduce access to the schools in question, therefore compromising what many see as their mission of providing such access to the legal profession. At the same time, and in may view, one might conclude that legislators, the ultimate representatives of the public, have decided that such access is not worth the cost of providing it. Schools that nonetheless keep their tuition artifically low will thereby be furthering a mission of their own making, and not one that can be characterized as necessarily flowing from their public status.

In any event, it's hard to imagine state legislatures reversing the recent trend of declining to provide increased or even level financial support to public law schools. When it comes to support for education, K-12 education always goes to the head of the line. This is not surprising because: (1) K-12 teachers are often unionized and thus well-organized politically and (2) save for those who attend private schools, all children in a state attend such schools at one time or another, thereby enhancing the magnitude of public support for such expenditures. By contrast, many children, upon graduation from high school (if they do graduate) do not attend college at all or, if they do, attend a school in another state. Hence, support for investments in higher education are is predictably weaker than support for investments in K-12 education. And, of course, college faculties are often not unionized and thus lack the political muscle found among K-12 teachers.

Perhaps, 50 years from now, we will look back and view the state-funded law school as a sort of anomalous relic.