Tuition Economics

A recent speech by the Secretary-General of the Organization for Economic Co-Operation and Development (OECD), an organization which studies trends within its thirty member-countries, brought home the fact that while tuition costs are rising in America, other developed countries face a similar higher-education financial crunch. Angel Gurría said that “the demand for education in OECD countries has been growing at an accelerating pace, and this rising tide is creating budgetary pressures to increase the offer of education without compromising quality, but tertiary education is not managing to meet this growing demand in many countries and this is quite a risk in a highly competitive globalised economy.”

According to OECD statistics, which can be found in its 2008 Education at a Glance publication, higher education in these countries has seen a 20% rise in participation since 1995. “While in 1995, 37% of an age cohort went into university-level programmes; that number is now 57%,” said Gurría.

The Secretary-General recommended that instead of simply searching for new revenue sources, countries should focus on streamlining their programs and using their resources more efficiently. “While designing policies to bridge this gap, policymakers should not only focus on finding more resources, but on improving the overall management of tertiary education, in helping universities to improve their governance and adopt the latest financial management techniques to deploy their resources more efficiently,” he said.

“Again, it is not only a matter of money; it is a question of policy choices.”

One successful method might be increasing private funding for higher education, he argued. (Many European countries nearly completely fund their universities through progressive taxes without charging tuition).

But Education International, a global union federation spanning 171 countries, vociferously attacked the OECD’s suggestion that private funds might ease government’s strained education budgets. “EI asserts that the continued focus on privatisation of education undermines the principle of education as a basic human right accessible to all for the purpose of lifelong learning, and as a tool to enhance social cohesion,” wrote Education International in a press release.

“The argument made by the OECD that private contribution to the costs of education ‘is fair because there are private returns to it,’ challenges the basic notion of education as a public good that is equal for, and accessible to all,” they write. “This line of reasoning fails to consider the larger social and cultural benefits of free quality education to societies in the future.”

Readers of this website might be familiar with the popular truism: there is no such thing as a free lunch. Contrary to EI’s conception, there is also no such thing as “free quality education” because the financial burden of that education must either be placed on the taxpayer or fulfilled through private sources such as tuition dollars.

The U.S. system provides a concrete example of how relying on federal revenues increases college costs overall. Scholars have shown that increased federal financial aid may actually encourage universities to hike their tuition as they expect higher funding during the coming year.

“If you look at the trend line of federal assistance to higher education—grants, loans, and so forth—and track that number, [which] has been fairly steadily increasing since the ‘70’s. You go and time lag it a year and the tuition numbers follow the same path,” said Troy University Professor Chris Warden at an Accuracy in Academia author’s forum.

“Right now, the government subsidizes your loans, what, 3-4%, and at most everybody can get them, so what does that do? [It] drives up tuition, creating the need for more loans. It’s almost like the solution is part of the problem.”

The author of AIA’s forthcoming textbook Voodoo Anyone? Economics for Journalists, Professor Warden suggested that eliminating or reducing federal financial aid would actually improve students’ ability to pay for college. “My view would be have a very strict income test, get rid of all the loan programs and let people do it in the marketplace because then they’ll be competing for those loans and banks will naturally lower interest rates to get that loan money,” he said.

Terry Hartle, the senior vice president of the American Council on Education, made a similar point this February when he told an American Enterprise Institute (AEI) audience that “the financing of higher education is quite unlike anything else.”

“Higher education is one of the few industries in the country where the cost of providing the education is not met by the price charged to consumer,” he said. (The natural consequence of which is a shortage, according to Warden).

Hartle pointed to Harvard’s artificially low tuition cost as an example of this. “Harvard has 2,7000 applicants for 2,200 places. Now I think a lot of economists would look at that and say well, why isn’t their tuition a whole lot higher than it is?,” he said. “Certainly it’s fairly hard to imagine another industry, say your hypothetical widget producers that produce a product that can only meet one of every thirteen buyer’s requests, that doesn’t increase its price very rapidly and very dramatically.”

But assuming that Harvard did drop its tuition costs, the move wouldn’t necessarily benefit more students, Hartle argued. “But let’s assume that Harvard dropped its tuition by 50%, just a hypothetical. What would happen? Well, I suppose that we would see a surge in applicants at Harvard,” he said. “So instead of having 27,000 applicants for 2,200 spots, we might have 40,000 applicants for 2,200 spots.”

“Have we increased access to Harvard? No. We’ve made it a bigger benefit for people who get in, but we haven’t necessarily increased access unless we add more spots in the freshmen class at the same time.”

Price is product of both supply and demand. When supply stays static and demand skyrockets, prices will of necessity increase. This is not simply “downloading the costs onto students and their families,” as EI asserts—it’s simple economics.

Also, at least one contrarion, AEI’s Charles Murray, questions whether increasing access is all that great an idea.

Bethany Stotts is a staff writer at Accuracy in Academia.

Bethany Stotts