The Economics Of Higher Education: Why Does It Cost So Much?

We hear a lot about how expensive higher education has become. The common wisdom is that higher faculty salaries and a growing cadré of administrators are the reasons why. The common wisdom is wrong. In this, the first article in a series on college/university finance, the real reasons for higher costs are presented.

Summary

Tuition and other costs have increased, but not primarily because of higher faculty salaries or more administrators. While these have gone up a small amount, fringe benefits, most notably health benefits, have increased more. And higher faculty costs have been offset by employing more part time faculty and increasing the use of teaching assistants. Student costs have increased substantially because of falling state and local government subsidies. In addition, higher education costs have risen significantly because of the hiring of a large number “non-teaching professionals.”

The Data

 a. Reduction in Government Support

A major factor impacting school costs is the reduction in governments support and in particular, the reduction in state and local government assistance for public institutions. Table 1 shows that with the exception of private colleges, the subsidy share of tuition has fallen by very significant margins, meaning students must pay more. A good example of this is what happened at public universities. Since 2001, tuitions have only increased by 5%, but the average student payment net of subsidy has increased by 65%.

Table 1. – Costs of Attending Colleges/Universities (in 2011 $s)

Source: American Institutes for Research, Delta Cost Project, “Trends in College Spending: 2001–2011”

b. Growth in College/University Costs

Table 2 shows what happened to major school expenses per full-time equivalent (FTE) student in 2011 dollars. Several patterns are apparent. The fiscal squeeze resulting from the reduction in government support show up in the numbers for public and community colleges. And with the exception of these colleges, “student service” costs have increased dramatically. Private universities spent a lot more money on research, probably paid for by research contracts.