Inside American Education (19 page)

While these odd examples are not intended to be typical, they do demonstrate the enormous elasticity of the concept of “cost,” as used in the academic world—and hence its meaninglessness as a justification for tuition increases. A much more
common cost item are professors’ salaries, which rose faster than the rate of inflation, every year during the decade of the 1980s.
⁵⁶
Added to this is the normal tendency toward expansionism in organizations not checked by the competition of the marketplace and the grim realities of a bottom line. At Vassar College, for example, the vice president for finance said: “Vassar’s departments are consulted for projected costs for the following year. Usually included are proposals for new materials and projects.” The college administration then “tries to allow as much departmental expansion as possible”—and this in turn drives up tuition.
⁵⁷

As a comprehensive economic study of American colleges and universities concluded, “the cost of any institution is largely determined by the amount of revenue it can raise.”
⁵⁸
This was said, not by a critic, but by a man described as “the supreme defender of higher education.”
⁵⁹
In other words, it is the amount of money that colleges and universities can get—from tuition, endowment income, donations, etc.—which determines how much their spending or costs will go up,
not
the other way around, as they represent it to the public. To say that costs are going up is no more than to say that the additional intake is being spent, rather than hoarded.

When a college expands its range of expensive activities first, and then calls it “increased costs” later, when seeking more money from various sources, this tends not only to confuse the issue but also to erode the very concept of living within one’s means. The financial problems of well-endowed Bowdoin College illustrate the process and the attitudes. Its own professors and administrators have blamed its ballooning deficits on a decade of expanding programs, jobs, and buildings. As the dean of the college put it: “People would come forward with plans that were good ideas—and because it was a period in which we could afford to grow, we just said Yes without being very deliberate about it.” According to
The Chronicle of Higher Education
:

Many faculty members did not even know of Bowdoin’s financial problems until last year, when they read about them in a newspaper,
The Maine Times
. Several administrators say they also were unaware of the magnitude of the problem until last year.
⁶⁰

This situation was not unique to Bowdoin, or even to rich private colleges in general. A consultant looking into the finances of Oregon State University reached very similar conclusions: “It’s amazing how much in a university, processes are added on and added on, and no one takes a critical look at it.”
⁶¹

In short, when parents are being asked to borrow against the equity in their homes to pay rising tuition, it is not simply to cover the increased cost of educating their children, but also to help underwrite the many new boondoggles thought up by faculty and administrators, operating with little sense of financial constraints. As an official of the U.S. Department of Education put it, many colleges “choose to increase tuition because they can get away with it.” While colleges claim that the increased spending is to improve education, this official saw it as going into “the swelling of the ranks of vice presidents and deans” and to other costly endeavors which make little or no contribution to quality education, which is “not a function of money.”
⁶²
The availability of federal grants and loans to help students meet rising tuition costs virtually ensures that those costs will rise. A college which kept tuition affordable could forfeit millions of dollars annually in federal money available to cover costs
over and above
what students can afford, according to a financial aid formula.

Arguments have often been made that students are getting a good deal from college, because tuition does not cover the full costs of their education. Such statements are much more difficult to check than they might seem to be. First of all, education is not the only activity going on at research universities, and even at liberal arts colleges, research is increasingly expected of the professors. This research is paid for not only by faculty grants but also by reduced teaching loads—which is to say, by hiring far more professors than were required before to teach the same number of courses. These additional costs may be carried on the books as instructional costs, but they are in fact research costs. Almost anything can be treated as a cost of educating students—on paper. At the University of Texas, for example, more than $11 million of student fee payments were applied to paying for construction of a microelectronics research facility, located more than 6 miles away from the campus.
⁶³

The research imperative has spread across all kinds of institutions and down the academic pecking order. Virtually everywhere, the education of undergraduates is a joint product, along with research and other activities. As any economist knows, there is no such thing as the average cost of producing a joint product—that is, there is no such thing as the average cost of producing pig skin, because it is produced jointly with bacon, ham, and pork chops. There is an average cost of producing a pig, but not its components, which cannot be produced separately.

Even if it were possible to separate out the cost of undergraduate education, there is no reason why tuition should cover it, since alumni and other donors contribute money for the express purpose of subsidizing education. Endowment funds often were contributed for the same purpose. When college and university administrators expand their empires by raising tuition, this is not necessarily due to the rising cost of education. Nor are the “extras” necessarily an enhancement of education, nor something reflecting student demand through the marketplace. In the public institutions, where most students go, it is largely a matter of administrators’ convincing legislators to contribute the taxpayers’ money.

It may seem odd that college admissions directors are under heavy pressure to enroll more students, if the colleges are losing money on each student enrolled, as academic administrators so often claim. When Dartmouth vice-president Robert Field announced that the college was accepting more transfer students, in order to bring in more revenue, the
Dartmouth Review
asked editorially: “How can Field make money on new students when every time he raises tuition, he claims tuition pays for only half the cost of each student?”
⁶⁴
This probing question goes to the heart of the economic issue, and its answer depends upon
incremental
costs. Once a college is built and its dormitories and classroom buildings are in place, the additional or incremental costs of adding more students is relatively low, so long as their numbers do not exceed the existing capacity. Within those limits, adding more students may well bring in far more additional revenue than any additional costs they represent.

The claim by college administrators that tuition does not cover the average cost of a college education is both meaningless
and misleading. It is meaningless because there is no such thing as the average cost of a joint product, and it is misleading because there is no more reason why tuitions should cover all the costs of a college than there is for magazine subscriptions to cover all the costs of producing a magazine. Advertisers often pay most of the costs of producing a magazine or newspaper, each of which comprises joint products—journalistic writings and advertisements, just as academic institutions produce both teaching and research. No one believes that magazines are doing a favor to their subscribers by offering subscriptions at prices which do not cover the average cost of producing the magazine. Nor do magazines make any such sanctimonious claims.

It is commonplace in the ordinary business transactions of the marketplace for joint products to be sold simultaneously to different groups, no one of whom pays enough to cover the total costs of the business. A professional baseball team not only sells tickets to those who enter its stadium; it also sells television and radio rights to broadcasters who cover the game, and rents out the stadium to others who use it for rock concerts, boxing matches, and other events while the team is on the road or during the off-season. If ticket prices for baseball games rose to exorbitant levels, it would be no answer to the fans to say that they were still not being charged enough to cover the total costs of the baseball club. Yet colleges and universities use this as an argument against students and their parents who complain about exorbitant tuition.

In the ordinary transactions of the marketplace, competition from rival producers limits how much a given business can charge its customers. In the academic world, however,
organized collusion
among some of the most expensive colleges has stripped the students and their parents of this consumer protection. Each spring, for 35 years, the Ivy League colleges, M.I.T., Amherst, Northwestern, and a dozen other colleges and universities have met to decide how much money they would charge, as a net price, to
each individual student
, out of more than 10,000 students who have applied to more than one institution in this cartel. The lists of students have been compiled before the annual meetings and officials from the various colleges have decided how much money could be extracted from each individual, given parental income, bank account balance,
home equity, and other financial factors. Where their estimates differed, these differences were reconciled in the meetings and the student then received so-called “financial aid” offers so coordinated that the net cost of going to one college in the cartel would be the same as the net cost of going to another.
⁶⁵

The U.S. Department of Justice began investigating these and other colleges in 1989. With a legal threat of anti-trust prosecution by the government, and a class action suit on behalf of students, hanging over this group of colleges, pending the outcome of the investigation, Yale and Barnard dropped out of the meetings in 1990, and in 1991 the meetings were canceled.
⁶⁶

A cartel or a monopoly maximizes its profits by charging not only a high price but also, if possible, a
different
price to different groups of customers, according to what the market will bear in each separate case. Seldom can most business cartels or monopolies carry this to the ultimate extreme of charging each individual customer what the traffic will bear, as the academic cartel did. But academic institutions are armed with more detailed financial information from financial aid forms than most credit agencies require, and for decades have been comparing notes when setting their prices, in a way that would long ago have caused a business to be prosecuted for violation of the anti-trust laws. In other respects, however, the colleges and universities use the same methods as business cartels or monopolies. Like monopolistic price discriminators in the commercial world, private colleges and universities set an unrealistically high list price and then offer varying discounts. In academia, this list price is called tuition and the discount is called “financial aid.”

The widespread availability of financial aid—often received by more than half the students at the more expensive colleges—changes the whole nature of tuition. Back when scholarships were awarded to a needy fraction of the students, this was clearly a matter of philanthropy and reward for academic ability. Today, varying amounts of financial aid are awarded up and down the income scale, and very little of it has anything to do with the quality of the student’s academic record or with philanthropy to the poor. Approximately two-thirds of the undergraduates at Harvard and four-fifths of those at Rice receive financial aid.
⁶⁷
The average family income of financial aid recipients
at Harvard in academic year 1990-91 was $45,000. These financial aid recipients included more than 400 whose family incomes were above $70,000, of whom 64 came from families with incomes exceeding $100,000.
⁶⁸

Harvard is not unique in this respect. At Marquette University, for example, out of 119 students in the class of 1989-90 who came from families with incomes of $60,000 to $70,000 and who applied for financial aid, 71 were declared eligible for it, as were 74 out of 192 students from families with incomes above $70,000.
⁶⁹
Similar figures are common at other private colleges and universities. The President of M.I.T. noted that financial aid applicants at that institution “are distributed almost uniformly across the spectrum of family incomes.”
⁷⁰
The percentage of applicants who receive aid typically varies by income level and so does the amount of the aid received, so that the net price actually charged is adjusted to the most that can be extracted from each applicant’s family.

Ordinarily, price discrimination does not work in a competitive marketplace, because those charged extortionate prices will be bid away by competitors, until the price is competed down to a level commensurate with the cost of producing whatever commodity or service is being sold. But this does not happen among high-priced colleges which engage in organized collusion. The picture is complicated somewhat by the fact that the term “financial aid” encompasses both paper discounts from tuitions listed in college catalogues and actual transfers of money—the great bulk of this money being governmentprovided or government-subsidized. Philanthropic aid also continues, enabling a needy fraction of students to cover their cost of living, as well as tuition. Fundamentally, however, college-provided “financial aid” is a method of producing a sliding scale of tuition charges, like ordinary price discrimination elsewhere—and like successful price discrimination elsewhere, it is a by-product of collusion. For example, when one student found that his financial aid package offered by Brown University and by Yale were inadequate to enable him to attend either institution, his efforts to get an increase were complicated by the fact that “each could alter a package only after consulting with the other.”
⁷¹