The Surprising Reason Why Colleges Raise Tuition
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April 12, 2012

In the recent op-ed Why Does Tuition Go Up? Because Taxpayer Support Goes Down in The Chronicle of Higher Education, author Gary Fethke's argues that "rising tuition is the obvious consequence of declining state appropriations..." and that "Students are required to pay more because taxpayers are paying less--it's that simple."

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Though it’s an enjoyable read, I disagree with Fethke’s main point because the data doesn't support this conclusion. The chart below shows the enrollment weighted national average change in per student state appropriations and tuition at public four-year colleges by academic year. I've multiplied state appropriations by negative one, so that if a $1 cut in state appropriations leads to a $1 increase in tuition, the two bars should be exactly equal (rather than being mirror images).

It is clear that the two bars are not equal. The 2003-2004 changes are the only ones that fit Fethke's story, while the rest show a tenuous relationship (correlation of 0.21). Particularly striking are the increases in tuition even when state appropriations were increasing (2000-2001 and 2004-05 through 2007-08). The conclusion is that historically, changes in tuition were not driven by changes in state appropriations. Examining longer time periods rather than yearly changes does strengthen the connection, but it is still nowhere near 1 to 1 (e.g. a one dollar change in appropriations is associated with only a $0.06 to $0.15 change in tuition in the long run).

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So if changes in state appropriations don't explain changes in tuition, what does? Some would argue that faculty salaries (Baumol's cost disease) or institutional aid (college-funded scholarships and discounts) are important, but forthcoming examinations show that they are negligible and minor respectively. One factor that Fethke dismisses is the idea that increases in financial aid lead to higher tuition, known as the Bennett Hypothesis. Fethke argues that “competition defeats the Bennett hypothesis by reducing a university's ability to raise tuition in response to increases in federal grants...”