The Surprising Reason Why Colleges Raise Tuition
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The Surprising Reason Why Colleges Raise Tuition

iStockphoto/The Fiscal Times

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...”

However,in my recent paper, I find that isn't the case. After updating the theory, a revised Bennett hypothesis is shown to be a big factor in explaining why tuition increases, largely because competition in higher education is dysfunctional:

We would not expect bread producers to simply spend more making bread until they had captured the entire subsidy, so why does this happen in higher education?

The key difference between higher education and the bread industry is the nature of competition: In higher education, colleges essentially compete in a zero-sum game for relative standing... Since high quality inputs are costly, and colleges are playing a zero-sum game of relative position, there is no limit to what college[s] will spend in the pursuit of excellence...

In contrast, bread producers compete based on value (roughly defined as quality divided by
price, both components of which are observable to consumers)... Bread-makers seek to make the bread with the highest value, they do not seek to spend as much as possible in the pursuit of the highest quality bread regardless of cost... [so] there is no need to worry that subsidizing bread will lead to higher bread prices and capture of the subsidy by bread makers...

Whether you buy my argument that the new and improved Bennett Hypothesis is an important factor in explaining why tuition increases or not, it is clear that tuition increases cannot be explained by changes in state appropriations.

That is why ACTA has been vigorously urging college trustees to reject the notion that declines in state appropriations necessitate balancing the budget through tuition increases. Holding the line on tuition is essential to prevent shifting the burden of rising costs to the very students the institution serves. More importantly, it will place the imperative on all stakeholders to work together toward solutions that ensure that higher education remains efficient, effective, and accessible.

Andrew Gillen is the Senior Researcher for the American Council of Trustees and Alumni, a higher-education non-profit dedicated to academic excellence.

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