Student loan debt has now surpassed credit card debt as the second-largest category of consumer encumbrances and will soon reach $1 trillion sometime in 2012. One-third of all students owe more than $20,000 in student loan debt. Annual subsidies to higher education, including direct grants to institutions, grants to students and subsidized loans, exceed $50 billion annually.
It is little wonder then that President Barack Obama addressed this issue in a recent speech at the University of Michigan. He stated that as tuition continues to increase, colleges and universities can count on less funding from the federal government. With this type of pressure placed on institutions, why does tuition tend to grow faster than the Consumer Price Index? There are several reasons — some justified and some not.
The Consumer Price Index measures a market basket of goods and services that consumers buy, but it is not the same market basket that colleges and universities purchase. New buildings, scientific equipment, sophisticated computer networks, accounting costs, and, in general, goods and services which colleges and universities purchase have increased in price much faster than the products consumers buy. The productivity gains that have been realized in, for instance, the automotive and basic manufacturing industries, are the result of increases in the use of more efficient capital, like computers and new machinery.
Higher education has not been as fortunate. Colleges and universities are very dependent upon labor. In fact, salaries and benefits of faculty and staff amount to about 70 percent of the budget at Misericordia University. Most institutions have similar ratios.
William J. Baumol, an economist at Princeton University and later NYU, spent a year’s sabbatical at the Ford Foundation in the 1960s studying institutions with high labor costs, such as the arts and education. His conclusion, as recounted in a recent New York Times article by economist Robert H. Frank, is that certain sectors of the economy have a much higher percentage of labor costs and these costs grow much faster than the cost of capital. Baumol compares college instruction to musical performances. Beethoven’s String Quartet No. 4 in C Minor still takes four musicians as long to practice and play in 2012 as it did in 1801. Similarly, it takes almost as long to teach an introductory course in economics or history today as it did 100 years ago.
There is some hope that greater productivity gains in colleges can be realized. Major universities such as MIT, Rice, and others are placing often-taught introductory and intermediate undergraduate courses online. Probably sooner than later, college faculty throughout the country will be using these courses for most of their basic instruction, reserving in-class time for more thoughtful discussions and in-depth analysis.
For many students, online education is becoming a substitute for the traditional class. At other institutions such as Misericordia, hybrid classes that employ both “brick-and-click” technologies allow students the opportunity to learn content that is best presented through technology while also enjoying the advantage of in-person faculty structure.
Clearly, the public is aware of the increasing cost of tuition, but they seem equally aware of the benefits of a college education. A recent study by the Pew Foundation showed that college presidents and the general public both believe that college graduates on the whole make 20 percent more each year than those who do not graduate college. Both groups are on target. According to the Bureau of Labor Statistics, last year a college graduate made $19,500 more than their high school graduate counterparts. College graduates are also half as likely to be unemployed and 70 percent less likely to be in family financial straits.
So, if college is worth it, how can we keep costs relatively low? According to Mark Kantrowitz, publisher of Fastweb and FinAid, a national clearing house for helping to contain college costs, there are several steps students can take to mitigate their costs. He recommends students enroll full time at a college with a high four-year graduation rate and to try and avoid transferring to another college or changing majors. When a student needs to retake a course or catch up in his or her major, he suggests summer classes because they are usually less expensive. It is also important, Kantrowitz says, to graduate on time, use tax-deferred college savings plans and to use a college’s short-term tuition payment plan over long-term debt.
These and many other strategies can reduce the cost of college and, consequently, debt. Above all, make sure that the institutions you are visiting genuinely care about students academically, personally and financially. If they do, it can make a big difference in how long it takes to graduate. After all, shortening the time to graduation is the best way to reduce college debt.
Michael A. MacDowell is president of Misericordia University in Dallas, Pa., where he occasionally teaches economics.