Monday, August 14, 2006

Strategies to Reduce Tuition Increases: II

By Richard Vedder

If a larger percent of students in American higher education start attending relatively low cost schools, the average cost of higher education will start rising at a slower rate, even if each individual school continue to operate in the relatively inefficient fashion common for American colleges and universities, raising their price of attendance at a rate much greater than the general inflation rate.

Let me make the point more specific by using a little illustration. Suppose we had 10 students going to college, two at a prviate schools with a $20,000 tuition, five at state universities with an average $8,000 tuition, and three at community colleges with a $4,000 tuition. Total tuition costs for the ten students would be $92,000, or an average of $9,200 per student.

Fast forward one year. Suppose we had 3 percent inflation, 4.5 percent median family income growth (about 1.5 percent after adjusting for inflation), and 6 percent increases in tuition fees at all schools. For example, the private school tuition would go to $21,200. These figures are pretty close to the typical historical experience --tuition rising double the inflation rate and faster than family income.

Now, suppose we have two of our ten students still going to private schools, only four at four year state universities, and four at community colleges. The total tuition bill for the ten students would be $93,280, or $9,328 average per student, an increase of less than 1.4 percent from the previous year, and far less than the growth of overall prices or family income. Shifting the composition of college students towards lower cost institutions has real promise as a means of meeting the goal of the Spellings Commission of trying to keep tuition charges below the growth of family income.

Several questions arise. How do you accomplish the shift in enrollments? Won't this devastate the higher priced schools enrollment-wise? The answer to the last question is probably no, since enrollments are projected to grow anyhow, and if that growth goes exclusively to the low cost schools, the traditional universities will not face, on average, serious enrollment declines. State governments, anxious to reduce the incremental cost of educating more kids, might find it cost effective to offer some forms of scholarship aid usable exclusively at two year or low cost four year schools. Less desirable, they might impose strict enrollment limits on the more costly schools, forcing incremental enrollments to seek the less expensive schools (although some might confound those plans by going to more costly private institutions). Governmental capital constructions monies should go to the low cost institutions relative to the higher priced ones. Federal loan subsidies for upper middle class kids going to relatively costly schools could be ended, giving them greater incentives to seek the lower cost alternatives.

From the standpoint of educational policy, students whose probability of collegiate success are deemed rather low (based on grades, academic preparation or test scores) should be encouraged (forced?) to attend the low cost options. If they succeed in their first year or two, they should be able to transfer in a relatively seamless fashion to the more costly major four year universities. If they fail, they have been given a chance to further their education (in keeping with the American egalitarian ideal), at a relatively low cost both to them and the taxpayers.

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