Sunday, August 13, 2006

Strategies to Reduce Tuition Increases: I

By Richard Vedder

The Secretary of Higher Education's Commission on the Future of Higher Education (hereafter, the Spellings Commission) recommends as a benchmark that tuition increases should be no greater than the growth in median family income. A very long article could be written on the politics of getting that into the report, but that is a story for another day.

How do we meet that objective? There are some moderately radical things that would certainly ultimately lead to achieving the goal, including the federal government getting out of the business of providing loans for relatively affluent students. These things, unfortunately in my judgment, are not likely to happen in the near term (although we should be working to see that they ultimately come about).

State college presidents argue that the solution is simple: increase state appropriations. Bigger state subsidies will reduce the need to rely heavily on tuition fees. There are two problems with this argument. First, the empirical evidence suggests that only a minority of incremental appropriated funds are devoted to moderating tuition increases. While our research on this is on- going, my best current guess (based on some solid econometric examination), is that for each new dollar of per student appropriation, tuition increases are reduced by only 30-35 cents. Universities use the rest of the money for other things -- they will say to improve research capability, but some of it ends up in greater income for working members of the university community.

The second problem with the "give us more money" argument is that it is very unlikely to happen, at least to the extent that the universities want. Until we rationalize the funding of Medicaid (and Medicare, for that matter), state government budgets are not going to allow big university funding expansion. Given a choice of helping poor people meet their health needs or subsidizing largely middle class college students, or even younger kids with their schooling, the politics demand that the money go to these other needs.

How then do we meet the Spellings Commission objective? Two options are worth exploring. First, increase the proportion of students going to relatively low cost institutions. Even if tuition rates within each type of institution continue to rise a good deal, the average tuititon for the entire population will rise less if relatively more students go to lower costs institutions such as community colleges and on-line universities like Western Governors University. The second option is to provide incentives to universities to reduce the rate of growth in tuition charges -- and increase the proportion of appropriation increases going to moderate tuition increases.

In coming epistles, I will elaborate on each of these two strategies.

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