Higher (Priced) Education: Part 3 of 4
Few Incentives to Keep Costs Low
![Student Debt [1]](https://static.wixstatic.com/media/805d47_756d1adb68414a3381ccf598a771fa2a~mv2.jpg/v1/fill/w_425,h_282,al_c,q_80,enc_auto/805d47_756d1adb68414a3381ccf598a771fa2a~mv2.jpg)
While most of the factors we'll discuss rely on either increasing internal costs or decreasing external funding, this next factor speaks to the nature of higher education and the lack of incentives for institutions to keep their costs down. This claim relies heavily on Bowen’s Rule or the “Revenue Theory of Cost.” Bowen’s Rule states that the “main goal of higher education institutions is excellence, prestige, and influence” and there is “virtually no limit to the amount of money that can be spent to increase these.”[2] Because virtually everything that an institution of higher education does adds value, institutions will attempt to raise as much money as they can and then spend all of the money that they raise.[3] The consequences associated with increasing prices to consumers and rising college debt have not played a key role into the decision making process of institutions of higher learning.
As funding mechanisms change (decreased state funding), higher education institutions choose to raise more money by increasing tuition rather than decreasing their operating expenses. One can hardly blame an institution for this ideology if they truly believe that everything they do adds value to the greater community. Filipic argues, “Everything a college does is a good thing. There are new areas of knowledge to explore, research centers you can create, and new majors you can offer. If campuses have the money, they will do them. They value these things more than they value keeping the costs down.”[4] However, this is the exact thinking that has caused the exorbitant price increases to students. Higher education institutions refuse to eliminate low priorities to their institutional missions and in turn leave the students to flip the bill. Additionally, our society has clearly moved toward viewing higher education as a privately beneficial service. Many people believe that if they are forced to take out a thirty-year loan for a home that benefits them then students should have to take out a thirty-year loan for the same reason. As citizens and policymakers begin to devalue state supported education and institutions themselves see little value in decreasing the price to students, student debt rises rapidly.
The market eventually controls increasing costs in most other sectors of the economy. As institutions raise their prices it should result in less students attending these institutions. However a four-year education has very few substitutes. Success in the United States correlates quite heavily to degrees from four-year institutions. Therefore, higher education is extremely inelastic and can raise prices quickly with little decrease in enrollment. Additionally, students have become much less sensitive to the accumulation of debt and put little forethought into how they will pay it off.[5] Without regulation, these costs will continue to soar.
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The second issue is that there are more external funding mechanisms for students than ever before, most notably in the form of financial aid. Universities have guaranteed revenue streams because no matter what price they charge, scholarships, grants, and loans will cover the cost. Robert Martin and Andrew Gillen argue that while financial aid has been designed to “increase access by lowering prices, recent increases in financial aid have not improved affordability and therefore not increased access.”[7] When institutions find cost saving measures across their university, they rarely, if ever, transfer those cost savings to students.[8] As Vedder puts it, “The students are getting grants and aid so the universities can more aggressively raise fees than they normally would. Instead of the money going to the students to make college more affordable, a lot of the money is instead going to the university—to administrative staff, faculty, and others.”[9] Institutions have little to no incentive to keep costs down and to provide savings for students.
In addition to Bowen’s Law arguing that higher education institutions will find ways to spend every dollar that they earn, these same institutions are able to know their consumers’ exact ability to pay. Robert Martin and Andrew Gillen state:
“The government requires students wanting federal aid to provide intimate financial details for themselves and their parents so that need-based aid can be determined. This is perfectly reasonable, but the government, unreasonably, gives this financial data to colleges and universities. As a result, colleges and universities have unrivaled information about each student’s underlying ability to pay. No one would consider sharing this much detailed family financial data with their car dealer or roofing contractor, yet for higher education, it is standard operating procedure.”[10]
Institutions know exactly how much their students and families can pay. They then use this data (sometimes unintentionally) to justify price increases. Rather than federal aid actually decreasing costs for students and improving access, it results in significant price increases and little additional accessibility.[11]
Institutions have little incentive to keep their costs down according to Howard Bowen’s Revenue Theory of Cost. They have a product with few substitutes and have allocated guaranteed revenue streams, mainly through increased federal aid. These same schools are able to see their consumer’s financial information and utilize this to justify price increases. While this factor has significantly contributed to the increasing cost of college, our next factor is the most significant reason higher education prices have increased.
Next Blog: Higher (Priced) Education: Why Have Higher Education Costs Risen so quickly? Part 4
Sources:
[1] http://www.collegescholarships.org/loans/
[2] Russel, Josh. “Alternative Theories for Rising College Tuition: Baumol’s Cost Disease and Bowen’s Rule.” (Kaufman Foundation, 2015), 6.
[3] Bastedo, Altbach, Gumport. Higher Education in the Twenty-first Century, 30.
[4] Filipic. Personal Interview.
[5] Wimberg, April A. “Comparing the Education Bubble to the Housing Bubble: Will Universities be too Big to Fail?” (University Of Louisville Law Review 51, no. 1, 2012), 179.
[6] http://clinicians.org/college-loans-and-congress-why-you-should-care/
[7] Martin, Robert, and Gillen, Andrew. “How College Pricing undermines financial aid.” (Washington, D.C., Center for College Affordability and Productivity, 2011), 13.
[8] Ibid., 2.
[9] Vedder. Personal Interview.
[10] Martin and Gillen. College Pricing undermines financial aid, 6.
[11] Ibid., 1.
About the Author:
Lukas Wenrick spends his days working to develop innovative solutions to the most complex issues universities face. He does so to ensure that the most marginalized students may pursue an alternative trajectory than the one laid out by their zip code. He believes that universities and other educational enterprises have the duty to expand educational opportunity to as many individuals as possible and that excellence should be judged by the students that an institution includes, rather than those that it excludes.
Lukas holds a Master's of Education in Higher Education from the Harvard Graduate School of Education and a Bachelor of Arts in Social Science Education from Wright State University. His experiences at both an open access public university and an elite private institution inform the work he does every day. Currently, Lukas serves as a University Innovation Fellow at Arizona State University where he works to leverage the ASU enterprise to resolve educational and social inequities in the world.
If you'd like to know more about Lukas you can find him on the following sites:
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