Commentary

D.C. Drove Up Your Student Debt

One of the major complaints of the Occupy Wall Street crowd, many of whom have taken on significant student debt, is that the cost of college is too darn high. And they’re right, but not because of greedy corporate fat cats. No, the real guilty party here is federal politicians, who for decades have been fueling high profits — and prices — at both for-profit and nonprofit schools.

Wait. Big profits at nonprofit colleges? Yes, money has been piling up even at schools you thought had no interest in profit. And Washington, D.C., is the biggest hand feeding the beast.

Thanks to recent congressional hearings and battling over new regulations for for-profit schools, most people — including many college-aged, profit-disdaining Wall Street squatters — are probably at least vaguely aware that for-profit colleges are making good money.

[T]he feds have been blasting helium into the college-cost bubble, enabling profits to balloon at the expense of students and taxpayers.”

But not just openly profit-seeking schools are making big bucks. If we define profit simply as revenue derived from providing a service exceeding costs, putatively nonprofit colleges actually have much higher margins than for-profit schools.

How do we know that? It’s tough, because nonprofit schools typically report all their profits as expenses. Basically, they take excess revenues coming from undergraduate education and distribute them throughout the college in subsidies for research, graduate education, low-demand majors, low faculty teaching loads, excess compensation or featherbedding. In other words, rather than rewarding investors, colleges pay themselves.

Given this surplus-into-costs alchemy, there are just a few ways to get at schools’ real costs. One is the buildup method, in which you calculate all the inputs required to educate undergrads, from market-rate professors’ salaries to photocopying costs. The second is to get the best internal accounting of actual college expenditures you can, which a few states furnish, and estimate costs from that.

Using both methods reveals that it costs roughly $8,000 to educate an undergraduate at an average, residential college.

Now look at your college bill, including room and board: An average of almost $37,000 at a private four-year university, and $16,000 at a public equivalent.

So what’s the profit? The average tuition and fee charge at a private bachelor’s college, minus institutional aid, was $13,515 in 2008. Subtract $8,000 from that, and just from tuition and fees the school made about $5,500 per student, a margin of 41%. Add donated money like endowment funds, which are often intended to help undergraduate students, and the margins become even bigger.

Profits are similar at public institutions — only what schools don’t get from tuition they make in state subsidies.

This is where Washington’s policies come in.

Colleges have been able to achieve these stunningly high profit margins by radically increasing the prices they charge students. Inflation-adjusted tuition and fees have tripled in the last 30 years.

Politicians have enabled schools to charge these skyrocketing rates in the name, ironically, of helping students. Indeed, inflation-adjusted federal aid to students has quadrupled since 1980, going from $35.4 billion to approximately $146.5 billion. Meanwhile, total student debt has leapt ahead of total credit card debt, blowing past the $800 billion mark.

In other words, the feds have been blasting helium into the college-cost bubble, enabling profits — which, if driven by undistorted demand, could be good — to balloon at the expense of students and taxpayers.

Fortunately, since Washington has been a big part of the problem, it can be a major part of the solution. One relatively easy thing it can do is change financial aid rules that give schools sizable advantages over students when setting after-aid prices. Basically, when students apply for aid the feds give schools students’ total financial pictures, enabling colleges to change their after-aid prices on a student-by-student basis. Students have no such insider knowledge about schools.

The politically tougher, but essential, move would be to phase out the big subsidies to students that enable schools to raise prices with impunity. That means reducing everything from Pell Grants, to cheap student loans, to tuition tax deductions.

The outcry would be that this will hurt students, an objection that would probably issue loudly from the people raging against the financial machine. But it would do the opposite, forcing schools to keep their prices in line with the real cost of providing education, and saving both students and taxpayers big bucks. And that is what everyone should want.

Neal McCluskey is associate director of the Cato Institute’s Center for Educational Freedom. Vance Fried is the Riata Professor of Entrepreneurship at Oklahoma State University and author of the Cato study “Federal Higher Education Policy and the Profitable Nonprofits.”