Tag: Terry Hartle

Our Greedy Colleges

Two publications addressing college costs caught my eye in the last 48 hours. Both undermine the notion that college prices have skyrocketed almost exclusively because state subsidies to schools have plummeted.

The first piece, however, is actually supposed to make the opposite point.

You might recall my previously taking exception to statements by Terry Hartle, senior vice president of the American Council on Education, in which he asserted that there is no meaningful evidence that federal student aid drives tuition inflation, and that price increases are almost entirely a result of decreasing state appropriations to public colleges. Yesterday, Hartle and ACE’s Bryan Cook published a chart in a publication titled “Myth: Increases in Federal Student Aid Drive Increases in Tuition” that supposedly illustrates that it is indeed state budget cuts, not colleges’ ability to rake in money through aid, that explains tuition inflation.

Now, I wouldn’t say that aid “drives” prices, but I would say that aid fuels inflation by enabling schools to greatly increase tuition. I am also not aware of anyone arguing that an increase in aid leads to an immediate, one-for-one spurt in prices; instead, aid enables prices to rise over time. And it is not only federal assistance that enables prices to balloon—though Washington is the biggest aid source—but also state aid, scholarships, etc. And no one says that aid is the only factor involved in price increases; undoubtedly state subsidies matter for public colleges. So to a large extent the argument that federal aid doesn’t fully and immediately drive prices in public colleges attacks a strawman.

With all that in mind, what does ACE’s graph reveal about the declaration that state subsidy cuts are the real culprit behind rapidly rising college prices? It shows that there’s much more to the story. And I’m not even talking about the near-total inability of ACE’s preferred bogeyman to explain private college tuition.

I haven’t been able to track down the source of ACE’s data, so I can’t reproduce the graph here, nor can I do better than eyeball where each point lies. But by my viewing, there are only two academic years in which colleges’ per-capita tuition increase simply made up for state-subsidy losses: 2004-05 and 2010-11. Every other year tuition rose well in excess of subsidy losses, ranging from a 1 percentage point net gain in 1992-93 to 7 points in 2007-08.

So even by ACE numbers, our supposedly beleaguered public colleges actually look pretty greedy. And what likely enables that greed? The ability of students to cover price increases with aid.

But don’t just take my word, or ACE-supplied evidence, for this. Ask a professor:

Academic economists like to make fun of businesspeople: they want competition when they enter a new market but are quick to lobby for subsidies and barriers to competitors once they get in. Yet scholars like me are no better. We work in the least competitive and most subsidized industry of all: higher education….

Just as subsidies for homeownership have increased the price of houses, so have education subsidies contributed to the soaring price of college. Between 1977 and 2009 the real average cost of university tuition more than doubled.

These subsidies also distort the credit market. Since the government guarantees student loans, lenders have no incentive to lend wisely. All the burden of making the right decision falls on the borrowers. Unfortunately, 18-year-olds aren’t particularly good at judging the profitability of an investment without expert advice, and when they do get such advice, it generally counsels taking the largest possible loan…

Last but not least, these subsidized loans keep afloat colleges that do not add much value for their students, preventing people from accumulating useful skills.

Those are the words of University of Chicago professor Luigi Zingales in a piece in yesterday’s New York Times. It’s a nice bit of truth-telling because it comes from within academia, not without. The article is also important because it goes on to discuss a way of lending that makes sense for lender, borrower, and taxpayer: “equity contracts,” or what a 2002 Cato report called “human capital contracts.” Basically, borrowers would repay lenders by giving them an agreed-upon percentage of their future income, and all government would do is enforce the contracts. That would enable borrowers to avoid the big problem of having a set amount due often before they have the ability to repay, and it would greatly increase the efficiency of college financing, with lenders likely to be quite discerning about who really would benefit from college.

Unfortunately, that sort of efficiency is something colleges—even, it seems, public ones!—almost certainly don’t want. They love making money, and do it most easily when government gives out dollars like water.

The Student Aid ‘Myth’ Myth

There’s a very disturbing tendency among academics – though many people in policy fights do it – to dodge substantive debate by declaring, basically, “the other side is full of garbage so just ignore them.” You probably see it most glaringly about climate change – no one credible disagrees with Al Gore! – but I see it far too frequently regarding the possibility that government student aid, the bulk of which comes from Washington, is a significant factor behind college price inflation. 

Today, we are treated to this lame dodge in a letter to the Washington Post from Terry Hartle, Senior Vice President at the American Council on Education, arguably the most powerful of Ivory Tower advocacy groups. He writes:

Second, we must do away with one of the most persistent and pernicious myths of higher education: that increases in federal aid drive up the cost of college. Several studies, including two by the Education Department, show there is no link between federal student aid and tuition increases. But there are still those who would have people believe that modest increases in student aid programs are the driving force behind institutions’ decisions about tuition and fees.

I would love to put this “myth” myth to rest. Yes, as I discuss in my recent policy analysis, there are serious challenges in trying to prove that aid fuels price inflation. Lots of variables affect what colleges charge; you need to study long time frames encompassing several business cycles; and you have to account for the fact that aid automatically rises when prices do. So while there is tremendous logical reason to think aid has enabled price inflation – former college presidents acknowledge as much, basic economics says subsidies drive up demand, etc. – like any social science there is no definitive proof.

That sure as heck doesn’t mean, though, that there isn’t any research showing government aid driving price inflation, even if it doesn’t prove it. In addition to the incredibly powerful rational reasons to strongly suspect aid plays a big role in out-of-control college pricing, there is, indeed, empirical evidence. For the benefit of the whole debate I offer a smattering of it below, hopefully putting an end to the disturbing denial tactic employed by Hartle and others. Hopefully, but not likely….

John D. Singell, Jr., and Joe A. Stone, “For Whom the Pell Tolls: The Response of University Tuition to Federal Grants-in-Aid,” Economics of Education Review 26, no. 3 (2006): 285-95.

Bridget Terry Long, “How Do Financial Aid Policies Affect Colleges? The Institutional Impact of Georgia Hope Scholarships,” Journal of Human Resources 30, no. 4 (2004): 1045-66.

Bradley A. Curs and Luciana Dar, “Do Institutions Respond Assymetrically to Changes in State Need- and Merit-Based Aid? ” Working Paper, November 1, 2010.

Rebecca J. Acosta, “How Do Colleges Respond to Changes in Federal Student Aid,” Working Paper, October 2001.

Michael Rizzo and Ronald G. Ehrenberg, “Resident and Nonresident Tuition and Enrollment at Flagship State Universities,” in College Choices: The Economics of Where to Go, When to Go, and How to Pay for It, edited by Caroline M. Hoxby, (Chicago, IL: University of Chicago Press, 2004).