GlobalShift

Why College Tuitions Are On The Rise

With the tuition hikes of UCLA getting so much publicity, I thought it would be good to take a moment to explain why college tuition rises so outrageously. The UCLA students are right to be angry, since cost is a major factor in their decision to enroll, and without consent an altogether different price is thrust upon you. The fact that UCLA made a host of fiscal errors is bad enough, but to push the cost of their mistakes onto students makes things worse. It’s legal, but it’s still a form of contract violation, even if the contract being violated is a social one. While newsworthy, what isn’t understood is how universities can raise costs without fear of a decline in enrollment.

Up to the period of World War II, average cost of college tuition was around 1 to 3 HUNDRED dollars annually. Yes, annually. By the mid-50’s, college tuition had risen to about 1500 dollars per year. You think UCLA raising cost 32% is bad, try a 750% increase over a 10 year period. What happened?

The G.I. Bill and eventual “baby boomer” generations happened. When the government, nobly enough, poured out money that allowed war veterans to go to college free of charge, the game changed. Universities were now faced with demands that outstripped their resources. They had to hire more teachers, buy more books, build more classrooms, supply more housing, and on it went. But what happens when those WWII veterans graduate? The universities had invested a lot of money to get the resources to meet demand; what if government-stimulated demand drops? Would universities have to lower tuition costs to stimulate their own demand? Or would government further subsidize education in an effort to create demand on behalf of the universities?

THE CIRCUS NEXT DOOR

Imagine owning a restaurant and having the circus move in next door. Suddenly the circus performers are all eating at your restaurant. Looking around, you see that business is booming, not realizing that the boom is temporary. So you decide to invest in building another restaurant. If the circus leaves town and business goes back down. Your stuck with two restaurants that you can no longer pay for.

This is what happens when the government saturates a market with money. For government to spend money that it doesn’t have, it has to sell bonds, stock, treasury bills, reserve notes, and so on. Basically, they sell IOUs on the market, an people buy them because they think it’s a sure thing. They assume the government will pay back their debts – with interest (because after all, they can just print money to do it).

When government spends too much money, the first place you will see inflation (money worth less and so more is needed to buy fewer goods) is areas in which the government is most directly involved, in this case – education (social security & health care are other two biggest government expenditures).

Since our economy has shifted from production, to one of information management and consumption, college becomes more and more necessary for even an intermediate job (a problem for another day). Yet offering such huge subsidies in education, the value of a college degree is actually diminished. Everybody has an undergraduate degree, so to be competitive you have to get a master’s degree. Pretty soon we’ll have secretaries with their doctoral degree hanging above their desk.

As tuitions rise, politicians promise federal aid as a ploy to be elected. To receive these huge sums of money, universities are mandated to maintain certain levels of enrollment (with different specifications for in-state/out-of-state, research funding, etc. involved). And if it seems that universities are having a hard time containing tuition costs, they are more likely to secure more federal aid. This decreases a colleges incentive for financial responsibility, allowing colleges to keep huge profits and stick students with the bill.

By pouring money into loan securitization, which removes the risk of financing student loans, and offering huge sums of government money to schools, the government creates a false market for the education system. It’s similar to what happened in the morgage market in 2008. A major contributer Wall Street’s greed was the mentality that the government would cover the costs if loans went bad. The careless behaviour that resulted drove prices up artificially and destroyed many lives. In fact, government bought up a lot of bad loan deals, and pumped huge sums of money into student “aid” programs. Just like propping up failed banks, loan programs were inflated which prevented tuition prices from falling to meet market demands. This allows colleges to “bid up” the price of tuition, because they know that even if a student can’t pay back their loan, the government will step in and cover the cost of both the loan and collecting on the debt (through the department of revenue). It’s a can’t lose for universities.

 How many people could actually go to college if they weren’t able to get a student loan? Very few I suspect. If money for education wasn’t so easily available, nobody would be able to enroll at a university. Universities would have to take it upon themselves to get students to enroll. They’d have to slash tuition costs.

…PAVED WITH GOOD INTENTIONS

Even if our politicians have the best of intentions, the inevitable result will be huge price increases. We need to untangle and limit governmental involvement in education. We’ve been doing a lot of things wrong, so it would have to be done over a long period of time and in a morally responsible way. By doing so, we can create an imperative for universities to cut tuition and improve their overall efficiency. They can’t be profitable if they aren’t efficient (anyone that’s ever dealt with university bureaucracies knows just how efficient they are). Universities would be far less able to exploit their student bodies.

So protest on, you UCLA students. But know, where the real problem lies.