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The Surprising Explanation Behind Skyrocketing College Costs

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As legions of students head off to college, the subject of college costs is front and center -- particularly as President Barack Obama heads off on a whirlwind college tour. One of the main issues the president is addressing is the high cost of a college education, which is spawning a college-educated but debt-laden society. These days, student loan debt can be crippling, keeping graduates from being able to own a home or start a business.

The president's plan to rate colleges according to how good of a job they do preparing students for the work force is a great idea, particularly the part about tying the amount of financial aid available to those institutions based on their performance.

The new concept may not be enough to make college affordable for all, but it does acknowledge the fact that ballooning costs are not a function of how well a school does its job. In actuality, the true reason for the high cost of college has more to do with administrators than professors.

Close to 30 years of spiraling costs
Bloomberg presented a chart recently comparing the percentage increases since 1985 of college costs, health care, gasoline, shelter, and the consumer price index. College costs have soared an amazing 538%, while health care has risen less than 300%. What is causing the wild upsurge in tuition and fees? Administrative bloat.

According to the Goldwater Institute, teaching expenses rose 39% between 1993 and 2007, while administrative costs expanded by 61%. During this same time period, the study found that employees who performed student-oriented services, research, or instruction increased by 18%, while the number of full-time administrators rose by 39%.

Why are so many administrators coming on board, boosting expenses and student costs while contributing very little -- if anything -- to the educational mission of colleges and universities? The reason is fairly simple. Administrative costs are fed by income other than tuition, such as non-academic fees, gifts, and state and federal funding. Much of the latter, of course, comes in the form of financial aid.

Financial aid: fuel to the fire of escalating costs
As Ohio University economics professor Richard Vedder told The Wall Street Journal recently, the federal government's drive to make higher education more accessible to the masses has actually enabled colleges to push costs ever higher. As taxpayer subsidies grow, institutions keep pace, ratcheting tuition and fees to match the expanding generosity of the federal aid programs -- which, in turn, continue to grow as more people attend college -- and require help to do so.

It's a kind of vicious circle, and colleges and universities are making out much better than students and taxpayers. According to Professor Vedder, federal monies have helped build luxury dorm buildings and other extras. At the same time, college administrators are being paid big bucks, and living lifestyles that the rich and famous would envy.

Economics professor Robert E. Martin echoes the belief that federal aid encourages schools to pad costs. In his and co-author Andrew Gillen's 2011 paper, "How College Pricing Undermines Financial Aid," the authors point out that institutions know how much students can afford to pay since the government allows them access to student aid applications. Colleges also know how much aid to expect from outside sources because the money is sent directly to them. This enables schools to plan expansive budgets -- while keeping college accessibility as limited as ever.

Will Obama's plan help?
President Obama's ranking system should, at the very least, help identify those schools that are ratcheting up costs while failing to produce graduates that are able to procure employment. In order to force colleges to contain costs, however, even schools that produce good results will need to have their use of financial aid scrutinized. Otherwise, students will continue to face a future in which their income will held hostage to huge college loan payments -- until, eventually, the cost of a college education becomes too burdensome for anyone to undertake.

Understanding the Big-Debt Picture
The U.S. government has piled on more than $10 trillion of new debt since 2000. Annual deficits topped $1 trillion after the financial crisis. Millions of Americans have asked: What the heck is going on?

The Motley Fool's new free report, "Everything You Need to Know About the National Debt," walks you through with step-by-step explanations about how the government spends your money, where it gets tax revenue from, the future of spending, and what a $16 trillion debt means for our future. Click here to read the full report!

Read/Post Comments (5) | Recommend This Article (2)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 02, 2013, at 9:13 AM, andiconda wrote:


  • Report this Comment On September 02, 2013, at 10:15 AM, woollyrhino wrote:

    It's actually simpler than that. The benchmark for college expenses is the cost of state universities and college systems. When the states defer more money from education toward other programs, then this decreases subsidies and requires more tuition from students attending these schools, thus private institutions can follow suit and raise their tuition as well. It's actually the government itself which is setting the precedent. One of the large drains of money, deferred from education in recent years is the money now pouring into the prison system. The U.S. has by far the largest per capita prisoner/citizen ratio in the world, a trend which began in more recent history. The average cost per prisoner in this system is roughly $24,000 per year, which is actually higher than supporting many college students for the same time span. We often spend more money now keeping a bad influence from society than actually preparing a productive person for society's future.

    It simply comes to control. And our "Justice System" has become big business, where too much emphasis is placed on careers being created and money being made from a continual supply of searching for, processing, and housing criminals, instead of actually preventing and decreasing criminality, eliminating the prisoner turn-style. Actually, criminal behavior, apprehension, and processing feeds a multi-billion dollar justice industry and has become job security for thousands of law-abiding citizens.

    The medical profession has also done a great job in this country in procuring patients-for-life; thus there is more financial incentive for treating patients instead of curing them, because health insurance guarantees a never ending flow of money...

    There is no incentive for government to become more efficient, because that would mean it would need less people to run it, which would mean leaders of departments would have less to do, which means they would have to shrink their departments, become less important, get less in their budgets, have less power, and earn less, and have less influence. And who wants that for themselves?

  • Report this Comment On September 02, 2013, at 10:35 AM, danallen9 wrote:

    woolly is right. I have a hard understanding how a site dedicated to finance can repeat the simplistic analysis of why college costs go up. No doubt, administrative bloat is huge (that's what happens when people insist on measuring the unquantifiable and assessing every breath taken by someone on campus; efficiency experts increase exponentially, as efficiency decreases). But administration is still less than 2% of the total cost. That alone won't account for the price increase.

    But let's analyze this the way you would a company. College costs are UP. For the consumer. But expenditures are NOT up. Tuition does NOT pay for the total cost per student at our public institutions (i.e. 85+% of our schools nationwide). Rather, research grants, endowments, taxpayer subsidies, are used in every budget. So, when you're gauging how far tuition has risen, you're not looking at expenditures, but just one revenue slice of the pie.

    Put it this way. In 1991, the U. Cal. Berkeley budget was 1.247 billion per year. In 2011, the budget was 1.650 billion. In 1991, the state spent $16,500 per Cal-Berkeley student. In 2011, the state spent $9450 per student.

    It's obvious what happened. Berkeley raised tuition to meet the taxpayer subsidy decrease. And expenditures rose at the rate of inflation even in the face of higher administrative and regulatory costs, higher health insurance costs for employees, and most of all, higher research costs for 21st century labs, higher technology costs for wiring the university for wifi.

  • Report this Comment On September 02, 2013, at 12:06 PM, duuude1 wrote:

    Hi Amanda,

    I think you have clearly identified the problem: "College costs have soared an amazing 538%, while health care has risen less than 300%."

    I'm sure you have not identified the cause: "teaching expenses rose 39% between 1993 and 2007, while administrative costs expanded by 61%"

    Teaching expenses rose 39% from what in 1993 to what in 2007?

    And in that period what were the actual admin costs?

    So although you identify % increases which look alarming - you fail to identify what % of college costs each of those comprise. So your argument that increased administration, and further, that financial aid inadvertently leads to college admin bloat - is very unconvincing.

    Your article therefore merely parrots others such as your profs Martin and Vedder, and adds nothing of value to the discussion. I would find this much more useful if you added in-depth analysis and provided more and better data - and a lot more skepticism.

    This topic is important to me since I have two young kids.



  • Report this Comment On September 02, 2013, at 1:54 PM, woollyrhino wrote:

    To further explain the government (and general public) apathy to support the education of the common people in the U.S., the state cost per pupil in the public school system has decreased tremendously in real dollars over the last several years. In micro, an example of this is the case of salaries of public school teachers, where in one district, from 2000 to 2013, the pay of a given teacher, although generally granted step level pay increases each year, has a salary equivalent to a beginning teacher licensed in one discipline. This is after 13 years of service and a M.S. educated level professional, licensed in 4 separate secondary-level disciplines. In what other real-world professional occupation would this be tolerated or found acceptable?

    Unfortunately the K-12 public schools have been relegated by many in this country to the status of a glorified day-care, and the care and training of our youth have been measured in a "how cheap can it be done" attitude. It is a sad society that sends its children to substandard paid professionals for 8 hours a day over the course of 13 years and expects a high quality output. Further, little incentive is provided for many of these students (such as in suburbia) to hunger for success, since many are provided with the "adult freedoms and amenities" of life long before graduating high school. In fact, many drive nicer cars than their teachers.

    This apathy to achieve and hunger for success (losing the "eye of the tiger") exists in other parts of the world. Teachers I knew who taught in Kuwait spoke of students who simply didn't care or try, because daddy was a millionaire and grades and discipline were inconsequential. Another teacher who taught in Colombia spoke of how affluent parents would simply bribe teachers or administrators to make up for their childrens' academic shortcomings.

    For a society to survive and stay ahead of others competitively, the two key components in education that must be instilled in young people are creativity and discipline, which I have seen sorely lacking in today's public schools. Simply learning facts and passing tests does not promote innovation or improvement in the real world.

    The gradual, but ever-declining funding provided for public schools by the government in both lower and higher education is indicative of the lack of concern of those in power to empowerment those in the lower and middle classes. Instead, these groups are encourage to increase their debt, working hours, and their children's debt to the finance industry (and government).

    This trend reminds me of the mining company communities of a century ago, where families became forever in debt to their employers, who controlled both costs and salaries.

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