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The Surprising Explanation Behind Skyrocketing College Costs

By Amanda Alix - Sep 2, 2013 at 8:37AM

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Simply put, colleges and universities raise prices because they can.

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.

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