The Cause of the High Rate of Price Increase in Higher Education in 9 Charts

I continue to have this dialog about the cost of higher education and the college debt crisis.  It is driving me more or less nuts that I can never find the time to write the full explanation for what is happening and why.  People keep blaming the wrong things on why the cost of college education on the part of the individual student is rising at a faster pace than nearly everything else in the economy.  Here are some of the reasons I have heard that are just bunk:

• Federal government backing college loans is driving up the cost of higher education.

• Higher education really isn’t “non-profit” or “not-for-profit” and is all about raking in money.

• Colleges and Universities have been on a building spree, creating mounting debt that is only causing tuition to rise.

• Athletics is costing more and the average student is paying for these non-academic “luxuries”.

• Too many are going to college that don’t need to, inflating the cost for those that do.

• And many more.

I am not going to spend time debunking each of these, because I want to get out a post on this now.  Suffice it to say, they just are not the reasons for the spiking cost of higher education.  The real reason for why this is happening comes down to a perfect storm of factors that have very little to do with the above, at all!  What it comes down to, in order of effect, is:

1. Plummeting taxpayer/public support for higher education by the several states.

2. Significant increase in labor cost to employers especially for healthcare and daycare in an industry that is highly labor dependent.

3. Increased mandated oversight and administrative tasks requiring increased administrative full time equivalent staff.

4. Increased demand for capacity for student support and auxiliary services as a differentiator among the competition.

So here in a series of graphs and charts I am going to try to spell it out.  Let’s first start with the fact that, yes, the cost of higher education has skyrocketed over the last several decades.  Here is a handy chart from the American Enterprise Institute that lays it out fairly clearly; other than hospital stays, the cost of the price college (to the consumer) has risen starkly.

[i]

But the question is why?  Well let me start with the most clear reason:  its simply not being subsidized like it used to be.  As a case in point, here is a chart from George Mason University, a public institution in the Commonwealth of Virginia.  This chart lays out in clear terms the impact of what the precipitous loss of State support to the institution is doing to the individual student and their expenses.

[ii]

Basically, since 1985, the ratio of state support coverage of the cost of attending Mason to that of what the student paid or other revenue sources[iii] pay has more than flipped (and if you go back to the 1960s, where many a baby boomer will recall covering college by “working their way through”, it is even more stark).  Simply, the taxpayer used to cover most of the cost, and now they are “supporting” the effort at a significantly reduced rate.  Mason is simply an easy example with a clear chart.  The next two charts show how States have pulled out of the college funding business, in some cases nearly completely.

[iv]

[v]

And as recessions hit, or other economic challenges emerge within the world of State financing, it’s getting worse each time.  As shown in this chart, the easy answer for State legislatures to help balance their budgets and/or lower taxes is to cut higher education spending when times are tough.

[vi]

So bottom line is that a huge contribution to the driver of the rise in the cost of college education to the individual student is that government is not helping nearly as much, or even at a reasonable proportion of as much as it did for their parents or their grandparents.  So what we have is that college costs are going to rise faster than inflation, or the general cost of everything else, because what had previously covered it was gone.

This brings us to the next driver, however, and that is the general cost of labor has risen steadily over that last decades driven by several things, but certainly healthcare.  The following a chart created from data available from the U.S. Bureau of Labor Statistics as it relates to employer costs for employing its labor.

You will note from this graph, that the cost of labor has gone up.  If you look carefully, however, you will also note that workers’ wages are NOT increasing, rather it is really driven by the cost of insurance going up.  On the side of the higher education customer (students and their parents), this basically means that there aren’t any increased resources on their part to cover the costs that they are incurring.  So, the many charts available that show how the cost of college is outpacing wages and salaries are on par.  All good there (well not "good" but accurate).  What folks continue to forget, however, is that on the college and university side, this has yet another effect: driving the cost of higher education even higher.

As is illustrated in a report from the California State Legislative Analyst’s Office, the following graphs make clear that largest portion of any college or university is the cost of its employees, somewhere between 66 to 75% of the overall enterprise.

[vii]

Thus, when you put together that the largest portion of the actual cost to run a college or university has risen some 15 to 25% in the last two decades (and over 60% since the 1980s), it becomes clear that the reality is that it just costs a lot to do education, because education is a human resource intensive enterprise.  This is seen in K-12 education as well.  This is especially true when you want to do it well and at a level commensurate with the expectations society has for it (e.g. leading to professional careers or other pursuits near the top of society).  This is not really any different than one of the major causes of the rise in health care costs, in that health care is inherently human resource intensive too (which creates a bit of a price spiral).  To that point the following chart helps you see how salaries have tracked as it relates to higher education as compared with medical professionals as well as lawyers.

[viii]

These are just not industries like construction, finance, industry or others where there are other components like materials, energy, and equipment drive the cost of the enterprise.  This means the cost of it will outpace the cost growth in most of those other industries consistently.  So when you add the precipitous drop in public/taxpayer support higher education to this intensive real cost increase, that exceeds the norm for most any other industry or component in the economy, it is a perfect cost storm to the individual student.  These two factors (loss of support and increased cost of labor) are the largest components of the actual reasons for the increased cost of college for the average individual student.

That said, there are a couple more reasons for the rapid cost increases, that are not at the level of the previous reasons, yet are worth mentioning.  Of the two, one is shown in the following chart, which shows the increase in the full time equivalent senior staff and administrators compared with faculty in the University of California system over time.

[ix]

This is not unusual or particularly helpful in itself, except as it relates a couple points.  Administrators typically cost more than faculty at most ranks, so an increased number means increased marginal cost to the institution.  The further question is, why then are there more administrators?  Good question.  Well the biggest driver of the increase in the number of administrators is the numerous additional regulations and other oversight mechanisms that have been put into place on the industry, creating an administrative burden that someone is paying for (aka the average college student).  But it also ties to the other reason for the uptick in the college price tag: the demand for services that go beyond what we had in yesteryear.

The following chart helps to show this shift.  This chart from the University of California system, again, highlights the breakdown of the spending from two different snapshots in time, just 5 years apart.

[x]

If you look carefully, you will note that, as a percentage, instruction costs have gone down from 26.3% to 24.2% (and facilities costs have gone from 3.3% to 1%).  Then you will see that three specific areas have had varying levels of growth:

• Academic support went from 7% to 8.5%

• Student services went from 3.8% to 3.9%

• Auxiliary enterprises went from 6.3% to 9.1%

Adding those increases together, is a whopping 5% shift, all towards providing more “niceties” if you will.  Some of these are certainly things like an on campus Starbucks or better recreation facilities, but others are much more robust accommodative services, increased and improved tutoring or other academic help, counseling services, increased public safety, and better student life activities for all, which, many times are also mandated.  These final two reasons also contribute to the rise in per capita cost to the customer.  The bottom line is, yes, there are potentially some small nice to haves that are adding to the bottom line.  In many cases however, the cause for them is based on “must do” items that won’t appreciably change the picture unless the said same legislatures that are reducing the support for higher education also give relief from those requirements; there is fairly low likelihood of that.

In conclusion, the biggest driver of the increase in the price tag of college comes back to the rather dramatic decrease of taxpayer/public support coupled with the significant increase in the cost of the human resources required to make the enterprise work.  Fixes for this will inevitably come in the form of public policy shifts that we have to struggle to debate and resolve.  Public policies, however, can also make the problem a lot worse.  One such prime example is a minimum wage hike where colleges and universities employ many low-wage workers, sometimes college students, to accomplish a myriad of activities across campuses.  Adding even more costs to the already intensive human resource enterprise will only add to the high rate of growth.  I am not sure I have a silver bullet, other than to realize that yesteryear’s highly subsidized false price tag of higher education is a false comparison.  To that end, we need to get real and get on making some hard choices going forward.

End Notes:

[i] “Chart of the Day.... or Century?,” American Enterprise Institute - AEI (blog), January 11, 2019, https://www.aei.org/carpe-diem/chart-of-the-day-or-century/.

[ii] Davis, J.J. Wagner (2016), Presentation to the Board of Visitors, Finance and Land Use Committee, George Mason University, October, 13 2016

[iii] Basically, on campus enterprises, auxiliaries and so forth as well as fundraising.  In some cases this further increases the cost to the student (e.g. for housing and dining) and in others has driven decisions about things like athletics, public-private partnerships, and so forth with the costs being carried by others.

[iv] Mitchell, Michael, Michael Leachman, and Kathleen Masterson. “Funding Down, Tuition Up: State Cuts to Higher Education Threaten Quality and Affordability at Public Colleges,” August 15, 2016, 28.

[v] Mitchell, Michael, Michael Leachman, and Kathleen Masterson. “Funding Down, Tuition Up: State Cuts to Higher Education Threaten Quality and Affordability at Public Colleges,” August 15, 2016, 28.

[vi] Mitchell, Michael, Michael Leachman, and Kathleen Masterson. “Funding Down, Tuition Up: State Cuts to Higher Education Threaten Quality and Affordability at Public Colleges,” August 15, 2016, 28.

[vii] “The 2020-21 Budget: Analyzing UC and CSU Cost Pressures,” December 17, 2019, 20.

[viii] Archibald, Robert B, and David H Feldman. “Drivers of the Rising Price of a College Education,” August 2018, 20.

[ix] Christensen, Kim. “Is UC Spending Too Little on Teaching, Too Much on Administration?” Los Angeles Times, October 17, 2015. https://www.latimes.com/local/education/la-me-uc-spending-20151011-story.html.

[x] Public Policy Institute of California. “Higher Education in California: Institutional Costs.” Accessed December 8, 2020. https://www.ppic.org/publication/higher-education-in-california-institutional-costs/.