Higher Ed’s Competitive Arms Race

Despite highly publicized measures by elite universities to increase financial aid, access to higher education for lower income families is eroding, charge Robert B. Archibald and David H. Feldman, two William and Mary economists who have contributed on occasion to Bacon’s Rebellion. Driven by the imperative to increase their standings in the U.S. News & World-Report annual ranking of colleges and universities, institutions of higher education are competing for top students by increasing the dispensation of financial aid on the basis of merit, crowding out aid made available to students on the basis of need.

Over the past 10 years, the share of state grant aid that is not based on need has risen from just under 10 percent to over 23 percent, Archibald and Feldman write in the Baltimore Sun. “The shift toward merit aid is troubling because it doesn’t increase the number of qualified students who receive a higher education. … Merit aid’s primary effect is to concentrate talent at schools with deeper pockets.”

With tuitions at regional institutions rising at the rate of 6 percent to 10 percent a year, less affluent students are getting priced out of the educational marketplace. According to a June 2002 report by the Advisory Committee on Student Financial Assistance, financial barriers will shut off access to college for more than 2 million high school graduates from low- and moderate-income families — despite, I might add, a strong ideological commitment on the part of university administrations to economic and ethnic diversity. At the root of the problem: Colleges and universities are not driven by the profit motive — they’re driven by the prestige motive. And the average SAT score of the entering freshman class is one of the key metrics colleges use to gauge their relative status.

That’s only one of the reasons that inflation in college tuitions are out of control. As I noted in my column, “Tuition Trauma” (April 25, 2005), colleges also compete for the most prestigious professors, especially scientists who bring in research grants, by building expensive laboratories and providing financial support for graduate student/research assistants. We Virginians share in the prestige and benefit from the economic development that comes with having world-class universities in the state. But we’ve got to find some way to bring costs under control and make college tuitions affordable.

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  1. Terry M Avatar
    Terry M

    Jim, in reality, for most of Virginia’s public four-year institutions, it is not US News Rankings that is driving institutions to greater selectivity and more merit-based aid. Instead it is many of the measures US News uses, such as graduation rates and retention rates, that capture the attention of policy-makers who want such measures to increase. When NSU is compared to UVA (27% to 93%) on the percentage of first-time, full-time students who graduate in six years or less, and NSU is told it must improve, what is the easiest path to follow?

    The easy answer, the easiest path, is to become more selective. Better prepared students are much more likely to be successful than less well-prepared students. Further, if SAT is the most used criteria of student selection, the problem is further exacerbated by the fact that SAT scores are most closely correlated with family income than any other factor, which pushes an institution into a more competitive market environment where the consumers demand rebates (ie merit-based aid).

    In some ways, state and federal accountability has driven the arms race far more than US News. Policy-makers want high performing institutions, but they have been unwilling to pay the associated costs. Now, you ask, why does it cost so much? people. Lots and lots of people run the institutions and provide the product, not machines. Sure, you can cram more students into the classrooms, and use more technology….but not everyone is willing to buy that product. Many students and families would rather pay higher tuition for smaller class sizes and more personal contact.

    There are some in Congress who believe that federal need-based aid is what has driven tuition increases. I don’t think this is true, but I also don’t think that it slowed tuition increases at all.

    If you really want to solve this problem, you need to answer some questions:

    Who should pay for higher education?

    If the state has a role in paying, how much should it be?

    If the feds have a role in paying, how mcuh should it be?

    How much should families pay? Or should “families” pay?

    What is the student’s responsibility?

    And what will be done if one or more parties above fail to live up their responsibilities?

    These are the real issues about affordability in higher education…commitment to pay for it. Everything else, from faculty salaries to cost of delivery can be solved easily.

  2. My understanding is that the charter schools initiative will raise tuition but give a massive aid increase to the lower class. It’s the middle class that it’s really going to screw over (the REAL middle class, not people who earn 150k a year and THINK they’re in the middle class).

  3. Terry M Avatar
    Terry M

    Not quite. Tuition will rise. But “massive” aid increases to the lower class? Doubtful. The legislation requires institutions to “ensure higher education remains affordable” suggesting that it currently is affordable, and lower class students are typically not the most successful students. I suspect you will see need-based financial aid distributed across a matrix that looks suspiciously like merit – after all, that is how the private institutions do it.

  4. Jim, you said:

    At the root of the problem: Colleges and universities are not driven by the profit motive — they’re driven by the prestige motive.

    Just curious, this seems to imply that were colleges driven by profit, shrinking needs-based financial aid would not be a problem. I actually imagine that would only exacerbate the issue.

  5. Jim Bacon Avatar
    Jim Bacon

    Terry M, You make some interesting points about the metrics that colleges use to rank themselves. Thanks for the insight. However, when it comes to affordability and access, your list of key questions focuses only how how people are to pay for skyrocketing tuitions. I think it’s equally important to ask why costs are escalating so rapidly, in the hopes that we might control them.

    JGH, Why do you presume that the “profit” motive would lead costs to rise more rapidly than the “prestige” motive? Profit-maximizing institutions in competitive industries (not monopolistic ones) are much more focused on controlling costs, I would argue, than are prestige-maximizing institutions. The most inflationary sectors of the economy, education and health care, are dominated by government and not-for-profits. See my latest post, “Higher Ed’s Competitive Arms Race, Part Trois”, for a perfect example of how prestige considerations drive up the cost of higher ed.

  6. Terry M Avatar
    Terry M

    Jim, my questions are not really about how people will afford skyrocketing tuitions, but who should bear the cost of what is both a private and public good. It is clear that individuals gain a great deal personally in terms of personal growth and development and income.

    But it is also clear that there is tremendous public good from citizen involvement in higher education…better healthcare, better roads, greater wealth, all sorts of public goods.

    So once again, my questions are: Who should pay and how much? How much should the public invest in higher education?

  7. Jim Bacon Avatar
    Jim Bacon

    Terry M, Those are all valid questions, but they don’t begin to exhaust the questions we should be asking. While you’re asking, “How much should the public invest in public education”, I’m asking, “How much should public education cost?”

    I can’t answer your question (how much should we invest?) until I know how much of what we’re being asked to invest is absolutely necessary and how much simply feeds the out-of-control higher ed arms race.

    If we define the issues, as you seem to, as who pays, and how much, it’s a recipe for more of what we’ve been experiencing: increasingly unaffordable tuitions and decreasing access to higher ed.

  8. Terry M Avatar
    Terry M

    Perhaps, Jim. The answer to your question is: It varies. Higher education as an industry can be extraordinarily creative, or not. If you want a no-frills quality education, create and fund institutions (at a consistent level each year) with clear expectations as to what services they can and cannot provide. Do not let their leadership go to the general assembly and get exceptions. If you don’t want them to have competitive sports teams, don’t allow it and be consistent about that. If you don’t luxurious recreational facilities, don’t allow those.

    Of course, all of this will require changes in the law, and assumes there would be sufficient student demand to support these kinds of institutions.

    In my opinion, consistent funding and treatment, combined with clear expectations would go a very long way towards reducing higher education costs.

    Keep in mind, during the 90s, focus on the public four-year institutions was on undergraduate education…research, funded or not, was too often dismissed at the state level as not being important. Now where are we? The governor wants research to increase to a billion dollars a year because it is a major an economic driver. So, institutions are scrambling to rebuild programs and build new research facilities.

    This is a fundamental policy shift. Consistency is needed.

    The bottom line, is that a degree is really not a widget. There is no “what it should cost” of production, only what it does cost based on many, many options that are provided along the way. If it is clear that the market will only provide X dollars for the product, institutions will deliver a product that costs X-1 dollars (or develop alternative revenue streams). The reality though is that despite the fact that tuition and fees keep increasing, most everybody keeps paying and enrollment keeps growing.

    This is why I insist you have to answer my questions first and define what the federal and state governments will invest or pay, and then it will be up to the insitutions to negotiate with their direct consumers.

    I worked previously at a private institution outside VA. The year I left, 96% of its incoming freshman class received an average grant of $10,000 towards an annual cost of attendance of $27,000 (tuition, fees, room and board). The 24 students paying full cost, and endowment revenue paid for those grants. While this kind of tuition discount is common, this level is unsustainabe. I challenge you to look at the IPEDS COOL site and look at what VA private colleges are doing. High tuition/high aid is the name of the strategy…that is in part why tuition rises so much.

  9. Jim, I agree that “Profit-maximizing” motives won’t neccesarily lead to higher tuitions (indeed, they may do the opposite), but i do think it would result in reduced needs-based aid (as opposed to merit-based aid). if alumni contributons factor into the “income”, it would seem that it would be in the institutions best interest to increase the likelyhood of its graduates success (and capability to donate), and what better way to get a leg up than start with candidates more likely to excel (ie merit based).

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