Richard Vedder: The Real
Reason College Costs So Much
The expert on the economics of higher education
explains how subsidies fuel rising prices and why there's a 'bubble' in student
loans and college enrollment.
Another school year beckons, which means it's time for President
Obama to go on another college retreat. "He loves college tours,"
says Ohio University's Richard Vedder, who directs the Center for College
Affordability and Productivity. "Colleges are an escape from reality.
Believe me, I've lived in one for half a century. It's like living in
Disneyland. They're these little isolated enclaves of nonreality."
Mr. Vedder, age 72, has taught college economics since 1965 and
published papers on the likes of Scandinavian migration, racial disparities in
unemployment and tax reform. Over the last decade he's made himself America's
foremost expert on the economics of higher education, which he distilled in his
2004 book "Going Broke by Degree: Why College Costs Too Much." His
analysis isn't the same as President Obama's.
This week on his back-to-school tour of New York and Pennsylvania
colleges, Mr. Obama presented a new plan to make college more affordable.
"If the federal government keeps on putting more and more money in the
system," he noted at the State University of New York at Buffalo on
Thursday, and "if the cost is going up by 250%" and "tax
revenues aren't going up 250%," at "some point, the government will
run out of money."
Note that for the record: Mr. Obama has admitted some theoretical
limit to how much the federal government can spend.
His solution consists of tieing financial aid to college
performance, using government funds as a "catalyst to innovation,"
and making it easier for borrowers to discharge their debts. "In fairness
to the president, some of his ideas make some decent, even good sense,"
Mr. Vedder says, such as providing students with more information about college
costs and graduation rates. But his plan addresses just "the tip of the
iceberg. He's not dealing with the fundamental problems."
College costs have continued to explode despite 50 years of
ostensibly benevolent government interventions, according to Mr. Vedder, and
the president's new plan could exacerbate the trend. By Mr. Vedder's lights,
the cost conundrum started with the Higher Education Act of 1965, a Great
Society program that created federal scholarships and low-interest loans aimed
at making college more accessible.
In 1964, federal student aid was a mere $231 million. By 1981, the
feds were spending $7 billion on loans alone, an amount that doubled during the
1980s and nearly tripled in each of the following two decades, and is about
$105 billion today. Taxpayers now stand behind nearly $1 trillion in student
loans.
Meanwhile, grants have increased to $49 billion from $6.4 billion
in 1981. By expanding eligibility and boosting the maximum Pell Grant by $500
to $5,350, the 2009 stimulus bill accelerated higher ed's evolution into a
middle-class entitlement. Fewer than 2% of Pell Grant recipients came from
families making between $60,000 and $80,000 a year in 2007. Now roughly 18% do.
This growth in subsidies, Mr. Vedder argues, has fueled rising
prices: "It gives every incentive and every opportunity for colleges to
raise their fees."
Many colleges, he notes, are using federal largess to finance
Hilton-like dorms and Club Med amenities. Stanford offers more classes in yoga
than Shakespeare. A warning to parents whose kids sign up for "Core
Training": The course isn't a rigorous study of the classics, but rather
involves rigorous exercise to strengthen the gluts and abs.
Or consider Princeton, which recently built a resplendent $136
million student residence with leaded glass windows and a cavernous oak dining
hall (paid for in part with a $30 million tax-deductible donation by
Hewlett-Packard CEO Meg Whitman). The dorm's cost approached $300,000 per bed.
Universities, Mr. Vedder says, "are in the housing business,
the entertainment business; they're in the lodging business; they're in the
food business. Hell, my university runs a travel agency which ordinary people
off the street can use."
Meanwhile, university endowments don't pay taxes on their income.
Harvard's $31 billion endowment, which has been financed by tax-deductible
donations, may be America's largest tax shelter.
Some college officials are also compensated more handsomely than
CEOs. Since 2000, New York University has provided $90 million in loans, many
of them zero-interest and forgivable, to administrators and faculty to buy
houses and summer homes on Fire Island and the Hamptons.
Former Ohio State President Gordon Gee (who resigned in June after
making defamatory remarks about Catholics) earned nearly $2 million in
compensation last year while living in a 9,630 square-foot Tudor mansion on a
1.3-acre estate. The Columbus Camelot includes $673,000 in art decor and a $532
shower curtain in a guest bathroom. Ohio State also paid roughly $23,000 per
month for Mr. Gee's soirees and half a million for him to travel the country on
a private jet. Such taxpayer-funded extravagance has not made its way into Mr.
Obama's speeches.
Colleges have also used the gusher of taxpayer dollars to hire
more administrators to manage their bloated bureaucracies and proliferating
multicultural programs. The University of California system employs 2,358
administrative staff in just its president's office.
"Every college today practically has a secretary of state, a vice
provost for international studies, a zillion public relations
specialists," Mr. Vedder says. "My university has a sustainability
coordinator whose main message, as far as I can tell, is to go out and tell
people to buy food grown locally. . . . Why? What's bad about tomatoes from
Pennsylvania as opposed to Ohio?"
Mr. Vedder notes that, by contrast, "you
don't have to worry about this at the University of Phoenix. One thing about
the for-profits is that they are laser-like devoted to instruction." Although
for-profits like the University of Phoenix and DeVry spend more money on
marketing, they don't contain as much administrative overhead.
'The Obama administration has been beating up on [for-profits]
pretty hard for the past two to three years," Mr. Vedder says. "It's
true that drop-out rates are disproportionately higher at the for-profits, but
it's also true that the for-profits are reaching the exact audience that Obama
wants to reach"—low-income minorities, many of whom are the first in their
family to attend college.
Today, only about 7% of recent college grads come from the
bottom-income quartile compared with 12% in 1970 when federal aid was scarce.
All the government subsidies intended to make college more accessible haven't
done much for this population, says Mr. Vedder. They also haven't much improved
student outcomes or graduation rates, which are around 55% at most universities
(over six years).
Mr. Vedder is skeptical about the president's proposal to tie
federal aid to graduation rates, among other performance metrics. "I can
tell you right now, having taught at universities forever, that universities
will do everything they can to get students to graduate," he chuckles.
"If you think we have grade inflation now, you ought to think what will
happen. If you breathe into a mirror and it fogs up, you'll get an A."
A better idea, Mr. Vedder suggests, would be to implement a
national exam like the GRE (Graduate Record Examination) to measure how much
students learn in college. This is not on Mr. Obama's list.
Nor is the president addressing what Mr. Vedder believes is a
fundamental problem: too many kids going to college. "Thirty-percent of
the adult population has college degrees," he notes. "The Department
of Labor tells us that only 20% or so of jobs require college degrees. We have
115,520 janitors in the United States with bachelor's degrees or more. Why are
we encouraging more kids to go to college?"
Mr. Vedder sees similarities between the government's higher
education and housing policies, which created a bubble and precipitated the
last financial crisis. "In housing, we had artificially low interest
rates. The government encouraged people with low qualifications to buy a house.
Today, we have low interest rates on student loans. The government is encouraging
kids to go to school who are unqualified just as it encouraged people to buy a
home who are unqualified."
The higher-ed bubble, he says, is "already in the process of
bursting," which is reflected by all of the "unemployed or
underemployed college graduates with big debts." The average student loan
debt is $26,000, but many graduates, especially those with professional
degrees, have six-figure balances.
Mr. Obama wants to help more students discharge their debts by
capping their monthly payments at 10% of their discretionary income and
forgiving their outstanding balances after 20 years. Grads who take jobs in
government or at nonprofits already can discharge their debt after a decade.
"Somehow working for the private sector is bad and working
for the public sector is good? I don't see on what basis one would make that
conclusion," Mr. Veder says. "If I had to make some judgment, I would
do just the opposite."
He adds that the president's approach "creates a moral hazard
problem. What it signals to current and future loan borrowers is that I don't
have to take these repayment of loans very seriously. . . . I don't have to
worry too much about getting a high-paying job." It encourages
"sociology and anthropology majors compared with math and engineering
majors."
Can online education, which is being pioneered in some science
disciplines, substantially reduce costs? Mr. Vedder says it can, but government
won't do the innovating. "First of all, the Department of Education, to
use K-12 as an example, has been littered with demonstration projects,
innovation projects, proposals for new ways to do things for decades. And what
has come out? Are American students learning any more today than a generation
ago? Are they doing so at lower cost than a generation ago? No."
Innovation, he says, is being driven by
entrepreneurs like Stanford computer science Prof. Sebastian Thrun, who founded
the for-profit company Udacity that offers "massive open online
courses" (MOOCs). Mr. Thrun began teaching artificial intelligence, first
at Stanford and then at Udacity. Mr. Vedder notes that he quickly got
"200,000 people to sign up for it. And it's a great course and people are
learning like crazy."
Where the government can help, Mr. Vedder says, is to get out of
the way of progress and encourage slow-moving accreditors to allow innovations
to move forward more rapidly. But ultimately, the way to improve college
affordability is for the government to disinvest in higher ed and wean students
from subsidies.
Mr. Obama is dead set against that. "He wants to maintain
that world" of nonreality in which demand is impervious to cost, Mr.
Vedder sighs. "That world has to change."
Ms. Finley is an
editorial writer for the Journal.
A version of this article appeared August 23, 2013, on page A9
in the U.S. edition of The Wall Street Journal, with the headline: The Real
Reason College Costs So Much.
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