On Point: Higher education's broken financial model

 President Obama caused quite a stir in higher education circles recently when he announced that he wants to create a system for rating colleges on which ones provide consumers with the best value. The underlying motivation for his suggestion is a serious one that should provoke more than the reflex responses that you so often hear when anyone raises questions about the cost of college attendance.


Let’s start the discussion by getting the distractions out of the way. American colleges and universities are vital institutions, providing opportunities for education and upward mobility, innovation and economic development, and examination and debate about important issues facing society. None of that is driving the most recent proposal, nor is the quality of the nation’s institutions of higher education.

While there are many issues that can be the subject of serious debate, there is one set of facts that is indisputable. The cost of higher education to the consumer — tuition and fees — has increased more than that of any other sector of the economy since 1980. Much more than the Consumer Price Index. Much more than health care or energy or housing or food.

Those Himalayan increases have not slowed college enrollment rates, but they have left many students with enormous debts. The most recent calculation on total student debt in this country is more than $1 trillion. More than 40 percent of 25-year-olds have student debt, and the numbers run to the tens of thousands of dollars.

Moreover, the inability to find a way to pay for college prevents many individuals from ever starting and is one of the leading causes of students dropping out before they complete their degrees. All sorts of statistics verify the importance of education and of a college degree, but that financial barrier ends up being a major contributor to the increasing split in American society between haves and have-nots.

With the enormous caveat that there are significant differences between types of higher education institutions, there is one basic explanation for why the cost of college has gone up so much in the last few decades. The financial model for higher education institutions is a high cost one. A number of built-in structural factors guarantees that budgets always increase, resulting in a constant struggle to find the revenues to match them.

What are the cost drivers? First, salaries, both for administrators and faculty, tend to be higher than in many other sectors. Universities are complex organizations, and finding skilled leaders requires compensating them. Still, the “market” for university leader hires is generally a national one, not a local or regional one. As a result, hiring occurs within a closed system that self-justifies higher salaries.

Faculty salaries are a bit more complicated. National scholars who produce cutting-edge research are, justifiably, well-compensated. This system does, however, create a couple of financial anomalies. For one, those researchers have reduced teaching loads, which requires hiring additional faculty to fill the gap. Moreover, the teaching load and salary level for “stars” often become the aspiration and sometimes the reality for other faculty.

This last paragraph is most relevant to research universities such as College Park or Johns Hopkins. At private liberal arts colleges, public comprehensive universities and community colleges, the teaching loads are higher and the faculty salaries are generally lower. Where the best teaching gets done — and thus, where the undergraduate “consumer” gets the best value — is part of an ongoing debate that has examples to support any side you pick.

Another important contributor is the sharp decline in state support for public universities across the country. Many of these institutions have engaged in painful budget cuts that often leave them understaffed, neglecting maintenance and facilities and reducing some key services. Even in these colleges, however, the basic financial model remains unchanged, and tuition and fees have continued to increase.

Another problem is that many universities compete to be most highly ranked and most prestigious. Star faculty. The most up-to-date facilities. Residence halls that have the most amenities in order to convince parents and students to pay the high tuitions. A wide range of highly specialized academic centers and institutes that often meet no need other than the interest of a few faculty members.

The dramatic growth in college tuition is not new. Budgets do get cut at times, and some institutions have engaged in more systematic cost-reduction measures. But even there, the cuts have not altered the basic high cost financial model. Rather, some excesses have been squeezed out of the budget and some efficiencies have been instituted.

Higher education has been remarkably unresponsive to the concerns and complaints about its high cost. The president’s proposal is a relatively modest effort to create more knowledgeable consumers who may demand changes through their market strength. Advances in technology, such as the growing acceptance of online courses, may alter the cost structure. How that might happen is not yet clear however. Initiatives by new types of educational institutions — for-profits such as the University of Phoenix — may bring changes.

What’s unfortunate is that the nation’s colleges and universities are not taking the lead to devise a new financial model that serves students better than one that has led to runaway tuition and fee increases.

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Laslo Boyd has held senior positions in higher education in Maryland and Massachusetts as well in Maryland governor’s office. He can be contacted at lvboyd@gmail.com.