Money on the Table

Peter Wood

This article was originally published by NAS president Peter Wood in his capacity as a blogger at the Chronicle of Higher Education's Innovations blog.

I once worked in the administration of a private university known for, among other things, its hefty price tag. Its president at the time was relentless in pushing up tuition, room and board, and ancillary fees. Each year we spent considerable time working on the question, “How much higher should we set the prices for next year?”

The question had only a loose connection to spending. Faculty (and administrator) salary increases, building projects, and new programs were all tied to tuition income. Income from endowment, alumni giving, and research grants couldn’t keep pace with the university’s appetites. But the discussion of how high to raise next year’s prices was never based on a calculation of actual costs. It was rather a game of hunches.

The goal was to set the new prices as high as the market would bear without drawing too much adverse attention.  Each year The New York Times would run a front-page story spotlighting the colleges and universities that had the biggest increases and the highest overall prices. If we gauged it right, we would fall just below that level of exposure. Federal law prohibits collusion among colleges and universities on prices and we were purists about that. A scandal a few years earlier had exposed a group of top-tier universities that had been indeed consulting with one another about their tuition increases. Even after that practice ostensibly stopped, the annual percentage increases among many colleges and universities miraculously hovered in a range of a few tenths of one percentage.

Perhaps this was because all the colleges and universities had the same few reference points: the annual consumer price index as a measure of inflation; the overall shape of the economy and data on the regions from which they drew most of their students; and the amount of new financial aid coming through federal grant and loan programs. The CPI was seen as a floor. Few if any colleges and universities were content to raise tuition at the rate of inflation. The goal was not to stay even but to get ahead. How much higher than the CPI could a university go?

This might sound like plain and simple greed on the part of higher education. Well, greed yes, but plain and simple, no. After all, the inflation rate affects people in different ways depending on a variety of circumstances. Parents who are in a position to send their children to an expensive private university are probably in their maximum income-earning years. They probably already own their own houses and have a lot of other expenses under control. Generally, they can absorb price increases that outpace inflation. But by how much?

The university president I worked for had a colorful way of framing the problem. He would remind his administrative colleagues, “We don’t want to leave money sitting on the table.” What he meant was that if families could possibly pay more to attend our university, our duty was to capture that increment. A prime consideration was to make sure that those students eligible to get federal grants and to take out federally guaranteed student loans maxed out on these. If they didn’t, we were “leaving money on the table.”

It is not hard to extrapolate from this to what happened and what still happens when the federal government increases the funds in a student grant or loan program, or lowers the conditions of eligibility, or otherwise acts to make college “more affordable.” In college and university administrative offices across the country, people start to calculate just how high they will now be able to set new prices to capture these additional resources. Mentioning this in the company of higher education’s official representatives, of course, elicits indignation. Perhaps somewhere there are college administrators so conniving that they would do such a thing, but not us. We are concerned primarily about maintaining access and affordability. Those increases in federal aid mean that students who could not otherwise attend college now will have that precious opportunity. They will have access because the government has helped make college more affordable.

Well, if you say so.

The amounts that are “on the table” today are not trivial. A first-year freshman is eligible for a Title IV federally subsidized student loan of $3,500 and an additional unsubsidized federal loan of up to $6,000. A bounty of $9,500 per student is something to consider. And the bounties go up for continuing students: $10,500 for sophomores, $12,500 for juniors and seniors, and $20,500 for graduate students.

There is a paradox in government subsidies for higher education. Government subsidies for most goods tend to spur increases in supply and bring new competitors to the marketplace, and thus work to reduce prices. But government subsidies in higher education seem only to increase prices. That happens because American higher education is arranged in a fashion that makes it extremely difficult for new competitors to enter the field. When the federal government chooses to subsidize ethanol, more farmers plant corn in more fields. When the federal government subsidizes students, the number of colleges and universities remained basically static. Mostly that is because the regulatory barriers to starting new colleges are extraordinarily high. But that’s a topic for another blog.  We do have new forms of college education emerging today—and unsurprisingly the higher education establishment and the federal government are working hard to impede them.

I don’t want to be overly cynical about federal aid to students. I am sure that many of the politicians of both parties who over the years have favored increases in student aid imagined they were (mostly) helping students. And I have no doubt that college and universities administrators mostly see themselves as altruists whose pursuit of more income for their institutions is bound tightly to their commitment to use some of that income to fund scholarships for needy students. But benevolent motives aside, the system works very much like a treadmill.  No matter how fast we run, we stay in one place. Increasing student aid doesn’t make college more affordable; it just puts more resources in the hands of college administrators.

Our current system of higher education in the United States is so deeply enmeshed with the federal student aid system that it is difficult to see how we could ever get off the treadmill.  Treadmills, however, don’t run forever, and this one is showing its age. We need to give some serious thought to developing new federal policies that can sustain the crucial parts of American higher education while eliminating the perverse incentives to higher prices.

I should add that the university president who used to talk about not leaving money on the table has long been retired, and I have no knowledge one way or the other about how that university today goes about determining its price increases.

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