Tuesday, June 05, 2012


What Should a Year of College Cost?

What should a year of college cost?

We answer this question every single year, construing “should” in the narrow sense of “next year.”  But after several years of awful hand-wringing over annual increases caused primarily by the collapse of state support, we’re starting to try to get a longer-term handle on it.

A realistic answer to that question can’t be “zero,” since that’s a non-starter politically.  (I’m also not convinced that it would be the best answer on its own terms, but that’s another post.)  And anything along the lines of “the value of college defies a price tag” isn’t helpful.  I’m looking for an actual number of dollars per year. And that number should bear in mind the mission of a community college, which includes access for people who aren’t wealthy.

Without a target figure, we’re left with several unappealing options.

One option is to just go with last year’s number, plus a few percent.  That’s the default option, and it manages to annoy everybody.  With state support down, it doesn’t really allow for covering what we want to cover.  It means annual negative headlines.  It assumes that last year’s figure was essentially correct -- an assumption in its own right -- and over time, it starts to feel like a loss of agency.  Worse, extrapolating over time -- as in Monday’s post -- suggests that it’s eventually unsustainable.

Alternately, we could tie our figure to a group of peer institutions.  But that assumes that they have it right -- I suspect they don’t know any better than we do -- and “peer” is a relative term.  It also means that we’re always using last year’s figures.  Looking sideways at peers and backwards at previous years doesn’t seem like the best way to move forward.

Or we could just let the market settle the question.  Charge as much as we think we can get away with, and let students tell us with their feet if we overshoot.  As long as we don’t overshoot, this approach has the considerable virtue of not leaving money on the table.  Ideally, that would give us the money to restore some of the cuts of the last few years, and to invest in quality.  

But it would do violence to the “access” part of the mission of a community college, and it would build in a level of market instability that would make it impossible to make long-term commitments.  (There’s a reason that for-profit corporations don’t have tenure.)  It would also make it far easier for for-profit competitors to gain a foothold, since we’d lose a prime differentiator.  Given that “what the market will bear” is a moving target, we’d have to become nimble in ways that most incumbent employees would reject out of hand.

Alternately, we could do our best imitation of the Tea Party and try to cut our way to greatness.  If lower tuition is always better, and state support is dropping anyway, then the way forward is through sustained, aggressive cutting.  Who really needs a math department, anyway?

But that only makes sense if you assume, like the Tea Party, that all public spending is waste.  If you understand that much of it is actually beneficial, then this position quickly becomes insane.  As someone who believes strongly that public higher education is a social good, I reject this position out of hand.

We could tie the cost of college to a percentage of local family income levels.  That has the appeal of anchoring it in something concrete and external, and of carrying with it a built-in warning mechanism when it starts to get out of hand.  But local family income levels are a moving target, and they’re wildly disparate across the state.  They also don’t move nearly as quickly as many of our underlying costs do.  

We could look at projected future earnings of graduates, but that necessarily involves tremendous guesswork.  I’m just old enough to remember 401(k) calculators that assumed an annual 8 percent return.  The last decade hasn’t quite worked out that way.  Besides, if we took that as a guide, we’d have a powerful incentive to game the numbers by dropping programs in early childhood education and social work, and starting programs in, say, military contracting.  
The mission would get lost, quickly.

So since I don’t have a clear sense of a figure, I’ll ask my wise and worldly readers.  How much should a year of college cost?

If you believe, like most educators and economists, that higher education has broad external benefits for all of society, then "free" is the correct answer. Heck, we as a society could pay students a small stipend to go to school and still come out ahead.

Of course that's off the table politically. Judging by what's politically viable, I'd say that most state governments will only support a small fraction of the cost of college- basically they'll pay only for the parts that are directly job related, and leave the student paying for the rest.

For colleges the answer is pretty simple though. Charge as little as possible, while still making ends meet and not sacrificing quality. Most community colleges seem to do a pretty good job of that.
Asking what a year of college "should" cost? What a bizarre question. It should cost the accumulated costs of all the things determined to be necessary to provide an education. And remember, we must take care of our folks (I agree, btw) so this must include health care, and retirement, and long and short term disability insurance, and... (on and on...)

Costs are costs. You are really asking what you should "price" the costs to the student.

Here's a novel idea. Figure out what your costs are. All of them. The fully burdened, bottom line of the college budgeted expenditures.

Then divide that number by the number of students. (Fine, we can use the fictitious "FTE" if you insist, or some other aggregate such as cost/student/credit hour.)

That's the cost. Pretty simple really, and no politics involved.

Now to get to the real question you are asking... we can work our way down to the next piece. Go back to that really big cost number. Now, take all the money you get from grants, state funding, endowments, and so forth, and subtract that out from the "bottom line" cost figure.

That's the amount you need to recover from "other sources" to simply break even.

The question starts to get sticky here. What are those "other sources?" At this point, we tend to see that simply as "tuition." I would propose a new idea.

Let's stop charging the students tuition, because they aren't the customers. If they were truly the CUSTOMER we would charge them the full rate from the start. So, instead of creating systems of scholarships, and vouchers, and payment plans, and loans, let's instead reach out to the REAL customers of the community colleges and the universities--the businesses.

Think about this: get them not to sponsor a scholarship, but rather a chair, or a department, or a college. Put their name on it. Give them full credit. And get enough to put it in a trust, and run that line item from the interest.

NOW, you have students that aren't overburdened with debt when they leave, that can be hired at a lower wage because honestly, they don't have to pay 800-1400/month in student loan payments. What they DO get paid when they graduate will then go directly to the economy, supporting those around them--the small and large businesses in the very community you serve.

Let's get the banks (and student loans) out of the discussion. Let's make education count again.

And let it start by being honest with ourselves about the real cost of education, the difference between costs and prices, and finally admit who our real "customers" are.
I think you have made a rather fundamental error, equating the cost of a year of college with the tuition paid by a student for a year of college. That is what got California in trouble, thinking it was actually free.

You need two questions:

What does a year of college cost?

How will those costs be divided up between state, local, and tuition (and how will the tuition be divided up between federal Pell, cash, scholarships, and loans)?

The answer to the first question is important in its own right, both because it is wildly different for different kinds of colleges, but also because it put the emphasis on the real tuition rather than the sticker price at private (and public) schools. It might also expose the relative efficiency of English 101 at State Uni and DD's CC.
I think he's obviously asking what should we charge for a year of college. For higher-grade stuff, I dunno. But for CCs where the mission is access, I'd say somewhere around what you can earn at a crappy minimum-wage job during breaks. That'll serve 18 year old pretty well, I dunno about other demographics. You don't want it to cost nothing, or the barrier to entry will be too low.
In reply to The Professor at 8.49pm, the irony is that the approach you're describing has actually happened in the past. Isn't that how, in effect, some of the really elite private institutions were founded? The oligarchs, patriarchs and industrialists (depending on precisely where and when you're looking at) ponied up significant amounts of cash for educating the next generation. They did this out of a sense of civic virtue which is now apparently lost to us, or out of a sense of enlightened self-interest based in a belief that their businesses and/or community would thrive better with an educated population. The really remarkable feature of contemporary ideology around public spending is the absolute loss of this belief that businesses/corporations have any responsibility in this (or many other) regards. Not only do we now socialise private debt by bank bail-outs, but for even longer we've been shifting the burden of all training - despite its obvious benefits to employers - onto potential employees. It's a similar ideology, just at a micro level.

So perhaps before DD's question of today can be answered, a proper discussion about the underlying assumption of cui bono has to be had.
"If you believe, like most educators and economists, that higher education has broad external benefits for all of society, then "free" is the correct answer."

"Free" is not the correct answer from an economic standpoint. Educational resources will be allocated efficiently when tuition is set at the point where Marginal Social Benefit (MSB) is equal to Marginal Cost (MC). Through taxation, society will subsidize the difference between the marginal private benefit and the marginal social benefit at that quantity level. Admittedly, it is difficult to precisely estimate the point at which MSB = MC, and that point can change from semester to semester.
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Though I wouldn't say I'm a Tea Party member, I do think there are places in colleges where money could be cut. This doesn't apply to community colleges since these two things usually aren't there but...

1)Housing. I understand that "going away" to college is a big part of the growing up process for some people. They need to get out. However, if you live 5 minutes away from your campus anyway and you have a car, why on earth are you shelling out more money to live on campus? I also feel that many of the big state Uni's tend to exclude their local population in favor of out of state or out of country students and I have some real issues with that. the kid from nebraska or korea hasn't been paying taxes every year to support the state college system.
2)Athletics. This may be because I was a band dork myself but when our state flagship's commercial starts and ends with sports images and we (sister Pub U, non-trad) can't add a december graduation because the big arena is in use for basketball, I start to think that sports are more important than the education.
Another reply to The Professor: the value to society (or to business, although let's stipulate that business is far from the only consumer of educated workers)is relevant. But consider also that there is a fairly large cohort of students who are in college even though they don't want to be, and/or are not learning much, and/or will not graduate. The more we insist that all students should go to college, the larger this cohort is, and it distorts the extent to which we can expect society to be willing to pick up the tab. The countries that fully or mostly subsidize university and tech school education also expect not to offer this opportunity to all comers.
According to my ethics: no more than $8410/year from the student (you could charge more than that, but it has to be met by grants, not loans).
That's 8 weeks of full time (40 hours) plus 42 weeks of half time, at minimum wage (before taxes).

That is the maximum college can cost where we can have a reasonable expectation of people putting themselves through. Of course, that assumes nothing is taken out from taxes, but we could build that into the tax code if we wanted (i.e. rather than pay students a stipend to go to school, which I agree is a political non-starter, we could at least let them keep all their income).
This issue gets complicated when factoring in financial aid, as increasing tuition costs can be mitigated by increasing financial aid and vice versa.

As an example of the impact, I'm starting grad school in a few months (Master's degree), and even with a rather nice scholarship from the institution I've got a lot of costs. Federal loans will be covering a lot of the difference, with some part-time work covering the rest. Thankfully there's some very nice federal programs to help manage that debt (Income-based repayment and public service loan forgiveness) which makes cost something of a non-issue.

Even when I was a community college student (took me 5 years to graduate to a BA program) I didn't have to stress about it much, as our state (CA) has a nice fee-waiver program, so textbooks were the only substantial cost.

It's important to look at the real impact of college costs, not just the absolute value. For me, college cost has been rather low thanks to some clever use of financial aid and a wee bit of help from my parents. I had to work full-time through my entire education, which slowed things down tremendously, but I made it work.

Just another 2c.

- Jason
"Educational resources will be allocated efficiently when tuition is set at the point where Marginal Social Benefit (MSB) is equal to Marginal Cost (MC)."

Um, no, not quite. Tuition is the private cost of college. If there is a gap between the marginal private benefit and the total benefit, THAT is the Marginal Social Benefit (MSB). That is not directly related to the MC in any way.

Assuming all manner of convexities and predictions we can't actually assume in the real world, you're trying to get to:


(Marginal Benefit = Marginal Cost).

The marginal benefit is MSB + MPB (Marginal Private Benefit) and the Marginal Cost is MSC + MPC (Marginal Social Cost + Marginal Private Cost).

If you're just doing private decisions, your young decisionmakers will always make MPB = tuition = MPC. They won't consider public benefits at all, for obvious reasons.

At an efficient point,

MSB + MPB = MSC + MPC. That is, the optimal tuition (MPC) = MSB + MPB - MSC.

Why is this important? Because if MPC = MPB, due to ordinary students maximizing, MPB = MSC at the efficient point. That is, you need to pick a level of subsidy such that the entirety of the marginal social benefit is covered. Since students are already paying $13k by definition in opportunity costs from not working a minimum wage job, you can't push effective "tuition" below that. If you want students who won't get $13k a year worth of benefit out to go to college (because they'll be better citizens, for example, or because they are liquidity constrained such that $13k/year is impossible), then you have to subsidize tuition below zero -- Pell Grants and subsidized loans.
Dangit, typo. MSB = MSC. I hope that made sense.

The "hard" part of the tuition problem involves sorting out which of the marginal students actually SHOULD go to college, as well as the $13k/year hard floor on effective tuition.
Also, if the students incorrectly perceive MPB as lower than it is, due to lack of personal experience (i.e. being 18), then you have another interesting problem.
Punditus Maximus,

I think our formulaic differences may just be a result of semantics.

I define Marginal Social Benefit as Marginal Private Benefit + Marginal External Benefit (MEB). MEB is the gap between MPB and MSB, and thus, it is the amount that needs to be subsidized (according to theory). I think when you say Total Benefit, you are referring to what I call the Marginal Social Benefit.

Also, usually, we assume that there is no gap between Marginal Social Cost and Marginal Private Cost when there is a positive externality. If you think there is a gap between MSC and MPB regarding education, then you are saying there is some external cost (negative externality) that accrues to society due to the production or consumption of education. Maybe, but we usually asume not.

Thus, we hopefully can agree on the following formulas:


Allocative Efficiency is where MSC = MSB.

I assume MEC = zero in this case.

Thus the efficient point is where MPB + MEB = MPC.

A couple of other things:

Most of my students work at least part-time if not full-time. So, it may not be accurate to assume that their opportunity cost of going to school is $13,000.

When I said we should set tuition at the point where MSB = MSC, that was a little bit too vague. That really is the "price" of education = tuition + subsidy from taxpayers.
Dang it, I had a typo, too.

Should say: If you think there is a gap between MSC and MPC...
Responding partly to what you wrote in a comment on IHE and in tonight's post for Friday, you are certainly free to use your institutional data to calculate what it would cost per FTE to deliver an education at a CC that was 100% adjunct or that paid all adjuncts about what a t-t professor makes, all under existing workloads. You could even propose some other model and use your college's budgeting data to see what happens under radically different assumptions.

I've tried to look at some of those costs in the past on my blog, but it is fiendishly difficult to get good data due to the clever way budgets are described. That was why I was quite interested when Sherman Dorn posted state-wide average data for the state of Florida several months ago. It was quite remarkable that the cost per FTE (state plus tuition) ran around $12,000 per year over several decades but has recently fallen to around $11,000.

That gives a benchmark that could be useful, even if it is arbitrary, as well as one interesting data point that the actual cost of delivering a college education has not risen that rapidly in at least one state in this nation.
"When I said we should set tuition at the point where MSB = MSC, that was a little bit too vague. That really is the "price" of education = tuition + subsidy from taxpayers."

Yeah. The interesting bit is that the students are going to maximize, so you have to include the fact when setting "tuition".
Not necessarily weighing in on total cost, however i would like to comment on the suggestion to cut housing. At Many if not most institutions Housing services are an auxiliary enterprise that not only pays for itself, but provides a percent of revenue to the larger general fund as well. Yes attending local and living at home can save money for individuals, but is that the best choice in the long run? Those who live on campus perform better academically. Newer research suggests that social and professional networks may also be stronger among those who live on campus. Ultimately each individual must determine for themselves. In all decisions there are trade-offs. Where you are correct is in the costs of maintaining physical structures. Schools Like University of KY are taking innovative steps in private partnerships to manage these costs yet still provide the services and see fiscal gains at an ultimately lower cost to students.
Very good article. All the comment gives the reality of cost for the college year.! i simply thankful to all poster. Thank you very much for posting this article. Keep uploading this kind of article.

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