Monday, December 15, 2008

Why do college tuition rates keep increasing?

There are a few things in life that are sure: death, taxes and rising college tuition rates. Earlier this week the regents for the state of Iowa have approved an increase in tuition for the University of Iowa for next academic year. Why do college tuition rates keep increasing even when an economy is in a downturn? Let's look at some possible reasons.

Could it be that regents/trustees and college administrator hate college students and are greedy and just want more and more money? It is possible - almost anything is possible. From my limited experience, regents/trustees are usually former college graduates and they agree to become regents or trustees because they want to give back to colleges and universities primarily because they themselves have valued from their college eduction and see the value or benefit of college education. University/college administrator's do not benefit much monetarily by asking for higher tuition amounts, so I do not think that greed on the side of university/college administrator's is the driving reason.

Could it be that professors are greedy and want higher pay and force university/college administrators to ask for higher tuition amounts? While our pay is in part paid by student tuition it is also paid (at large public universities) by state appropriations - which means that students are really only paying for a portion of the overall faculty payroll/benefit expenses. Also, if faculty were really that greedy, they would either move to another higher paying university or choose to work in the private sector where salaries are typically much higher for their education levels. My experience is that professors choose to work at a university for other benefits (academic atmosphere, research interests, the joy of teaching) than for just a paycheck. But I doubt this is true for all professors, so I am generalizing to the main group.

Could it be that students demand more services? Maybe. During my undergraduate degree - I went to the computer lab one time, in uh, over four years. I did not have internet access until much later, nor did we have the level of campus security, apartment style dorms, on-line registering of classes - oh for that option, along with a number of other services that college/universities offer today that were not offered in the past.

Could it be that students want college and universities to raise tuition rates? Surely not. Yet, their (and mine in the past) behavior says - raise the price. Let me see if I can explain. A tool economists use to measure how sensitive changes in price are on change in amount demanded is called price elasticity of demand. Specifically, price elasticity of demand looks at the percentage change in quantity demanded divided by the percentage change in the price of the product itself. If we look at college tuition prices the percentage change is positive (4.2%). Now if we had a large number of college students (more than 4.2%) saying - hey that's too rich for my blood - and not return back to college, then the percentage change in quantity demanded would be greater than the percentage change in price, and economically we would say that the price elasticity of demand is greater than one (in absolute value), and the demand for college is price elastic - or than customers (students) are sensitive to the change in price.

But that is not what we typically observe. What we typically observe is that some students do not come back - because they have graduated - yeah - or dropped out. Others do not come back because of financial reason, but the percentage change in those students who do not come back is much smaller than the percentage change in price, which would be the case where the demand for college is price inelastic - or that college students are not that sensitive to changing tuition prices.

OK, so college students are not that sensitive to changes in college tuition prices, and this makes sense for a number of reasons that I am not going into here. How does this explain why college tuition rates keep increasing?

Given that college students are price inelastic, then an increase in price leads to a greater amount of revenue. A smaller percentage do not return, but a greater percentage do return and are paying higher prices which leads to higher overall revenues for the college. Thus college regents/trustees keep raising college tuition rates because by doing so this will increase the overall revenues for the college, which are used to pay salaries for faculty and staff and for student services.

If you are not convinced, take my argument above and substitute gas prices, in answering the question, why do gas prices increase quickly but fall slowly? Price Elasticity of Demand!

1 comment:

AMR said...

One question that I ponder is how much do energy costs factor in to tution costs? Even though services are more ubiquitous across the campus and that allows for students to efficiently complete their course work there have to be increasing energy costs too. If the University could find solutions to reduce energy costs do you think tuition prices could stagnate or possibly even decrease (probably unlikely I know)?