Colleges are raising costs because they can

Why does college cost so much? Commentators continue to look for clues. So far, two main schools of thought have emerged. According to the first, fees have increased to make up for declines in government appropriations for higher education. According to the second, bloated administrations are wasting the money on frivolous extras unrelated to the core instructional mission.

Though the two views aren’t mutually exclusive and both are supported by evidence, there remains an ideological divide between them. People who believe educating citizens is the government’s job, no matter the cost (generally those on the political left), tend to believe the first, while people who would rather shrink government (generally those on the right) are more inclined to the waste hypothesis. As a result, explaining college-cost increases becomes a kind of proxy fight in which neither side accepts the other’s good faith and both are usually proved right.

In an op-ed for The New York Times, law professor Paul F. Campos widened the gap. While its title, “The real reason college tuition costs so much,” oversells the case a bit, its main point is sound: Government funding for higher education has gone up a lot. Even if funding per student is down a little bit as more kids pursue degrees, calling it a massive defunding is disingenuous. However, because Campos didn’t focus much on the subsidy per student, it opened him to attack from his opponents. And attack they did, in Slate, Crooked Timber, Inside Higher Ed and elsewhere. Still, Campos is right that the defunding explanation is weak, even in light of increased enrollment.

In 20 of the past 31 years, both per student funding and tuition have increased at public two- and four-year institutions. Tuition increased in every year except 2000, even in years when there were sizable increases in state outlays. The three periods when state support fell all followed recessions, when state legislators were dealing with reduced tax revenue and a glut of new students who were frustrated out of job market and into the classroom. This results in a clear correlation between decreased funding per student and ever-escalating tuition in the early 1990s, early 2000s and since 2008 — but taken together, they account for only a third of those 31 years. That fails to explain the decades-long pattern of consistent tuition hikes. More important, the data give us no reason to believe that if government support had only increased, colleges wouldn’t have raised tuition anyway.

One problem with the college-cost debate is that most commentators look at only two sources of revenue: state appropriations and tuition. But as any administrator will tell you, these are the least interesting parts of a school’s budget. From a college president’s perspective, there’s only so much schools can do to influence the legislature, and the potential for tuition hikes is constrained by their competitors, if nothing else. Other sources, however, such as grants, gifts, discretionary appropriations and investment income, aren’t subject to the same limitations. Administrators who want to set themselves apart from their peers (and in this market, who can afford not to?) focus their energy where they can make the biggest and most noticeable difference.

Take the case of Manhattan’s Cooper Union, a private school that until recently operated without tuition. You might think that providing a college education for free isn’t feasible in this economy and that Cooper Union was forced to start charging. But that’s not really what happened. A New York Times column by James B. Stewart turned up different culprits: greed, hubris and mismanagement. The school had relied on money from a real estate endowment to pay its costs, but instead of pursuing low-risk stocks and bonds, the administration invested in high-risk, high-reward hedge funds. The strategy initially worked great: Its investments went from $19.4 million in 2006 to $103 million in 2008, and the school jumped up the U.S. News and World Report and Newsweek college rankings. The board then decided to go for broke and borrowed $175 million to construct a fancy engineering and art building. The idea was that the new building would attract donors and prestige and would ultimately more than pay for itself. That didn’t happen. Instead, those hedge fund investments crashed to $18.8 million in 2009, and the school was left to service the debt on a building it couldn’t afford. Cooper Union was forced to turn to tuition.

Except for its tuition-free history, the Cooper Union story isn’t exceptional in form, just egregious in its scale and consequences. Administrators across the country are motivated by the ranking systems and the unofficial prestige market to go for moon shots — the big grants, the winning investments, the donor-magnet buildings. If you go through a public flagship university’s budget, you’ll see all sorts of huge line items that have nothing to do with state appropriations or tuition. Take the University of Texas at Austin. In 2013 it netted $600 million in tuition and fees and a touch under $300 million in state appropriations. It also got $400 million in federal research programs and $100 million in private sponsorships and brought in nearly $500 million in “sales and services of educational activities” and “auxiliary enterprises,” according to its annual financial report. And that’s just the operating budget; it doesn’t include another $200 million in gifts and $300 million in investment income and increased value. A decline in per student state appropriations has not starved trend-setting public institutions of money.

When it comes to chasing the big bucks, tuition and state appropriations aren’t created equal. Whereas state appropriations have a pile of strings attached, fees are universities’ to do with what they will. They’re free to use it to finance capital projects like the Cooper Union building or investments in labor automation or eye-catching amenities or grant-friendly research facilities or debt service or hedge fund fees or administrators’ salaries. Given a choice between a dollar from the state and a dollar from students, any smart college president would rather have the latter. Fee income allows, for example, the University of California system to go to Wall Street and get bonds for giant construction projects, pledging tuition hikes to cover the debt.

Declines in per student appropriations at the very least give administrators good cover to increase tuition, even if the two variables aren’t quite causally tied. And high salaries for administrators appear to be the consequence of changes to higher education’s incentive structures as much as a cause: The competition for ever more funds launches competition for ever larger fundraisers. At the end of the day, college tuition is going up for the simplest of reasons: Demand is inelastic, and it’s exceeding the supply. Despite the price increases, enrollment has kept rising. As long as the Treasury is willing to write larger and larger student loan checks and as long as high school grads see no other option besides college to advance their career prospects, tuition will keep going up. If we’re not willing to change our higher education system from the foundation, arguing over the proximate causes of the cost crisis won’t do anyone any good.