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Education Reporter

Government Aid Fuels Higher Ed Inflation
Since taxpayers are forced to subsidize student loans and fund the bulk of higher ed grants, they should at least expect that their dollars are actually making college more affordable. A study released by the Center for College Affordability and Productivity (CCAP) last month suggests that isn't the case.

As it turns out, student financial aid from external sources increased significantly between 1987 and 2008, largely due to increased government subsidies. Outside aid increased 177% for students attending public doctoral institutions (schools offering both baccalaureate and doctoral degrees) and 82% for those attending private doctoral institutions over that time frame.

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If schools were keeping costs in line with general inflation, increased levels of aid should have made a college degree more affordable in 2008 than it was in 1987. In fact the opposite is true. Even after adjusting for inflation, the total cost of attendance minus all grant aid increased by 44% at both public and private doctoral institutions over the past two decades.

If colleges and universities aren't using taxpayer money to reduce the amount students must pay, then where is the money going? One answer is faculty wages, but not because faculty are paid a lot more than in the past. (The data show that real faculty wages at public schools remained almost constant over the past several decades, though wages did increase by 23% at private institutions.)

Overall, faculty didn't get fat raises, but their productivity, as measured by teaching load, has decreased by 15% at public institutions and 32% at private institutions since 1987. One might assume that smaller teaching loads could only benefit students, but the truth is that student/teacher ratios were already quite low. In 1987, the average student/faculty ratio at four-year and above institutions was 13.6 for public schools and 9.3 for private schools. By 2007, those ratios were down to 11.6 and 6.3, respectively.

Colleges and universities have also added layers of nonacademic administrators and staff, resulting in a decrease in non-faculty productivity of 27.5% at public schools and 27% at private schools. The combined decreases of faculty and staff productivity inevitably translate into higher costs for students.

In effect, say report authors Robert Martin and Andrew Gillen, colleges and universities have "captured" aid money intended to improve affordability and access. Private four-year schools (offering only baccalaureate degrees) were the only institutions where students actually paid less in net attendance costs as a result of external aid. Like doctoral institutions, public four-year schools also had a habit of "capturing" aid for the benefit of faculty and staff rather than students.

Because colleges and universities have access to detailed student and parent financial data for everyone who applies for financial aid (collected and supplied by the federal government), they have an unrivaled amount of information about a student's financial situation.

Similarly, subsidized student debt can also be calculated into a student's ability to pay. Schools also know exactly how much external aid they can expect to receive from the government. Martin and Gillen note that car dealerships and even banks can only dream of having that level of data available to them to set prices!

As a result of having such extensive financial data, higher ed institutions have a unique ability to adjust the amounts of school-based grants they offer to students along with tuition rates, fees, room, and board charges to maximize their revenue from each student. Instead of actual costs driving tuition rates, institutions have the luxury of maximizing student revenue and then adding in external aid to determine how much they can spend.

Martin and Gillen estimate that higher ed institutions would have foregone $59 billion in 2008 revenues had they followed pricing policies that actually passed external aid through to students.

Pouring increasing amounts of student aid into college and university coffers has done nothing to improve college affordability and access. Instead, the report concludes, "Higher education is engaged in an expenditure 'arms race' that thwarts policies to increase public access and redistributes wealth to higher education insiders."

Additionally, research published by CCAP Director Richard Vedder in 2004 found that more state spending on higher education correlated with lower rates of economic growth. Vedder's 2010 report, From Wall Street to Wal-Mart, concluded with an evaluation of increased taxpayer funding of college education: "If the public objective is to use higher education as a means to . . . expand national productive capabilities, it appears much of the recent 'investment' in colleges is misdirected. The bottom line is that we need to rethink our higher education policies, particularly the massive one-size-fits-all federal financial assistance programs, but also other public provision of higher education services. (CenterForCollegeAffordability.org, December 2010 and March 2011)

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