Raise or Lower Tuition
ECO204 Principles of Microeconomics
Instructor Robert Gordon
Schools, all over want to know if they can raise their tuition rates. This argument often ends up impassioned and subjective. Concerns in this argument about the tuition rates have a few different issues, for example: whether parents can afford an increase to whether what the schools provide is worth that much, to the increase in the tuition rates which is growing faster than the government aid and grants can keep up. Regardless, the bottom line is: will the increase in the tuition rates create a negative impact on the future enrollment numbers?
For at least a century, tuition at private, non-profit colleges and state universities has risen annually by two to three percent more than the rate of inflation making it hard for the government to keep up an compensate it with its student financial aid programs. Seltzer, Rick (2017). It wasn’t until the 1980s though, that the increase in tuition started to overcome the increase in middle class family income. During the 1990s, it got worse with endowments growing enormously because of the booming stock market, this growth lead many to wonder why the tuition needed to be increased at all, (Ehrenberg).
The student debt and costs are rising at exceptional rates. This seems to stems from the peculiar economics of education. Baumol recognized that some sectors of the economy, like manufacturing, have rising productivity as they regularly are producing more prodcuts with less manning, equipment, and time. This saving in productivity leads to increased wages and better living standards.
Other sectors however, like education, aren’t increasing in productivity. The average student-teacher ratio in college is sixteen to one, which is about the same as it was thirty years ago. The productivity level shows us that teachers now aren’t any more productive than they used to be. So here-in lies our problem; colleges can’t pay 1980 salaries in todays economy, and the only way they can pay wages today is by raising prices of tuition. (Amacher & Pate, 2013).
Now initially, this is sensable in widget factories, where the wage inflation is offset by productivity growth. In universities however, it doesn’t. The cost of a product can stay the same or go down over time even as the makers get paid more; the same concept doesn’t work with tuition costs (Ehrenberg).
Tuition expenses are going up mainly because the state subsidies are going down. Every time there’s fiscal crisis, education subsidies get cut first; now once they’re cut, the school’s never get the funds reinstated once the crisis is over and the budget balanced. So the proportion of the cost of college which is carried by the students has been rising steadily to compensate fro the lack of funds through the state.
Now, of all the reasons the tuition is going up, the teacher productivity is at the end of the list. It doesn’t matter if the teachers today more productive than they were in 1980 (Though it’s proably true), that is not the reason the student debt in America is approaching one trillion dollars (Ehrenberg).
To measure tuition correctly is important to colleges and state universities that depend on student tuition for the main portion of their operating income. They can increase revenue by raising tuition rates as long as the student enrollment is relatively steady or growing. However, if the students are price sensitive then an increase in tuition rates sees both the enrollment and total revenue plummet.
Ahmed, S., & Ghosh, A. (2012, June 28). Tuition Elasticity: Student Responsiveness to Tuition Increases. Retrieved from Higher Education Blog: http://www.hanoverresearch.com/2012/06/tuition-elasticity-student-responsiveness-to-tuition-increases/
Amacher, R., & Pate, J. (2013). Principles of Microeconomics. San Diego: Bridgepoint Education, Inc.
Ehrenberg, R. (n.d.). Tuition Rising: Why College Cost so Much. Retrieved from EDU Cause: http://net.educause.edu/ir/library/pdf/ffp0005s.pdf
Seltzer, Rick (2017) Net Price Keeps Creeping Up. Retrieved from: https://www.insidehighered.com/news/2017/10/25/tuition-and-fees-still-rising-faster-aid-college-board-report-shows