College Costs, the Sequel, the NY Times follow-up column on college costs explain the difference between college tuition prices and costs, and talks about the relative affordability of an college education in the US…notions that are also very much pertinent to Japanese education…
…”much of the “crisis” people perceive is driven by stories of astronomical tuition at elite private schools. But fewer than 10 percent of the students enrolled at four-year universities attend schools whose list-price tuition and fees exceed $33,000. Over 47 percent attend schools whose published tuition and fees total less than $9,000 per year.
Most colleges and universities can add students without seeing their costs per student go up. Buildings often can be utilized more intensely and the extra students can be absorbed without needing a significant increase in the size of the faculty. For some smaller schools, adding enrollment actually could lower the cost per student. And new schools can be created entirely from scratch if the demand is there. In other words, the long-run supply curve in higher education is not upward-sloping. It is flat.
Tuition is increasing at a faster rate than income. As a result the share of the family budget that must be set aside to buy a year of college education is rising, and this is taken as firm evidence that college is becoming less affordable. Although it seems very simple, this measure lacks any foundation in economic theory. Something becomes less affordable over time if you cannot buy the same amount of it without spending less on other things.
Here are the facts.
Between 1990-92 and 2003-05, the family at the 40th percentile of U.S. income distribution saw its real income measured in constant 2005 dollars rise from $41,072 to $44,834. This is roughly a 9 percent gain. Over the same period, net tuition and fees at public four-year schools rose from $1,529 to $2,089, also measured in constant 2005 dollars. This is a 37 percent increase. Net tuition is the correct measure because it includes all tuition discounting and grants students receive if their income is at the 40th percentile of the income distribution.
So, paying for this higher tuition does indeed eat up a greater fraction of the family budget; it grows from 3.73 percent to 4.65 percent. But after paying net tuition and fees, this family had $3,202 more to spend on other things. The language is being tortured to suggest that this is an affordability crisis.
The rising price of college does mean that it becomes more expensive compared with other things. This could be called a relative affordability problem. But if we somehow banned relative affordability changes, a market economy could not allocate resources efficiently.
In our book, we do not make light of affordability problems. Many families are indeed priced out of the market or forced to choose education options that are less desirable. Anyone who loses a job is a prime example. We have no doubt that the recent recession has made college and university charges less affordable no matter how one measures affordability.
In addition, rising income inequality in the United States drives longer-term affordability problems as the unskilled fall further behind the well-educated. For these families, affordability is a real issue. …
Two confusions crop up regularly in the commentary we received. First, people use cost and price interchangeably. Sometimes this is innocuous, but sometimes the distinction is crucial. Next, many people do not distinguish between list price and net price. No one should feel ashamed for mistaking these terms. These confusions bedevil much of the public discussion of affordability.
Cost is what the universities spend to provide their service. Caren in Berlin writes, “Yet… education in Europe is virtually free and it’s not like we don’t also use computers and don’t have buildings here.” She is talking about price, not cost. Education in Europe is not costless. It is heavily subsidized. Even in the U.S., most families pay muchless than the full cost of the education they receive. Universities get significant subsidies from state government and from private donations.
Our aerial view of the higher education industry is designed to explain the evolution of cost, not price. If states reduce their support, or if endowment earnings fall, this can lead to higher prices for students even if cost is not changing.
Costs in this important industry are rising over time because this flat supply curve is drifting upward for the three reasons we discussed earlier, not because government subsidy raises demand.