Friday, December 14, 2007

Education is the Future of a Nation, but it's too expensive

Crimson in Clover
Why Harvard costs so much.
From The Wall Street Journal

Harvard University got some nice press this week by announcing it will reduce tuition for middle-class families. It already allows students whose parents earn less than $60,000 a year to attend Harvard free. Now it promises that families making up to $180,000 will pay no more than 10% of their annual income to finance the $45,600 that a year in Cambridge now costs.

Drew Gilpin Faust, the school's new president, said the policy is designed to help families facing "increasing pressures as middle-class lives have become more stressed." Before applauding Harvard's altruism too loudly, however, readers should know that the school also had its back against a wall. In September, Republican Senator Chuck Grassley held hearings on whether colleges should be forced to spend a higher percentage of their endowments each year.

While private foundations have been required for decades to shell out 5% of their total assets annually, universities decide for themselves and average close to 4%. The difference may seem small, but the money at stake is very large. Harvard's endowment is $35 billion, and growing, with implications that Fay Vincent illuminates nearby. Mr. Grassley wants to know why rich schools don't spend more of their money to reduce ballooning tuition.

When the hearings began, Kevin Casey, the senior director of federal and state relations at Harvard, told the Crimson student newspaper that "it may not be the best thing for Congress to dictate the formulas by which financial aid and endowment spend-out should be connected." Mr. Casey is right. But given the hundreds of millions of dollars that the university receives from the government each year, Senators inevitably start to think that Harvard's business is their business.

Ironically, these government handouts are creating the tuition problem. Tuition has risen about three percentage points faster than inflation every year for the past quarter-century. At the same time, the feds have put more and more money behind student loans and other financial aid. The government is slowly becoming a third-party tuition payer, with all the price distortions one would expect. Every time tuition rises, the government makes up the difference; colleges thus cheerfully raise tuition (and budgets), knowing the government will step in.
As a result, "colleges have little incentive to cut costs," says economist Richard Vedder, the author of "Going Broke by Degree: Why College Costs Too Much." Mr. Vedder explains that there are now twice as many university administrators per student as there were in the 1970s. Faculty members are paid more to teach fewer hours, and colleges have turned their campuses into "country clubs." Princeton's new $136 million dorm, according to BusinessWeek, has "triple-glazed mahogany casement windows made of leaded glass" and "the dining hall boasts a 35-foot ceiling gabled in oak and a 'state of the art servery,' " whatever a servery is.

Our financial-aid system also hurts middle-class applicants. Parents who have saved money for their child's tuition quickly find that, by the strange calculus of financial aid, they are charged more for college tuition than if they had blown their savings on a bigger house. Mr. Vedder wonders why universities should get to ask the income of their students before telling them how much they'll be charged. That sounds like price discrimination: If a car dealer tried to make you fill out the form students have to fill out for financial aid, he notes, "you'd run to a consumer protection agency."

So is college still worth it? Though academic standards have certainly fallen, college graduates still, on average, make about twice as much over the course of their lifetimes as people with only a high school diploma. So if the government got out of the higher education business, a lot of families might decide to make the sacrifice anyway, even without the tuition aid. But they might also decide that they can live without the mahogany windows.
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