The standard narrative of why college has become more expensive is that public funding has been reduced and that universities must make up the difference in higher tuition. This piece challenges that assumption.
I've read that in the postwar days, dental work was cheap. Then, as the economy boomed, employers started offering dental insurance as a way to lure new hires. Suddenly, most decent paying jobs had dental insurance, ostensibly making quality dental care more affordable. The consequence, however, was that dental care became ridiculously expensive, since no one was price sensitive anymore. I wonder if there is a similar thing with education. As soon as student loans became the de facto way that middle class people pay for school, everyone became price insensitive, even though we all pay eventually. I assume the impact of expanded grants and loans on tuition has been studied. Anyone ever come across any interesting analysis?
My understanding is that health benefits were a workaround to payroll and tax law. "Employers didn't start offering health benefits roughly 60 years ago because they were experts in medical decisions. It was a way of circumventing the World War II wage and price controls. Barred from offering higher salaries to attract workers, employers offered health insurance instead. Aided by an IRS ruling that said workers who received health benefits did not have to pay income taxes on them, and by the fact that employers could write off the cost of the health benefits as a business related expense, this accidental arrangement became the primary way most Americans access health care." I agree that this plays a role, though insurance carriers are price sensitive. Prices are probably more competitive for elective, cosmetic procedures that are not covered. I suspect that a larger factor is licensing requirements and other legal barriers to entry which restrict the supply of dental service providers. Cars and houses are often paid for with credit, why did they not also become ridiculously expensive?Then, as the economy boomed, employers started offering dental insurance as a way to lure new hires.
The consequence, however, was that dental care became ridiculously expensive, since no one was price sensitive anymore.
As soon as student loans became the de facto way that middle class people pay for school, everyone became price insensitive
Cars and houses are hardly ever paid for with credit that is accessible to everyone like student loans are. Student loans are a completely risk free investment for the bank and they are ready to give them out without meeting any sort of payback forecasting metrics. It's a huge difference to ask why someone can't get a car loan for $5k but can still get a student loan for $100k+.
My guess is that student loans feel quite different from other immediately payable loans, because 1) they're deferred for at least four years, but often quite a bit longer, and 2) we're constantly told that student loans are a better investment than any other thing we might take a loan for (which is still generally true, as far as I know). We're not shown in explicit detail total principle and repayment terms until after we're done borrowing. These things make them feel less daunting, and encourage more borrowing. I suppose demand is still probably the main thing that encourages price increases. Lots of people go to college these days who would not have gone to college at any time in the past.
Sometimes the simple explanation is the best. But shouldn't supply increase in response to demand? Lots more people buy computers, airline tickets, and cars than before. There is a lot of talk about higher education as signaling: that students pay not so much for skills and knowledge but for a credential that opens doors. Students rarely complain when a class is cancelled, or that the instruction was not challenging enough. Universities therefore have incentive to appear prestigious and respectable. They compete for positions on the annual U.S. News college ratings report. The criteria for the report include things not obviously related to education, such as an exclusive acceptance rate (fewer accepted of total applicants), alumni giving rate (percent who donate, regardless of amount, considered a proxy for satisfaction), and graduation rate. An expensive recreation facility might be more effective at boosting these numbers than hiring a more qualified professor. It makes sense that governing boards would compete for university leaders who are best able to perform the CEO-like job of optimizing for these measures. It is therefore a little amusing to see the NYT author proclaim that I suppose demand is still probably the main thing that encourages price increases. Lots of people go to college these days who would not have gone to college at any time in the past.
there are no valid arguments to support the recent trend toward seven-figure salaries for high-ranking university administrators, unless one considers evidence-free assertions about “the market” to be intellectually rigorous.
Yes, that's true. Car dealers want to know how much you can pay each month and home shoppers have to budget for payments as soon as they move in. Student loans are structured more seductively, with more of an open credit line as you continue in school and payments deferred for years down the line, when the investment is expected to begin paying off.student loans feel quite different