ERIC Identifier: ED382092
Publication Date: 1994-00-00
Author: St. John, Edward P.
Source: ERIC Clearinghouse on
Higher Education Washington DC.| BBB32577 _ George Washington Univ. Washington
DC. Graduate School of Education and Human Development.
Prices, Productivity, and Investment: Assessing Financial
Strategies in Higher Education. ERIC Digest.
The controversy over college costs first surfaced in the mid-1980s after a
half decade of rising tuitions. The U.S. Congress mandated Secretary of
Education William Bennett to conduct a study of college costs, focusing on why
costs were increasing and how the federal government could maintain access and
possibly mitigate future cost increases. The intent of Congress had been to
focus on why the prices students paid were rising, but Secretary Bennett
responded to the mandate by initiating studies that examined the growth in
educational expenditures as an explanation for rising prices. Senior officials
in the U.S. Department of Education also argued that student financial aid did
not influence access or expenditures (Bennett 1986). National associations
responded to these claims by arguing that increases in tuition could be
attributed to reductions in federal grants and state appropriations (Association
of Governing Boards 1986). During the past decade, the controversy over college
costs has continued, and tuitions have continued to rise faster than inflation.
In the face of mounting prices--and frequent articles in the popular press that
claim (or imply) prices are increasing because of waste--taxpayers in many
states have backed off their historic commitment to fund public higher
DID FEDERAL POLICIES CONTRIBUTE TO THE CONTROVERSY?
the late 1970s and early 1980s, total federal expenditures for student grants
declined, while the use of loans expanded and the participation of minorities in
higher education also declined. The Department and its contractors ignored the
fact that federal policies might have contributed to the decline in the
participation rates of minorities, just as they had ignored the fact that these
policies might have influenced rising tuitions.
Recent studies of the effects of federal student aid programs have documented
that the shift from grants to loans in the 1980s directly influenced the
downturn in the access of minorities to higher education and indirectly
influenced the rate of growth in tuition, especially in private colleges. Many
private institutions used their own sources of revenue to substitute for the
loss of federal grants. Thus, the changes in federal policy influenced the
overall pattern of enrollment redistribution and indirectly influenced price
increases in private colleges.
DID STATE POLICIES CONTRIBUTE TO THE CONTROVERSY?
the early 1980s, the burden for financing public higher education shifted from
states to students and their families (Kramer 1993). An examination of the
controversy acknowledged that institutions responded to reductions in state
funding by raising tuition but claimed that increases in tuition did not
influence enrollment (State Higher Education 1988).
This shift in the pattern of public finance of higher education has markedly
influenced the controversy over costs. First, the decline in state support has
influenced tuitions in the public sector to rise. Second, when most states cut
appropriations to grant programs, they cut institutional appropriations,
influencing a simultaneous increase in tuitions and decrease in grants. Third,
research indicates that these changes contributed to the decline in the
participation rates of minorities in the early 1980s (St. John 1993). Further,
it appears that access is also being eroded by the financial crisis of the early
DID INSTITUTIONAL POLICIES CONTRIBUTE TO THE
Throughout this period, national associations have focused on
how to tell their story about tuition increases. Their reports encouraged
institutions to point out how state and federal policies influenced increases in
tuition and the improvements in quality they were making in the services they
provide to undergraduates (Association of Governing Boards 1986). Most
associations and many institutional officials dismissed the claim that
inefficiencies contributed to rising tuitions.
Why have prices increased? The research on college costs has identified three
reasons for increases in tuition during the past 14 years. First, federal
student aid policies have influenced many private colleges to raise tuition to
generate more revenue for grants (Hauptman 1990). Second, states have shifted a
larger share of the burden for financing public colleges and universities to
students and their families, which has influenced public tuitions to rise
(Kramer 1993). Third, an incremental increase in educational expenditures also
contributed to rising costs (Getz and Siegfried 1991).
Has higher education's productivity changed? The basic production functions
influencing instructional costs--student/faculty ratios, average class sizes,
and so forth--changed very little during the past decades. Faculty and
administrators have few incentives to adopt more productive behavior. Faculty
are rewarded for their productivity in research rather than in teaching. And
administrators are rewarded based on their portfolios--the number of programs
and staff they manage--rather than for their efficiency. Thus, the instructional
productivity of colleges and universities has gradually eroded during the second
half of the 20th century.
Is higher education a good investment? Higher education is a good investment
for students, and the financial returns on an individual's investment are
substantial. Further, if tax revenue is considered as a return on government
investment, then it appears that federal and state investment in education have
a substantial return for every dollar spent. Tax revenue returns by themselves,
however, provide a poor basis for arguing that more should be spent (Kramer
1993), especially if the historic problems with productivity continue to be
CAN THE NEGATIVE EFFECTS OF PRICE INCREASES BE
Throughout the past decade, this question, which Congress raised
when it mandated that the Secretary of Education conduct a study of college
costs, has largely gone unaddressed. Research on the effects of recent changes
in financial strategy in higher education provides some insight, however.
Middle-income students responded positively to the increased emphasis on loans
in the 1980s, while loans per se had little influence on low-income and minority
enrollments. Low-income students were negatively influenced by tuition charges
and positively influenced by grants. When tuitions increased and grants declined
in the early 1980s, minority participation rates also declined, especially for
African-Americans. Therefore, emphasizing loans could be more cost-effective to
the federal government than placing a heavy emphasis on grants, if the negative
effects of loans are minimized for low-income students. Thus, the federal
government should make a more consistent and concerted effort to monitor the
effects of its policy changes on access than it has since the mid-1970s.
CAN PRODUCTIVITY BE IMPROVED?
The cost controversy has cast
a shadow of blame and doubt over higher education. Higher education, unlike
private industry, has historically absorbed new technologies without improving
productivity. A substantial turnover in faculty should occur during the next ten
years as massive numbers of faculty hired in the 1960s and early 1970s retire.
In theory, this turnover and the new technologies available create opportunities
for improving productivity.
Successful efforts to improve productivity in higher education, however,
should consider the internal incentive structure in the academic community.
Increased decentralization of financial strategy might be necessary to create
incentives for more faculty to experiment with approaches that improve
educational outcomes (meaningful gains in productivity). Colleges and
universities should consider pay incentives for improvements in instructional
productivity. If the incentive structure can be appropriately modified, then it
is possible that a new form of professional responsibility could emerge.
Questions related to the causes and consequences of rising administrative
costs merit closer examination within colleges and universities and within
government agencies. Recent studies paint two types of pictures: one of
administrative excesses contributing to rising tuitions, the other of increasing
professionalization in administrative services helping higher education to avert
the financial disaster that was predicted for the 1980s.
CAN RETURNS ON HIGHER EDUCATION BE IMPROVED?
issue facing the academic community is whether the returns on investment can be
improved. In other words, having good returns might no longer be sufficient
rationale for justifying public support, given that a shrinking percentage of
the population can afford the full direct costs of higher education. Further,
the fact that students have high returns might not help institutions in
marketing when students are confronted by high levels of personal debt.
Therefore, states and the federal government are confronted by questions about
how to optimize the strategies they use to finance higher education. And
institutions are confronted by very basic questions about whether they can
improve returns through improvements in productivity. These questions merit the
attention of the academic and policy communities.
Association of Governing Boards 1986. "The Tuition Booklet." Washington, D.C.: Author. ED 276 360. 7 pp. MF-01; PC-01.
Bennett, William J. November 1986. "Text of Secretary Bennett's Speech on
College Costs and U.S. Student Aid." Chronicle of Higher Education: 20.
Getz, Malcolm, and John J. Siegfried. 1991. "Cost and Productivity in
American Colleges and Universities." In Economic Challenges in Higher Education,
edited by Charles T. Clofelter et al. Chicago: Univ. of Chicago Press.
Hauptman, Arthur M. 1990. The College Tuition Spiral. New York: Macmillan.
Kramer, Martin. 1993. "Changing Roles in Higher Education Finance." In
Background Papers and Reports, edited by J.P. Merisotis. Washington, D.C.:
National Commission on Responsibilities for Financing Postsecondary Education.
St. John, Edward P. 1993. "Untangling the Web: Using Price-Response Measures
in Enrollment Projections." Journal of Higher Education 64(6): 676-95.
State Higher Education Executive Officers, Committee on College Costs. 1988.
"Report on the Costs of College to Students." Denver: Author. ED 299 875. 15 pp.