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Notebook Money

No way down


No way down

Here's a pop quiz for students heading back to college this week: What goes up but never comes down, defies the rules against perpetual motion, and increases even faster than grade inflation?

Answer: Their tuition bills.

When it comes to price increases, few products or services can match higher education. Not only are tuition prices rising, but they have been for decades and at a rate that is far faster than inflation.

Consider this comparison: Despite recent price increases at the pump, the cost of gasoline is still lower, in inflation-adjusted terms, than it was in 1980. Meanwhile, during the same time period, the average tuition price at a four-year public university has almost tripled, after adjusting for inflation.

Also, unlike the price of gas, the average tuition price has never once fallen in the past 25 years; the only fluctuation has been in its rate of increase. Just between 2002 and 2004, tuition prices at four-year public universities increased by 20 percent, after adjusting for inflation (from $4,263 to $5,132).

It's not a pretty record, but college administrators have a ready excuse. When confronted about costs, they often say that they have to raise prices because state governments do not give them enough financial support. David Ward, president of the American Council on Education, described this process in The Washington Post as a "quiet cost-shifting from state support to tuition."

But many economists offer a different reason: Universities raise prices because they can, because federal aid to students allows them to charge more. These economists point out that tuition hikes have occurred regardless of whether state funding decreased or increased in particular years. The one thing that has been as constant as tuition increases, they say, is increases in federal aid to students.

"There are two sectors of the economy where the federal government involves itself heavily in financing private transactions, namely health care and higher education," economist Richard Vedder told the House Committee on Education and the Workforce in April. "It is not a coincidence that these are the two sectors with the greatest amount of price inflation in modern times."

As with health care, "third-party payers" shield students and their families from much of the immediate costs of education, making them less sensitive to price increases. Mr. Vedder, an economics professor at Ohio University and author of Going Broke by Degree: Why College Costs Too Much (AEI Press, 2004), told the committee that overall student assistance, most of it from the federal government, has increased fourfold since the early 1980s. This, he argued, has increased demand and allowed universities to raise prices.

What have universities done with the extra money? According to Mr. Vedder, they have increased spending on administration (from 8 percent of university spending in 1929 to 14 percent today), added luxurious facilities, and raised faculty salaries, with full professors earning 50 percent more in real terms than they did 20 years ago even as their workloads have decreased.

If economists like Mr. Vedder are correct, then institutions of higher education are a lot like people. When the government offers them free money, they take it.