Megan McArdle misses the biggest reason why tuitions are sky-rocketing and that is because Government funding is disappearing.
Basically this is what happened: Before the Bush administration, the fed government would give out these huge grants to the states for education and other purposes. When Bush became president he had to figure out a way to cut taxes while drastically increasing spending at the same time (because he had to have his war). Borrowing was a big part of the answer but he also severely cut the grants to the states. Bush also transferred huge war costs to the states by requiring that the national guard take an unprecedented part in the war.
All of a sudden states budgets were trashed and the first thing they cut was education subsidies.
Of course there were other things that destroyed state budgets such as the slow economy, pension liabilities (which were caused by the slow economy), etc., but it all started with the war.
It was always the large high quality state schools that kept tuitions down. If you have the UC system (for example) that can take hundreds of thousands of students, provides excellent education and charges only $5k per year (as it did during the 90's), it is very difficult for other schools to raise tuition. Of course few schools that were clearly better than the UC system could raise tuition also few schools that specialised in serving rich kids, but most schools could not.
Now of course the state schools are losing their state funding, which means they must raise their tuition, which means that all other schools can raise theirs too.
Now mind you student loans are an issue as well, but one has to mention the disappearing state funding when discussing skyrocketing tuitions.
It sounds like you're saying that cuts to education by the Bush admin caused total education spending to increase.
Regardless, education spending has been increasing at a more or less constant rate since the mid-1960s. Discounting one hiccup in the seventies, (energy crisis/boomers leaving school) the uptrend goes back almost 50 years.
No, I am saying that cuts in government education subsidies cause higher tuition, something that makes perfect sense.
It also makes perfect sense that total education spending would increase, because (a) the population is increasing, and (b) our economy is changing in such a manner as to require higher and higher portion of college-education-necessary jobs.
It makes sense for cuts in ed subsidies to cause tuition to rise, but you'd expect universities to make up some of the shortfall by cutting services. There would be a drop in total spending, but smaller than the cut.
Instead, total spending increased by 30% (about 100Bn/yr) between 2000 and 2007 even though the student population dropped from 15M to 13M during the same period.
Even so, spending per student went up 8%. Usually when demand drops, prices go down. Why do you believe education behaves differently than virtually all other goods?
"Even so, spending per student went up 8%."
And where do you get that data?
"Usually when demand drops, prices go down. Why do you believe education behaves differently than virtually all other goods?"
As I said above, demand went up from 15 mil to 18 mil.
You may need to spell out what you're trying to say. Why should one expect the spending per student to decrease solely (or even primarily) as subsidies decrease? Aren't tuition and enrollment far more important?
There are two countervailing effects going on: a drop in demand for college by states, and an increase in demand due to more college-age people. If the latter effect is the important one, then Hristov's original point (regarding reduced state subsidies for college) is irrelevant. If the former effect is the important one, then spending should have gone down.
And if Hristov believes the decrease in demand due to reduced state spending caused prices to go up, he should explain why he believes college behaves so strangely relative to other goods and services.
I thought I explained that in my initial post. Many of the state schools (such as the UC system, but many others too) provide high quality education and take so many students that they influence the market. Thus private school tuitions depend on market forces created by public school tuitions.
Once the public schools raised their tuitions the private schools knew it would be safe to raise theirs as well.
I could see this argument carrying some weight if you just looked at California, but the top-tier private schools on the East coast have never had such strong competition from state schools and geography is definitely a factor in school choice, so I expect that the effect of this price competition would be limited.
Megan McArdle misses the biggest reason why tuitions are sky-rocketing and that is because Government funding is disappearing.
It's not clear this is the biggest reason, and she doesn't actually miss it, either. She states we could just "shift the burden from students to taxpayers."
In fact both of you completely ignore the most important question: What is the tuition actually paying for? Where is the money going? Government subsidizing those costs doesn't make them go away and merely fuels demand, which probably causes raises costs even more. A subsidy could keep tuition down, but that would not discourage waste or increase the value of education.
Some of the discussion is reasonable, but I really dislike the reliance on "Figure 4: Expected Lifetime Earnings by Educational Attainment". Certainly there is a correlation here, but is there causation?
"But as you can see from the chart above, $1 million is close to the lifetime value of a college degree (it's actually about $1.4 million), and colleges are getting better at extracting quite a lot of that value for themselves."
To prove the point, you could make a parallel chart of "Lifetime Earnings by Car Driven", and I'm sure that the BMW owners would on average earn more over their lifetime than the Honda Civic drivers (like me). But this wouldn't imply this is a good pricing model for cars.
Obviously, the actual chart used is better than this hypothetical. But shouldn't one at least try to distinguish the value of the degree from the skills that the person already had going in?
Some of the discussion is reasonable, but I really dislike the reliance on "Figure 4: Expected Lifetime Earnings by Educational Attainment". Certainly there is a correlation here, but is there causation?
Not demonstrated, but certainly plausible, since the different education levels seem to point towards different career paths.
I think you'd see quite different figures if Figure 4 had been controlled by parental income (or even by total blue book value of parental household automobiles.) I always find it troubling when people find two events co-occurring and assume it's a causal relationship, particularly when both things are clearly possibly related to class.
"But in 2005, during a major overhaul of the bankruptcy code, private student loans were given an elevated status and thus couldn't be discharged. This didn't make sense. If we are going to have a fair bankruptcy system, private education loans should be treated the same as other private consumer debt. That's the risk lenders take, similar to the risk borne by providers of loans for cars, homes or other consumer purchases." [1]
"Lenders receive a 97 percent guarantee against default losses, which removes almost all of the default risk of the loan to the lender. If a borrower does not repay his or her federal student loan, the government pays the lender 97 percent of the outstanding principal and all of the accrued unpaid interest. In other words, the lender assumes default risk for only 3 percent of the loan principal." [2]
Subsidized student loans have been available for a long time. Why are they so much more pernicious now? Are there solid numbers available for the growth of loans over the last 50 years?
1. Businesses started pushing the cost of job training onto colleges. Then everyone had to go to college.
2. Colleges realized they were selling too cheaply when students could pay off tuition by working summers. They can't stop increasing the price because a competitor that kept increasing prices would use the extra money to become a better college than they were.
3. Because of 1 and 2, more parents and relatives became willing to help pay for college.
4. For people without parents or relatives that wanted to help, loans were the only way.
Since it would be too "socialist" to directly reduce the cost of college, the government decides to hand off the subsidies to for-profit entities that have become an $85 billion industry in a program called FFEL. Instead of reducing or reigning in the costs of college, they do what any sane business does: increase profits at the expense of someone else (students). They form partnerships with colleges to get kickbacks for every student loan.
And when all of you (including H-1B exploiters like Google and Microsoft) complain that the US is falling behind in education, more taxpayer money gets siphoned off into these corporations when a politician decides to get reelected again by keeping these programs in place.
It's because you didn't need a subsidized loan when you could afford to pay tuition yourself. Sure, they were available, but there were fewer people that would be unable to attend school without them. I have an old teacher who went to college in the seventies, and he says he didn't get a subsidized loan because he was too lazy to walk down the street and fill out an application.
It is temporally circular, not logically circular. It's a pernicious cycle. It has been headed for disaster for a while, but like a lot of economic trends that were (and are) obviously headed for disaster, people tended to think it could go for another ten or twenty years, a horizon that has really shrunk due to the fact that the economy has choked.
If the economy doesn't really pick up in the next year I think we're going to see some very shocking numbers come next fall admission.
I don't know that that's a circular argument so much as a vicious cycle. Perhaps I am reading too deep, but that's the exact point the article seems to be making.
I suspect that they have been coming more and more common in a positive feedback cycle. I know when I was in college in the early 1980s, loans were available, but not especially common; a lot more people seemed to be working their way through school, but as the cost rose that became less and less viable.
But beyond the high default rates, consider what a student loan does. In the past, college degrees conferred higher incomes on those who earned them. But almost all of that surplus went to the student rather than the college, because aside from a small number of extremely affluent families, the students were young and did not have that much cash. If colleges wanted to expand their market, college tuition was constrained to what an average student, or their family, could pay.
How far back do we have to go to get to a time when the "average [university] student" was from not an "extremely affluent" family, but still well above average?
To make this product work on a mass scale, you need the government guarantee--and the government's ability to shield those loans from bankruptcy. The default rate on student loans is 7%, not all that much lower than the current 8.8% default rate on credit card loans--even though student loans are not dischargeable in bankruptcy, are deferrable for hardship, and are supposed to be made to people who end up with higher than average earning power.
How does one actually default on the loan if you can't default? Do they just stop paying?
The law is that student loans cannot be discharged through bankruptcy. There are several ways they can be legally defaulted on, for example if the person becomes disabled and begins receiving SSI. Plus, as you said they can simply not pay, but that completely and permanently trashes their credit, since it doesn't go away (or so I understand - I could be wrong about whether it eventually falls off their credit rating).
Basically this is what happened: Before the Bush administration, the fed government would give out these huge grants to the states for education and other purposes. When Bush became president he had to figure out a way to cut taxes while drastically increasing spending at the same time (because he had to have his war). Borrowing was a big part of the answer but he also severely cut the grants to the states. Bush also transferred huge war costs to the states by requiring that the national guard take an unprecedented part in the war.
All of a sudden states budgets were trashed and the first thing they cut was education subsidies.
Of course there were other things that destroyed state budgets such as the slow economy, pension liabilities (which were caused by the slow economy), etc., but it all started with the war.
It was always the large high quality state schools that kept tuitions down. If you have the UC system (for example) that can take hundreds of thousands of students, provides excellent education and charges only $5k per year (as it did during the 90's), it is very difficult for other schools to raise tuition. Of course few schools that were clearly better than the UC system could raise tuition also few schools that specialised in serving rich kids, but most schools could not.
Now of course the state schools are losing their state funding, which means they must raise their tuition, which means that all other schools can raise theirs too.
Now mind you student loans are an issue as well, but one has to mention the disappearing state funding when discussing skyrocketing tuitions.