Some facts about university finances in Canada:
1. Undergraduate tuition has doubled in real terms in the last twenty years; tuition in professional programs has risen much more rapidly.
2. University enrolments are growing, as the participation rate - the percentage of people in a given age group attending university - continues to rise.
3. Each provincial government pays universities more or less a set amount per full time student. Between 1993-4 and 2007-8, half of the provinces, including Alberta and Ontario, increased that per student grant, and half, including BC and Quebec, decreased it.
4. The combined effect of rising tuition fees and enrolments, together with less rapidly increasing, or even decreasing, provincial funding, has been to raise the share of university expenditures funded through tuition.
These figures are taken from the Canadian Association of University Teacher's (CAUT) almanac, and are mostly derived from Statistics Canada data. Here are some pictures to illustrate:
One explanation of the rising cost of university education is cost disease - the relative price of university education has increased because universities have not enjoyed cost reductions created through trade or technological change. I don't wish to dispute these cost arguments, only to offer some alternatives.
Nick Rowe argued in a recent post that universities solve pie division problems, for example, how to meet the competing claims of different departments, by increasing the size of the pie. As he puts it:
A growing university is easy to manage. If you need to grow one department relative to another, you hire people in one department and don't hire them in another. A constant sized university is harder to manage. If you need to grow one department relative to another, you hire people in one department and fire them in another. It's easier to not hire than to fire. And a shrinking university is very hard to manage.
Nick's theory explains why universities would want to take in more students and charge them higher tuition. But why can universities charge higher tuition?
In Canada, governments regulate the amount that government subsidized university programs (almost all undergraduate programs) can charge in tuition fees. Universities will rarely charge less than the maximum allowable fees. Students use price as a signal of quality, therefore open discounting is unattractive. If universities wish to reduce effective fees, providing scholarships and bursaries is better than lowering tuition, because it allows universities to price discriminate, and because (as is explained below) it minimizes students' and parents' tax liabilities. Universities do not charge more than the maximum allowable fees because of the way that government grants are calculated - any revenue raised this way would be clawed back in the form of reduced grants.
Faced with rising university costs (see cost disease point above), governments have a number of policy options:
- Radically restructure universities in an attempt to reduce costs.
- Keep tuition low. Raise taxes to cover the rising cost of university education.
- Keep tuition low. If tuition plus grants do not cover the marginal cost of a student's education, allow universities to reduce total costs by restricting university admissions.
- Allow tuition to rise. Allow universities to cover their rising costs by increasing admissions. Provide selective subsidies to highly capable or highly needy students.
Option (1) will raise academics' ire, so is only worth doing if there is a really serious crisis. Option (2) will gain votes from students (a fairly small group who tend not to vote) and lose votes from taxpayers (a larger group who tend to vote), so is unattractive politically. Option (3) is not bad, but is dominated by option (4). Smart students are indifferent between options (3) and (4), because they will receive scholarships to offset their tuition costs. Ditto needy students.
Universities prefer option (4), as it solves their pie division problems, and universities are a well-organized interest group. It is hard for politicians or bureaucrats to find out exactly what goes on within our institutions of higher learning. University presidents, groups like the Canadian Association of University Teachers and the Association of Universities and Colleges of Canada use their role as information-providers to lobby for the policies and changes that they see as desirable. Students, who might prefer, say, option (2) - low tuition, higher taxes - are less likely to get the ear of the minister, or be in a position to influence policy through the provision of information.
Another group that would support option (4) -- high tuition, relaxed admission criteria - over option (3) - low tuition, restricted admission, is mediocre students who might otherwise be denied admission, especially well-off mediocre students. One recent paper suggests that an additional year of post-secondary education increases annual pre-tax earnings by 10 percent - from, say, $50,000 to $55,000. Another suggests a year of education leads to a 7 to 12 percent increase in annual earnings. Over a life-time of employment, that works out to a fair chunk of change. A B student seeking entrance to, say, Yale law school, might well prefer to pay higher tuition than to be denied access.
Canada's income tax act also makes option (4) - raise tuition, provide scholarships and bursaries - a very attractive option. Tuition fees generate tax credits. Scholarship and bursary income, however, is not taxable. Tuition fees of $4,000 accompanied by a bursary of $4,000 represent a net tax savings of about $800, depending upon the individual's provincial income tax rate (federal non-refundable credit=0.15*$4000 or $600, provincial tax credit equals, say, 0.05*$4,000=$200). This explains why, say, Prince Edward Island has a policy of charging relatively high tuition, and then providing all first year Islanders with a $2,000 bursary (thanks, Jim Sentence, for this example).
Noooo!!!!! Is it really all about some hidden way of transferring costs from the provinces to the federal government? Don't tell me this is another issue that just comes down to federal/provincial relations.