The political economy of rising tuition

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:

1. Radically restructure universities in an attempt to reduce costs. 
2. Keep tuition low. Raise taxes to cover the rising cost of university education.
3. 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.
4. 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.

Comments

[Determinant]

A small point of analysis, though overall this post is spot-on. Tuition is given a tax-credit, not a deduction. A deduction lowers one's total taxable income and therefore reduces one's marginal rate. Or put another way, it pays you at your marginal rate. RRSP's are a tax deduction and there are very few actual deductions left for wage-paid taxpayers.

A tax credit, on the other hand, is calculated by dividing the credit by the lowest tax bracket and then crediting it to tax payable.

For a student with only summer income, the difference is negligible. However if for some reason a student has high income their marginal rate is unaffected by tuition and they will still pay at their top rate.

[Frances Woolley]

Determinant, yes, you're right. Sloppy language. Later on in the paragraph I do clarify that it's a non-refundable tax credit.

[Alice Woolley]

A B student seeking admission to Yale Law School is dreaming in technicolour - actually, a B student seeking admission to any Canadian law school is (absent an exceptional LSAT score) dreaming in technicolour too. The interesting fact about law schools in Canada is that tuition has gone up, but law school places haven't significantly increased since 1982, making law schools a hybrid of 3 and 4 - rising tuition but declining (per capita) places.

[Ian Lippert]

Great posts Frances. This is something I've been interested in a while but have not had the time to seek out any good data. What are your thoughts on mark inflation? Are more students attending because they are understanding the value of a degree or are universities getting more lax? I've seen some data but I'd like to get your thoughts, another post on this topic would be great :)

[Frances Woolley]

Alice - thanks for your comments. There's a point where it makes sense for a university to say to the government "thanks but not thanks", turn down the per student government grant, and charge what the market will bear. U of T Law school seems to have done that, with first year fees at $23K Do you have a sense of why law schools have continued to restrict admission? Are they maximizing profits or responding to some other kind of incentives? On Yale - George W's admission is still, from what I can gather, mysterious - do you know what his undergrad average was? Was it Yale law school or somewhere else in Yale that he went?

Ian - thanks!

I don't have any numbers on mark inflation, though certainly the current system of grade-based price discrimination gives students an incentive to lobby teachers for higher grades - if the grade 12 English teacher gives the top student in her class 87% as opposed to, say, 93% or 95%, it could make a difference of several thousand dollars per year to that particular student. And in grading essays, like judging figure skating, it's somewhat arbitrary which particular numerical value one assigns to an "A" essay. I've really been stunned to learn the extent to which there is a clearly established scholarship/grade curve ("80 gets you in, 85 gets you money....") that high school students are very aware of.

To understand the increased participation rate it's also necessary to take into account demographic and other change, e.g. people who live closer to a university are more likely to go, people from certain cultural backgrounds are more likely to go, etc. Yes, another post.

[Alice Woolley]

U of T law school (and most of the other Ontario schools) took advantage of a window created by Mike Harris in which the professional schools in Ontario were allowed to increase tuition as they wished. I'm not sure that they forego their government grant, in part because most differential fees are not held only by the law school, but are shared with the university as a whole to fund other programs (at least that's how it works in Alberta). Governments won't always permit those big increases now - both U of A and U of C law schools (and other professional schools) were denied tuition increases by the government of Alberta within the last couple of years.

The responses of law schools here though is to push to expand spaces. There is a new law school opening at Thompson Rivers University in Kamloops, and also at Lakehead (if the government of Ontario approves it - the Federation of Law Societies has). A number of law schools have increased their numbers, although only modestly to this point. The fact is that the number of spaces compared to the number of applicants is quite skewed. There are twice as many applicants per place in Canadian law schools as there are to ABA law schools in the US, and many law schools in the US are not ABA approved. Now of course there is also a difference insofar as graduates from Canadian law schools tend to be able to get jobs (at least at our law school almost 100%, even through the recession), which is not true of even grads of Ivy US schools, have been put back a modest $46K per year for the benefit of that degree.

In terms of GWB, I can't speak to Yale undergrad admission, but Yale Law School is the most selective law school in the US, and I think being a legacy applicant is only helpful if you are within their general criteria, which are very, very high (A average and 98th percentile LSAT high).

[ian lee]

Frances,

Excellent piece. But I was hoping you would address the "head in sand" position of faculty associations (i.e. unions), CAUT and the Federation of Students, in their obdurate opposition to tuition fee increases, demanding increased government funding, notwithstanding a 30 year record by all political parties to underfund higher ed (in Ontario per CAUT), due to the ever increasing financial appetite of the "health care monster in the room" (Jeffrey Simpson).

In a recent discussion of this issue with a certain faculty association, I argued that faculty associations and faculty members:

suffer from “false consciousness” in unthinkingly supporting student demands for lower tuition fees, because students are “transient” 2-4 year members of the academy – on their path to incomes double those that do not attend university (Stats Can). Students are not focused on the strategic interests of the academy, for they want low or no tuition fees so that upon graduation, they can buy a bigger car and a bigger house, sooner rather than later.

Thus faculty associations and faculty members are falsely concerned with the students’ future ability to consume, rather than the long term interests of the academy.

In the absence of substantial increases in government funding, faculty members should advocate personal investments in the most valuable asset in the world – the educated adult mind – which is far more valuable than a car or a house. Yet, students think that $20K in student loans is a catastrophic state of affairs – but think nothing of borrowing $35K to $50K to buy a shiny new car and $300 K to $400 K to buy a condo after graduation.

We unwittingly participate in this unconscious trivialization of the academy, by stating that it is wrong to go into debt for education, but just fine to go into debt for car and home.

Faculty members suffer from false consciousness as the head waiters for the future elites – the "bourgeoisie".

And for those concerned about “equity” or access, read Stephen Gordon’s just excellent WCI post from last year, “ How increasing tuition fees can increase university participation rates” http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/02/how-increasing-tuition-fees-can-increase-university-participation-rates.html

Ian

[Jim Sentance]

If you're going to go on about cost disease and rising university costs, I would think you might provide some evidence that there is at least some tendency for costs to rise. In fact from your data I see the opposite. From 1978 to 2004, while tuition rose as a proportion of operating funds by nearly three times, it only doubled in real dollar cost. That suggest to me that costs per student have actually gone down. Tuition cost is not the same as the cost of university. It's the share of university costs borne by students.
Overall costs probably have gone up, but because more students are attending.

[Patrick]

I think it might be similar to health care at end of life. Students don't face a marginal decision, they face an all or nothing decision. The difference in outcomes for degree vs. no degree are pretty drastic. Price controls aside, Canadian Universities could probably charge a whole lot more and attendance wouldn't suffer much, if at all. Really, what's the alternative for students who aspire to anything even vaguely resembling a middle class existence?

[Mark Dowling]

Can someone explain to me the rationale where the Federal government provides CST transfers to the provinces which fund higher education while not concurrently forbidding differential treatment of out-of-province Canadian students?

[Jospeh]

I think that there may be some level at which growth and exclusivity come into conflict. I am always amazed at how the University of Toronto manages to have such a strong reputation despite it's large size; it'd make more sense to me if it were small but highly funded. So I would conjecture that it might be a good strategy to make headline programs (like Law) very limited enrollment so that you can combine examples of tough to enter programs (like Law) with the otherwise hugely expanded undergraduate programs (like psychology).

Psychology appeared to have this strategy in the 1990's (when I was close with psych people) where it was very easy to get an undergraduate degree (especially a three year one) but extremely hard to enter graduate school in psychology (I believe there were more applicants per spot for a master's degree in psychology than in medicine). A very effective blend of large size but tight exclusivity.

[ian lee]

While I cannot answer the excellent question posed by Mark, the following PBS Frontline Report on College Inc, inadvertently provide's the market response to the university "cost disease" that Frances and Nick have addressed.

COMING TUESDAY: PBS FRONTLINE

COLLEGE, INC.

Airs Mar. 1 at 9PM EST

We examine the multi-billion dollar world of for-profit colleges, where a new breed of "educational entrepreneurs" are running some very big, and increasingly controversial, businesses.

In College, Inc, this Tuesday night's rebroadcast, Smith introduces us to some of the people who are remaking higher education -- for the better, they say -- while also making a fortune.

The Los Angeles Times called this investigation "a vivid portrait of a startling new kind of American education, one that has grown up along our highways, in our urban centers and on the Internet with weed-like speed and tenacity, and seemingly while no one was looking."

Led by the University of Phoenix and a few other big players, the for-profit higher education sector says it's serving a growing number of students left behind by traditional four-year colleges, and by a community college system that's become overwhelmed by demand in this down economy. But the film raises a number of serious questions about the for-profits' deceptive, high-pressure recruitment tactics, and their failures to deliver the improved job prospects and earning power that they promise their students.

We hope you'll tune in Tuesday night, then join us online, where the film generated an extraordinary viewer reaction when we first aired it You can also find responses from leaders in the industry. And as always, check out the extended interviews conducted for this report.

Ken Dornstein
Senior Editor
Frontline

[Determinant]

"Thus faculty associations and faculty members are falsely concerned with the students’ future ability to consume, rather than the long term interests of the academy.

In the absence of substantial increases in government funding, faculty members should advocate personal investments in the most valuable asset in the world – the educated adult mind – which is far more valuable than a car or a house. Yet, students think that $20K in student loans is a catastrophic state of affairs – but think nothing of borrowing $35K to $50K to buy a shiny new car and $300 K to $400 K to buy a condo after graduation."

Ian Lee:

You entirely miss the point of the decreasing return from academic degrees. This shows up as only as decreasing grad employment rates, involuntary employment in non-field related work and decreasing starting compensation.

The fundamental problem in our society today is not education, it's capital. We have been very successful at creating an educated middle class. We have an enormous pool of good workers available. What we lack is capital and management to employ that workforce.

Grads aren't greedy, they are entirely rational. When you graduate you are short income and capital and long "work", actually the ability to to do work. So in this world we go to work, or at least try to. But there is a large degree of uncertainty that you will be able to get work or work that is sufficiently remunerative to pay your debts. It is entirely rational to deal with that uncertainty by decreasing the debt incurred.

[Frances Woolley]

Jim - " I would think you might provide some evidence that there is at least some tendency for costs to rise." If you click on the link to the CAUT almanac at the top of the post and then go to the chapter that says 'finances' you'll see a diagram that shows total university expenditures in real dollars over time. They are trending upwards. You're right, I don't know about per student costs, and I don't recall seeing any numbers on that.

Ian - "In the absence of substantial increases in government funding, faculty members should advocate personal investments in the most valuable asset in the world – the educated adult mind – which is far more valuable than a car or a house."

Ian, think about the interests of a typical faculty member. If the government pays the bills, that faculty member is accountable to government - and the ability of governments to monitor individual faculty members is weak. If an individual student pays the bills, that faculty member is accountable to the student, leading to "I'm paying $1,000 for this course, I expect coherent lectures/you to show up on time/an A"

[Jim Sentance]

I'm sure spending is going up in real terms, but so is enrolment so I'm interested in what the breakdown is between the two. I'm fairly certain in my province that cost per student has gone down, while huge increases in numbers have driven overall costs up.
Another question would be to what extent costs have gone up because of the shift to relatively more graduate students, who cost more.
And sort of related to that is the question of what share of university costs represent the cost of educating the students, how much to other things we do, like chasing research dollars so we can spend more research dollars. Over the past decade the share of our income (and presumably spending) generated by research has climbed from a couple of percent to over 15 percent, most of which has a negligible relation to teaching students.

[Determinant]

If an individual student pays the bills, that faculty member is accountable to the student, leading to "I'm paying $1,000 for this course, I expect coherent lectures/you to show up on time/an A"

I heard that uttered several times during my student days.

[Gregory Sokoloff]

Frances, George W. an undergrad at Yale, and never had anything to do with Yale law school that I can discover. His undergrad grades were in the 70s, though he bested Dick Cheney who flunked out. Yale Law school was the most selective in the nation by the 1970s, and Bush would have needed at least presidential intervention to get in...whoops, no problem!

[Gregory Sokoloff]

Ian, your position is roughly what American universities propounded in the last century. The problem was that once you had "invested", say, $50K in your education, you were no longer in a position to take low-paying jobs in the non-profit sector to exercise your newly enlightened moral being. Since many schools prided themselves on the contribution of their grads to charitable causes, a charge of hypocrisy was unavoidable. In 2001 this caused the schools that could afford it, like Harvard and Princeton, to stop lending money to needy students, and instead just give it to them. For example, Princeton gives financial aid to over 50% of the students, and that aid averages over $32,000 per year with no loans. You need a whopping endowment to afford that.

Forgo government grants, raise tuition rapidly, force students to take out big loans, and you too can have these problems.

[Frances Woolley]

Gregory - thanks for the clarification on Yale - and as Alice told me off-line, it's not clear that he would have even gotten in as an undergrad at Yale today. Interestingly, only one of his daughters was admitted.

[Gregory Sokoloff]

Frances, who knows if Bush would get in today? Yale and its peers don't like to talk about it much, but they have always given preference to so-called "legacy" applicants, i.e. daughters and sons of alumni, and that continues to this day. This preference is never big enough to fully placate alumni who tend to be furious when their progeny are refused, and furious alumni donate less to the endowment. On the other hand, the preference is large enough to piss off everybody else. Bush would still have that going for him. However, the acceptance rate is lower today than forty years ago, and the applicant pool larger. Counter balancing that is a much better developed industry for the rich to game the system of admissions. The one more or less constant is the SAT test in which places like Yale put a lot of store precisely because it is hardest to game.

[Bob Smith]

"Do you have a sense of why law schools have continued to restrict admission?"

I seem to recall that a number of law schools (UofO - I know they increased admissions by 60 odd students per year (from say, 150-odd) in the mid-'00s. UofT also comes to mind) have had significant increases in enrolment over the past decade (though given the increase in the number of Canadian students going to Bond university in Australia, clearly not enough to keep up with demand).

I think the problem with law school is the same as the problem with medical school, the schools could admit tons of people, but if they end up being unable to secure articling (or, in the case of medical schools, residency) positions, that's going to be a real problem for the law school (as it is, it's already apparently a problem for Uof0. see: http://www.lsuc.on.ca/media/licensing_appendix_9.pdf. That performance is all the less impressive because the mid-'00s was a boom period for the legal profession). Its hard to sell hefty tuitions when your graduates can't get articling positions (and, for law schools, you have to be concerned that some litigious graduate will turn around and try to sue you). And this is more likely to be an issue for narrowly-defined professional programs, because it's easier for students to figure out the articling prospects of a recent graduate for those programs (since the law society and, presumably, whoever regulates admissions to the medical profession closely monitor these numbers) than it is to figure out, say, the employment prospects of someone from a more general program (economics, sociology, woman' studies).

In practice (though not in theory) Canadian law schools serve as the gate-keepers to the legal profession. It is almost impossible to fail the Ontario bar exam (provided you speak english or french to some degree), unlike our American cousins, where law schools proliferate, but where the failure rate on the bar exam in states like New York or California runs up to 30%+ (even for graduates of ABA approved law schools, the failure rate is material - in 2009 the fail rate for Yale graduates writing the New York bar was 8.8%). And, of course, US lawyers don't have the equivalent of articling, so there isn't the same quantitative limit on entering the profession (since, in theory, anyone who passes the bar can hang up their own shingle).

[Joel Wood]

Provincial governments can also use student loan/grant (e.g. OSAP) programs to cushion the political fallout of option 4. It seems to me that although a large percentage of students do not vote, their parents do vote (and their parents are often paying a share of their university costs). The current Ontario government allowed small tuition fee increases, but also greatly increased the percent of students eligible for OSAP loans (at least that was what someone told me). Their justification was to help middle class families with multiple college aged children.

[Frances Woolley]

Joel "It seems to me that although a large percentage of students do not vote, their parents do vote (and their parents are often paying a share of their university costs)." - yes, this is a very good point.

[Bob Smith]

Gregory: "The problem was that once you had "invested", say, $50K in your education, you were no longer in a position to take low-paying jobs in the non-profit sector to exercise your newly enlightened moral being."

What percentage of university graduates take "low-paying jobs in the non-profit sector"? Probably pretty small. Was the percentage higher when tuition was lower? Probably not.

This was often a common argument when UofT law school was increasing it's tuition. People would regularly assert that the only reason they were taking positions paying 6-figure salaries on bay street was because of their high student loans. There were, however, two problems with this claim: (1) it is obviously self-serving ("Gee, I'd really like to help the poor, but I guess I'll just have to make a ton of money") and (2)it was far from clear the hgher tuition fees actually affected career choices. What evidence there was suggested that tuition had no impact on the decision of graduates to go into private practice rather than working for the government or other "non-firm" jobs. Indeed, as I recall, the government jobs were much sought after and hard to get. Moreover, it was unclear that the non-profit jobs that people were allegedly induced away from ever existed (There aren't (and never have been) a lot of positions for lawyers in the non-profit sector, and what positions there are typically requiremore experienced lawyers. People were taking corporate law jobs because that's where the jobs were.)

In any event, if you want to encourage university graduates to work in the non-profit sector, that's great, but doing that by subsidizing tuition is a lousy way to do it (the metaphor that I once hear was that it was equivalent to trying to feed the birds by giving grain to a horse - I'll leave it to you to visualize that metaphor). It makes no sense to subsidize the tuitions of a horde of corporate lawyers in the hope that a handful of students will work in the public interest sector. If you want graduates to work in the non-profit sector, subsidize the non-profit sector and/or those graduates who chose to work therein. Indeed, to a degree that was the approach that UofT took. They adopted a back-end loaded debt-forgiveness program which reduced all (or a portion) of the debtload of its graduates based on their post-graduation incomes. If you want lawyers to work in the public interest sector, it makes a lot more sense to subsidize lawyers who work in the public interest sector, than to give an accross the board subsidy to everyone.

If you want to feed the birds, feed the birds, not the horse.

[Jesse_helmer]

Glad to see a post on this issue. A couple of points:

1. Tuition is a bit more complicated if you consider Everybody's Net Tuition (ENT), a concept introduced in Higher Education Strategy Associates' paper Beyond the Sticker Shock. As Frances points out, there are significant tuition tax credits provided by the federal government. In addition, some provincial governments (eg. Manitoba) provide income tax rebates to students. ENT in Manitoba is actually negative. Looking at tuition in isolation or without provincial breakdowns obscures important variations. For more detail: http://helmer.ca/blog/2010/11/23/why-free-tuition-is-a-bad-idea/

2. There is a missing option, which is to admit more students who pay higher tuition -- ie international students.

I expect that a combination of 1) reducing costs and 4) increasing tuition will be pursued. More international students, more targeted scholarships and bursaries and higher gross tuition across the board. General operating revenue from provincial governments is unlikely to increase in an environment dominated by an aging population and rising health care costs.

[Frances Woolley]

Jesse: "General operating revenue from provincial governments is unlikely to increase in an environment dominated by an aging population and rising health care costs."

Yes, Health Care as Pac-Man, gobbling up all of the yummy pac-dots and power pellets. Pac-Man can only be stopped by the four ghosts, Blinky, Pinky, Inky and Clyde - I'll leave it up to you to imagine where to take the analogy from there!

Yes, I agree on the importance of provincial variations.

[flip]

The univrsity model is broken in the long-term and replaced with Chindian equivalency tests. It would force a partial GAI to pay people for their HS science project, undergraduate, freshman, research. I've missed out on researching AB enrgy policy (kill the peat-intensive sands leases at least), and epidemiology research because Canada doesn't giveme a welfare income (thx AB Texas). I'd like to suggest to the USA how to manage the carbon in our North, and adjust Legatum to ccount for States/Provinces, natural resource endowments...but my parents didn't sell their souls running away AGW.

[K]

Was that a bot? They are getting more and more sophisticated, yet utterly incoherent.  Certainly doesn't pass the Turing test.