The question “why does tuition keep increasing?” is one of the most important questions in all of education policy. But the most common answers to this question—that it’s a result of inadequate state funding, increases in faculty compensation, or even that it might not be rising at all, are individually and collectively inadequate. Let’s take these explanations one at a time.
First up is state funding. Hundreds, if not thousands, of articles and op-eds have attributed the increase in tuition to declines in state funding: If the government cuts funding by $1 per student, the college has to charge each student $1 more. This is logical enough, but the data doesn’t support it. The chart below shows the change in tuition from the previous year, and the change in appropriations (federal, state and local) per student for all 632 public four-year colleges with sufficient data. (Note that figures in this post are enrollment-weighted averages.) The change in appropriations is multiplied by minus one, so if a $1 decrease in state funding per student leads to a $1 increase in tuition, the two bars for each year should be exactly equal. They are not.
The change in per student appropriations does a reasonable job of explaining the tuition increases from 2008-09 to 2010-11, but for every other year there is little relationship between the two. In particular, from 2004-05 to 2007-08, state appropriations per student increased, meaning tuition should have been falling. Instead, tuition rose during each of those years.
Another favorite explanation for the rise in tuition is Baumol’s cost disease. The argument is that each class requires a professor to teach it, but outside higher education, increases in labor productivity lead to higher wages in other sectors. Universities are forced to increase wages to prevent professors from leaving for higher paying jobs elsewhere. Higher salaries combined with stagnant productivity lead to higher costs per student, which lead to higher tuition. This is theoretically sound, but according to the data, it does not explain changes in tuition. The chart below shows the average change in faculty compensation per student and the change in tuition for 216 public four-year colleges with sufficient data. If a $1 increase in faculty compensation per student leads to $1 higher tuition, the two bars for each year should be equal. They are not.
Changes in faculty compensation per student do a good job of explaining changes in tuition from 2005-06 to 2007-08, but in the other years, there is little relationship. Again and again, tuition goes up, even when faculty compensation goes down.
A third explanation for rising tuition is that tuition isn’t really rising at all because colleges are using much of the extra tuition money for financial aid. Unfortunately, we only know the level of institutional aid— college-funded scholarships and discounts—given to first-time, full-time students. However, if we assume that this is a good approximation of the average aid for all students, we can compare the change in tuition versus the change in institutional aid per student for all 586 of our public four-year colleges with sufficient data.
If a $1 increase in institutional aid per student led to a $1 increase in tuition, the two bars for each year should be equal. Again, they are not. While the direction is at least consistent, the change in tuition always dominates the change in institutional aid per student.
None of these three commonly cited explanations can answer why tuition is increasing. This means we should be wary of claims asserting that tuition is only going up because of fill in the blank. Regardless of what is chosen to fill in the blank—and declining state funding has been the most common villain for the past few years—it isn’t supported by the data.
Combining all three explanations doesn’t answer why tuition keeps increasing either. The chart below shows the data for all 201 public four-year colleges with sufficient data. The first bar for each year is the change in tuition from the previous year. The next three bars are the change in appropriations per student (multiplied by minus one), the change in faculty compensation per student, and the change in instructional aid per student. The fifth bar in each year is the “Unexplained Change in Tuition.” It is the amount of the change in tuition that is not explained by changes in appropriations per student, changes in faculty compensation per student, or changes in instructional aid per student. The combined height of the last four bars is equal to the height of the first bar.
In some years, the entire change in tuition is unexplained. For example, in 2004-05, faculty compensation per student and institutional aid both increased, which would tend to drive tuition up. But state appropriations increased by even more, so tuition should have fallen in 2004-05. Yet tuition rose that year, meaning that all of that year’s increase in tuition is unexplained.
With the exception of 2010-11, a substantial portion of the change in tuition each year remains unaccounted for even after considering changes in appropriations per student, changes in faculty compensation per student, and changes in institutional aid per student. In other words, we don’t know what is causing tuition increases, but we do know that the commonly cited explanations of changes in state funding, Baumol’s cost disease, and financial aid can’t explain it.