Nov. 8, 2006

How competition for the best students, faculty and facilities -- and rankings -- sends tuition soaring

chart
Michael Whalen/Cornell University Division of Planning and Budget
Cornell's tuition has consistently risen since the late 1960s as a result of many factors, including competition for top students, faculty and facilities. The top line shows Cornell's tuition for students in endowed colleges on the Ithaca campus; the middle line is for non-New York state residents in the statutory colleges, and the bottom shows tuition for New York state residents in the statutory colleges.

For the past 40 years Cornell's tuition has outpaced the Consumer Price Index (CPI) by 2 to 3 percent annually.

Why? The simple answer is that Cornell offers a premium product (an education at an elite institution) in an extremely competitive market, and to stay ahead of the pack, the university must keep getting the best students, faculty and facilities -- and the best rankings. And that costs a lot of money.

So reported three Cornell experts in higher education, economics and budgetary finance in a presentation to the Cornell Board of Trustees Oct. 27. Offering trustees insights into the forces behind sharply rising tuition rates were elected trustee Ronald G. Ehrenberg, the Irving M. Ives Professor of Industrial and Labor Relations and Economics, Robert Frank, the Henrietta Johnson Louis Professor of Management and professor of economics, and Carolyn Ainslie, vice president for planning and budget.

The average tuition at private universities, the three experts noted, jumped 474 percent from 1970 to 1990, compared with the CPI's increase of 248 percent. In 1980 college tuition took an average bite of 26 percent of the median family income; in 2004, it more than doubled to 56 percent.

However, competition for students, faculty and top facilities explain only some of the reasons behind these staggering increases; the fuller explanation is far more complex.

Here are the experts' explanations as to why tuition costs so much and keeps going up:

The higher education perspective

Ehrenberg, who also is director of the Cornell Higher Education Research Institute, said the "root cause" of the continual increase in tuition "is the failure of faculty productivity to grow." In other words, "Our output in terms of the numbers of students we are educating doesn't change." Although Cornell keeps getting better, it does not become more efficient by teaching more students, because that is not in students' best interest.

Many other factors also contribute to tuition inflation, he said. These include:

  • Graduate education -- More graduate education is offered than in the past, which is more expensive than undergraduate education.
  • Faculty salaries -- Over the past 40 years Cornell has had to increase tuition by 2 to 3 percent annually to help prevent faculty salaries from slipping behind those at other leading universities. Keeping faculty happy is critical to retaining them.
  • Student expectations -- Although the quality of life and education on campus keeps improving -- with food courts, state-of-the-art classrooms, modern living-learning residence halls and new fitness centers, for example -- changes in tuition do not adjust for or give "credit" for improved product quality.
  • Less research support -- The federal government gives higher education less money for research even while the cost of research has skyrocketed. That puts more pressure on the rest of the budget, making less money available to defray the cost of tuition.
  • Alumni support -- Alumni give generously, but often to specific programs. Gifts often fail to support a program in full, so the university must make up the shortfall.
  • Maintaining rankings -- Higher rankings lead to more applications, allowing Cornell to be more selective; as a result, the quality of students goes up. However, this tends to increase financial-aid expenditures in order to compete with other elite universities for top students. Also, how much the university spends per student for education and maintaining a low student/ faculty ratio both weigh heavily in determining rankings. Any slippage in the rankings is extremely costly to the institution.

The economic perspective

Frank noted that Adam Smith's theory that the pursuit of self-interest usually results in a socially efficient allocation of resources does not apply to the university domain. Instead, elite universities fiercely compete with each other for the best and the brightest, which prompts them also to vie for top positions in the national college rankings.

"The fact that elite schools are increasingly the gateway to professional positions offering six-figure starting salaries has fueled the explosive growth in demand for elite educational credentials," said Frank. "And the growth in demand for elite educational credentials explains the growing importance of academic rankings.

"…Universities face increasing pressure to bid for the various resources [top students and faculty] that facilitate the quest for high rank. These pressures have spawned numerous positional arms races that have already proved extremely costly, and promise to become more so."

While the race benefits individuals who get admitted, it works to the disadvantage of the group because it inflates expenses. Frank called the educational marketplace, in which universities compete for a high ranking, a "winner-take-all market where small differences in performance -- or even small differences in the credentials used to predict performance -- translate into extremely large differences in reward. "

Universities must spend more and more in financial and merit aid to attract the best students, he said. Though Cornell doesn't offer merit aid, it must compensate by allocating more and more resources to attract and retain the very best students it can.

"They (elite universities) need top students every bit as much as top students need them," he said. "A school without top-ranked students cannot hope to achieve elite status. ... Higher education is an industry in which success breeds success and failure breeds failure."

Frank also blamed these other factors for the rising cost of education:

  • The rapid growth of administrative staff (including staff to support a sophisticated technology infrastructure), which has risen 123 percent in the last 15 years.
  • Increasingly expensive laboratories and library materials.
  • Increase in marketing to woo top students. "While the additional spending adds to the cost burden, it has little impact on the ultimate distribution of students."
  • Enhanced career counseling and job placement services in the effort to attract top students.

He concluded: "In sum, universities face increased pressure to pay higher salaries to star faculty, to spend more on marketing, more on student services and amenities, and more on financial aid to top-ranked students. It is little wonder, then, that their financial situations have grown more precarious, despite the record growth in the value of their endowment portfolios."

The budget perspective

Ainslie observed that although tuition keeps rising, "the cost to educate a Cornell student is actually twice that of the sticker price to attend the university."

Her other points:

  • Education is extremely labor intensive -- 60 percent of Cornell's budget goes to supporting faculty and staff, and Cornell's "steadfast commitment to its labor intensive product in teaching, research and public service."
  • Financial aid -- Since 1991, when the federal government prohibited colleges from sharing information about which students will be offered generous financial aid packages, the competition for top students has become increasingly fierce. Yet, federal assistance (Pell and TAP awards, for example) has failed to keep up with inflation, and more tuition dollars are needed for financial aid. In 1976-77, tuition and fees provided 27 percent of the university's revenue and government appropriations provided 28 percent; in 2006-07, tuition and fees provided 35 percent of the revenue while government support had shrunk to 10 percent. As a result, Cornell makes up the difference: It provided 81 percent of its students' grant aid in 2005-06, up from 62 percent in 1987-88. This academic year, 13 percent of the university's general operating expenses went to financial aid compared with only 9 percent in 1977-76. "For every tuition dollar we bring in ... about 16 cents on that dollar gets recycled to subsidize financial aid," Ainslie said.
  • Employee benefits -- Employee benefits take a bigger bite out of the budget: In 1976-77, they took 5 percent of the pie; this academic year, they require 12 percent.

 

Comments

We invite your comments on this story and will post your thoughts here. Only signed e-mail will be considered.

Dec. 14, 2006: Comment from Robert Nelson, <Robert.Nelson@centresolutions.com>:
With all due respect to the experts from the field, I think there is a more compelling and simple answer to the question posed. College education costs rise faster than [the cost of living] because there are no productivity gains to speak of. Innovation and technology offset price increases in most other endeavors. But the college educators are using the same methods today that they used 100 years ago. A professor teaches three classes, each class has 22 pupils. In the end, while the rest of society becomes more productive -- farmers get higher yields, robotics improve manufacturing productivity -- college educators do not. Thank you...........Bob Nelson

Dec. 11, 2006: Comment from Tom Sennett, <tsennett@kunkleandsennett.com>:
I am heartbroken that I cannot justify incurring the expense of sending my son to Cornell. I loved my Cornell experience, my mother went there, my brother, my sister and myself, but none of my mother's grandchildren will go there, simply because of cost. The nutshell is in this quote from the article itself: "In 1980 college tuition took an average bite of 26 percent of the median family income; in 2004, it more than doubled to 56 percent." This statistic appears to be for all colleges, so I would assume that the percentages are even more extreme for a high priced school like Cornell. I don't know what the fix is for this problem. Certainly there is a cost to attracting qualifed students, but there is also a cost in driving them away. It appears from the article that tuition at Cornell has risen twice as fast as inflation. Is the education twice as good as when I went to Cornell? I doubt it...........Tom Sennett

Dec. 3, 2006: Comment from Richard Heck '68, <rheck@stny.rr.com>:
Perhaps one important variable missing in the economic analysis is the quality of the educational experience. Students benefit from learning in an environment that is cutting-edge in terms of knowledge. As knowledge expands, the value of that product also expands.

Yes, there are many intervening and interacting variables that help set tuitions price (and net price) such as government policies, supply and demand, perceived value (both present and future), and social mobility. Often these are taken into account, however it is not always recognized that in todays world there is so much more to know. How to approach this mushrooming knowledge and to hone in on key developments takes a sharpening of skills such as analytical and critical thinking. For example how can, and should, we now:

Do we still expect these issues to be dealt with as they were when tuition was below $3,000 per year? Even after inflation, one could reasonably expect the price of education to increase as the complexity of knowledge and learning grows. The small list above include only a few examples of how knowledge, methodology, and understanding have developed in recent years. Is there not value to be assigned to developing resources and tools to study and learn continuously from advances in science, and the arts?

I would suggest that a factor be added into the regression equation to help predict a net price that accounts for the influence of the collective knowledge, skills and experience that both our faculty and our students bring to the classroom...........Richard Heck

(Heck, a Cornell National Scholar and graduate of the College of Arts and Sciences, has spent more than 35 years in higher education administration and research, serving in admissions, financial aid, budget, research and planning at Colgate University; as associate dean of the college at Dartmouth; and, more recently, as director of alumni and parent relations at Binghamton University.)

Dec. 1, 2006: Comment from Corinne Austein '52, B.Arch. '54, <basmom@hactrn.net>:
What are you trying to achieve? Are the elite universities playing a zero sum game with only one university to be declared the winner? This strikes me as a bandwagon to get off. Cornell seems to have become a brand name, like Nike, Coca Cola or Microsoft. In all this competition, the purpose of the university is getting lost. Way back when, wasn't it to provide an education? Your description sounds more like the way to win an advertising war. Money spent looking for the "best" students would seem to be wasted considering the number of outstanding applicants for each place in the freshman class and the number of very well qualified students turned down each year. Who else do you want to attract?

I enjoyed my time at Cornell very much, and no small part of the experience was the quality and diversity of the student body. I didn't come there for an all star faculty, although there were some such people there in the 1950s. The non star faculty was mostly good, but we may have learned more from each other than in any class. It was the whole Cornell package that attracted me. Although I certainly hoped to get a decent job, I didn't come to earn a six figure salary right out of school; it was unheard of then anyway. We didn't have to be so greedy, since we were able to get through college without today's huge debt load.

Obviously we can't go back to the old days; they weren't good in every way anyway, but I find the present competition for faculty, students and being "TOP" to be appalling. Being the best is wonderful, but I don't see that this is a quest to be the best. It is to be the WINNER and there is a difference.

As a CAAAN [Cornell Alumni Admissions Ambassador Network] member, I find it harder and harder to tell talented but neither rich nor poor students (who don't qualify for need based aid) that Cornell will bring them enough more than Penn State (or any other equally good public college) that they should take on the long term financial burden of going there. Some merit aid for such students would help to keep Cornell accessible to other than only the very rich and very poor. but I feel that the crazy competition between the "elite" universities may make some university a winner, but the students will be losers..........Corinne Austein

Dec. 1, 2006: Comment from John Detmold, <johndetmold@msn.com>:
The cost of education these days is scandalous! When Vice President Carolyn Ainslie says "The cost to educate a Cornell student is actually twice that of the sticker price to attend the University," she should list what she considers the University's education costs that add up to exactly twice "the sticker price" for each student to attend Cornell. I'll bet than many of the items on her list have nothing to do with education: items such as what she spends on advertising, on student aid spent to "fill the beds," on putting up new buildings, and on adding even more members to the staff. Such expenses have little to do with the education that goes on in the classrooms: where faculty members teach their students.

When I entered Cornell in 1939, the tuition was $400. Four years later it was still $400. It did not increase by 5 or 6% each year, as it does today. Yet I had the very best education in the liberal arts and sciences from teachers like Harry Caplan, Lane Cooper, Alec Drummond, Walter French, Donald Lord Finlayson, Loren Petry, John C. Adams, Carl Becker, Harold Thompson, Otto Kinkeldey, Carl Becker, Fred Marcham, Carl Stephenson, Henry Myers, and Richard Robinson; and I graduated with a Phi Beta Kappa key..........John Detmold

Dec. 1, 2006: Comment from Greg McConville '91, <gmcconvi@yahoo.com>:
I have a better understanding of some of the causes of tuition rising after reading this article, so I very much appreciate your publishing it.

One of my thoughts about why tuition has risen at elite universities has to do with simple supply and demand. The supply of available student positions at elite universities is limited in that few new top-name universities are being created and most are not growing student bodies significantly. At the same time, demand is growing for at least two reasons. US and worldwide population have grown substantially in the past 40 years, and per capita wealth has grown, so more people can afford to pay tuitions, even as the cost rises...........Greg McConville