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Devon Smith

T05303111

Industrial Organisation Final Paper

As early as kindergarten, classroom teachers all around the United States will pose

a similar question to their respective students. What would you like to be when you grow

up? Due to the open ended-ness of the question, there will a great range of responses.

Some students are adventurous and enjoy the idea of putting their lives in danger in order

to protect others; they may be the future fire fighters or police officers that serve and

protect our neighbourhoods. Some students prefer a less dangerous alternative. These

students may become the medical professionals that heal us when we are sick, or the

legal professionals that make sure our rights are not infringed upon. Maybe, the will

choose to follow in the foot steps of their temporary care taker and go on to educate

students who will be sitting in their place on the rug one generation later. Regardless of

the profession that any of these young visionaries have their mind set upon, most of them,

will be in for a surprise once they are ready to transcend the compulsory education

system. If things continue to develop in the way that they are, a lot of students will find that

they are shackled to their circumstance. Education, which used to be regarded as the key

to freedom in terms of achieving high levels of success, is becoming less and less

accessible for students. The costs of attaining higher levels of education are increasing

rapidly and unfortunately the average income of the American household has not kept up.

College students in this era of soaring tuition costs are often burdened by large sums of

debt. No sooner than the students walk across the graduation stage, the collection

agencies are already on the prowl, ringing their phones and demanding payments.

Although there are different forms of higher learning institutions, in general the cost of all

institutions has risen drastically in the past few decades. As a low income and first
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generation college student, I take this issue quite seriously. Year after year, I have seen my

tuition and room and board cost increase while the financial aid I receive from the

government decrease. As a result of this, I have had to take larger and larger loans to

cover the costs. With no explanation from the university tuition increases every year. In this

paper, I aim to track down exactly what is it that has been leading to this soaring of tuition

in American Universities. While I am sure there must be a multitude of reasons for this

increase in tuition. I want to investigate whether it is truly a problem of funding that is

causing tuition to increase, or, is it greed. I will also investigate possible ways to solve this

problem, and alleviate student loan debt from the next generation of students pursuing

their dreams.

American colleges and universities come in many different flavours, however, for

the purpose of this paper, I will limit our discussion to four year private and and four year

public universities and colleges. Before writing this paper and conducting research, my

feelings about the high cost of college were based off personal anecdotes. While I

personally have experienced tuition hikes throughout the duration of my college years, I

wasn’t exactly sure how my college had faired in the larger picture of the United States.

Unfortunately, after doing some research, it appears that my intuition was correct.

According to a Business Insider article, “The average annual increase in college tuition

from 1980-2014 grew by nearly 260% compared to the nearly 120% increase in all

consumer items.”1 I found this statistic to be quite interesting. For one, we know that due to

inflation, the price of items in the market will increase gradually over time. Of course there

are some goods that will increase at a faster rate than others but, college tuition alone

grew by 260% when there was an increase of only about 120% of all other consumer

1 http://www.businessinsider.com/this-chart-shows-how-quickly-college-tuition-has-skyrocketed-
since-1980-2015-7
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goods. There have been rumours in the United States that college tuition will be the next

economic bubble that will cause a recession. If I were to speak honestly, I would have

been inclined to agree after simply reading statistics such as these. There doesn’t seem to

be a justifiable reason for this surge in price. The article also mentions another statistic, it

says, “In 1980, the average cost of tuition, room and board, and fees at a four-year post-

secondary institution was $9,438, according to the Department of Education. That number

has since climbed to $23,872.” Surveying the plethora of articles, and academic Journals

available on this topic, these numbers are pretty standard. On top of that, I noticed a trend.

When discussing this increase in tuition, the comparison usually starts from the 1980’s. It

made me wonder there may be some reason for this. Perhaps there was a exogenous

factor that changed drastically that cause tuition to rise? In order to get to the root cause of

the rise in tuition, I thought it would be a good idea to start to gather information about

exactly how a typical university is structured. What are the costs that face the university?

Are these costs constant, or do they change over the course of the years. Is it possible

that the cost structures have changed in such a way that the cost of college tuition simply

followed suit?

Referencing the Wall Street Journal infographic that I have appended to the end of

this paper, we can see the general cash flow of colleges and universities in America. From

the agents at play in the infographic we can only expect this infographic to truly represent

the funding structure of public universities. While private and public universities can both

receive federal aid, private universities, ignoring some special cases, for the most part are

not eligible for state aid. So the cash flow for these kinds of universities cannot be mirrored

by this chart so my analysis of this chart is only in reference to public universities. There

are three important actors in this chart that I want to highlight, the state and federal

government, and private banks. We can see from a preliminary glance at this chart that the
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large bulk of the cash inflow comes from the state and federal governments. The state and

federal government gives direct aid to the student, the university itself, as well as indirect

aid in the form of medicaid and medicare that will trickle down back into the university. This

finding was a huge shock for me as I had not realised just how large of a role that the

government plays in the cash flows of public universities. It seems hard to believe that

although the government is the bulk of the income flow of the school that the tuition could

be so expensive. This hinted to me that if there is some change in the college tuition, it is

highly probable that there are external policy issues that played a large role. Having

already discussed the federal and state governments, the next major player is the private

banks that provide loans to students. The college institute for access and success says,

“Private loan volume has been rising since 2010-11. Data show that annual volume

peaked at $18.1 billion in 2007-08 before the credit crunch, then decreased to $5.2 billion

by 2010-11 before steadily increasing to $7.8 billion in 2014-15.”2 It is not uncommon to

hear many students bemoan the fact that they must depend on private student loans in

order to graduate from school. These loans are often unable to be forgiven or deferred no

matter what the income of the student is. Unfortunately, the statistic provided by TICAS

shows us a startling reality. It seems that the raw amount of students borrowing from

private banks is increasing. But still, we haven’t found the cause. But, in some way

progress is being made. The general structure of a public university dictates that the

universities access to funds depends heavily on cash flows from the state and federal

governments. Yet, if there has been an increase in private borrowings by students who

attend these universities, at least one of these scenarios must be true. The first scenario

being that the state and federal governments are no longer providing enough funding to

keep at least the public universities afloat. This could either be intentional, meaning that

the government decided to cut the budgets to schools, or it could simply be that the cost

2 http://ticas.org/sites/default/files/pub_files/private_loan_facts_trends.pdf
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margins of the university are increasing at a rate that the current government budget

cannot cover. The infographic breaks down costs of the university into four large chunks. It

breaks down into payments to bondholders, employees, long term investments as well as

a more ambiguous category, “other’. This infographic, while being great at being showing

the incoming flow of income to the universities, it is not adequate enough to draw any

conclusions about why tuition across the nation have risen, if only using the costs faced by

universities as an explanation.

Exactly what are the costs that are facing a college in the year 2016? John Schoen,

in an article published by CNBC, writes about exactly what costs colleges in America face.

He says, “Higher education payrolls have also been rapidly adding non-teaching jobs in

recent years. Public and private colleges and universities expanded their payrolls by 28

percent between 2000 and 2012, more than 50 percent faster than the previous decade,

according to an analysis of higher education staffing by the Delta Cost Project. That build-

up largely tracked the rise in enrollments.”3 Referring back to the infographic from

Business Insider, this cost was already apart of our cost “model” so to speak. It seems that

if this is the case and the payroll in many universities has extended it is natural to assume

that one can attribute the increasing costs of tuition to development and expansion of

resources to service the needs of students as the world changes. The article also notes

that “Over the decade from 2001-2011, the share of expenses devoted to ‘student

services’ rose from 17 percent of the average school's budget to 20 percent.” When first

thinking of possible causes of the increase in college tuition, increasing enrolment in

colleges was the first thing that came to mind. So after seeing that college payrolls were

expanding it led me to research how much student enrolment is increasing, and what

impact that would have on the costs to colleges. Following that path, I found a lot of

3 http://www.cnbc.com/2015/06/16/why-college-costs-are-so-high-and-rising.html
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compelling information. In another Business Insider article, Abby Jackson explains the

correlation between the growth of college enrolment and costs faced by universities. She

says, “Growing college enrollment contributes to increased costs in two ways. It

necessitates the hiring of more administrative staff, which can be costly. It also normally

means that the expenditures, from state and federal government, per student is lower,

again placing the burden of tuition and fees on students and families.” While it seems that

this could be a possible cause of the tuition increase, Jackson’s statement about

government spending seemed more compelling, at least in the case of public colleges and

universities. Due to the increase in enrollment, there needs to be more staff present to be

a resource for the students. Increases in staff sizes and larger facilities become a

necessity and costs to the school will increase. Yet, in the scenario that Jackson gives,

government funding stays the same. This means funding per student must decrease, and

to make up that loss, students take on the financial burden. From the research I have

done, it seems as though the largest chuck of funding for public universities comes from

state aid. Yet, the situation of financial aid provided by individual states to universities is in

a bit of crisis:

“Researchers found that the money public colleges collect in tuition surpassed the

money they receive from state funding in 2012. Tuition accounted for 25 percent of

school revenue, up from 17 percent in 2003. State funding, meanwhile, plummeted

from 32 percent to 23 percent during the same period. That’s a far cry from the

1970s, when state governments supplied public colleges with nearly 75 percent of

their funding, according to data from the Federal Reserve Bank of Cleveland.”4

4https://www.washingtonpost.com/news/get-there/wp/2015/01/05/students-cover-more-of-their-
public-university-tuition-now-than-state-governments/?utm_term=.47fc4a1d69e3
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After coming across this information, I thought it makes a lot of sense exactly why

the tuition costs are the way that they are. It seems as though the most empirically

significant cause of tuition hikes is because of state government cuts to school funding.

The second chart that I have attached shows the correlation between the rise in tuition and

the decrease in state allocations to universities. Also evident from this chart, there is an

inverse relationship between the decrease in state funding and college tuition. While there

seems to be many reasons for the increase in tuition across different higher learning

institutions, after reading the opinion of many economists and studies, I have come to a

preliminary conclusion. At least in public schools, regardless of the increase in costs facing

the school due to hiring new faculty, or building new buildings, the main cause of tuition

hikes is lack of support from state and federal governments in funding schools. In the third

infographic I have attached, we can see trends of high increases of tuition by state. In a

New York Times article I found this interesting statement:

“Sandy Baum, a senior fellow at the Urban Institute, says that in the 2001-2002

school year, public schools received from 44 percent to 62 percent of their funding

from state governments. Only a decade later, those levels had decreased to 27

percent to 51 percent. On average, states have lowered their per-student funding by

25 percent over the last 15 years. Some — Louisiana, Wisconsin, Kansas and

Arizona — have cut their support sharply in the past few years. “

If you look at the states mentioned in this quote, you can see that half of the states

mentioned with the sharp cuts have had astronomical increases in their tuition. So I feel

that due to the empirical evidence, it is a safe bet that the reason we see this hike in

college tuition in public universities is due to state funding allocations. For private

universities, for now, it seems there isn’t much data that leans one way or the other. 


In terms of solutions to this problem, I think it becomes a very multifaceted problem. This
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issue is a social, political, and economic monster of a problem. There seems to be a split

in opinion of America. Some believe that education is a privilege and not a right, and do

not believe in public education. Just as recently as January 18th the fight for the protection

of funding of public education is going on. The new secretary of education of the united

states had a confirmation hearing in which she discussed her opinion of public education.

The following is an exchange between a current senator and the prospective secretary.

The senator asks, “Can you commit to us tonight that you will not work to privatize public

schools or cut a single penny from public education?”. Unfortunately, her response was

nothing more than a dodge from the question. She says,”I look forward, if confirmed, to

working with you to talk about how we address the needs of all parents and all students.”

Because of this divide in America I feel that it is very difficult to give a solution that is a

good solution and also relatively easy to implement. My only hope after conducting this

research and seeing whats at the root of raising tuition across the US, is that state and

federal governments will take a serious look at the consequences of continuing to defund

public education. Students are unable to bear the burden, and the next generation of

students will be in for a surprise. The dreams for our future career that we all held dear to

our hearts as children, may not come to fruition because access to education is being

attacked.
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