By Samantha Hilyer
On Oct. 24, the Honors Round Table invited Dr. Zachary Davis, associate professor of economics at Saint Vincent College, to give a lecture in the intimate setting of a classroom among several students and faculty members, explaining possible reasons for the rise of tuition costs.
Davis started out with a simple question: “Why do you think college is so expensive?”
A few students offered their thoughts. Then, Davis went into his lecture, which was split into two main theories: the Bennett Hypothesis and Baumol’s Cost Disease. Both theories deal strictly with the tuition cost only and are general trends across colleges and universities, without specifically talking about Saint Vincent College.
The Bennet Hypothesis, Davis said, states that federal policies are not the cause of rising prices, rather that they enable this increase in tuition. As the cost of tuition rises, the demand for higher education will decrease. In order to offset this effect, the government will increase federal subsidies such as Pell Grants – income-based federal grants that students do not have to pay back. However, in response to students getting extra money from the government, colleges begin to up their prices.
While the tuition keeps rising, Davis said, subsidies drive a wedge between what a student is actually paying and what colleges are charging, which causes a “felt” price decrease. The “felt” price decrease is less than the amount of subsidy, meaning students are getting more help from the government, but the rising tuition costs somewhat offsets that extra help.
Non-profit colleges and universities decrease financial aid when Pell Grants are applied to an individual student, but the tuition cost stays the same, so that while a student is seeing a decrease in the cost of their tuition, the cut cost is much less than the actual Pell Grant, said Davis. This is known as an incident of subsidy, because the subsidy is intended to help the student, but in the end, it is the college that gains from it.
Another aspect to this problem is the regulations for for-profit colleges and universities. The 90/10 rule states that for-profit colleges must get 10% of their funding from alternate sources other than federal financial aid services.
This regulation means that students must pay out of their own pockets to cover that 10% in the cost of tuition without aid. Colleges and universities that near the 90% threshold may then be forced to raise their prices if Congress increases their federal subsidies.
The second theory Davis presented, Baumol’s Cost Disease, states that because higher education is a service, there is a productivity lag, which means that productivity increases at a higher rate in manufacturing than it does in a service. Firms also demand labor and they hire laborers who will offset the cost of paying them. As workers leave the service sector, the sector will increase wages to keep and attract more workers.
Professors are providing a service and so they are getting paid less than someone in manufacturing. Because of this, there are less professors, and in order to keep them, colleges and universities must increase their wages. This comes from an increase in tuition.
In addition to these two main theories, Davis covered another factor: changes in income inequality may also tuition costs. With need and merit-based financial aid, colleges are charging different prices to people of different incomes – wealthy families pay higher prices than lower income families. However, as more people become middle-class, it means that tuition can be increased with a wider price range for individuals which can lead to a rise in the net tuition cost — the original price of tuition.
These theories do not provide definitive answers to the question Davis asked at the beginning of his lecture, but they are possibilities that he has spent time studying and are worth thinking about, he argued, as tuition costs continue to rise.