Vance Fried and Richard Vedder on the Rising Cost of Higher Education

The Daily has a handy guide to rising tuition costs. Vance Fried has offered a theory as to the drivers of underlying cost growth. And Richard Vedder, one of America’s leading experts on the subject, recently summarized his take in a short CNN op-ed:

Whereas private businesses cut prices for consumers and costs to themselves through efficiencies that increase profits and incomes, universities lack those incentives.

Indeed, the typical successful university president views his or her key constituencies not to be the customer (students and their parents who pay tuition charges or the granters of research funds), but rather others — the faculty, important alumni, key administrators, trustees and occasionally politicians. They please these constituencies by raising, and then spending, lots of money.

They effectively bribe powerful faculty with low teaching loads, high salaries and good parking. They give the alumni successful intercollegiate athletic programs that are expensive and usually financed off the backs of students. They give trustees whatever they want, no matter how costly or eccentric.

Universities do a second thing unheard of in the private sector — they often deliberately turn customers away.

A fast food chain or discount store succeeds by selling more hamburgers or television sets; no customer was ever kept from spending money at McDonald’s by an “admissions office.” Yet for American universities, the “bottom line” is measured by college rankings that often reward schools for turning people away, becoming more “selective.” Many believe the Ivy League offers the best education in the world, so why do we encourage those elite institutions to deny access to thousands of highly qualified students every year?

Like health care, prices are rising rapidly for higher education because of the predominant role of third-party payments — federal student loans and grants, state government support for institutions and students, private philanthropic gifts and endowment income. College seniors who borrow to finance their education now graduate with an average of $24,000 in debt, and student loan debt now tops credit card debt among Americans. When some else is paying a lot of the bills, students are less sensitive to the price, thus allowing the colleges to care less about keeping prices under control. And the nonprofit nature of institutions reduces incentives for colleges and universities to be efficient.

The key to getting costs under control is contained in three words that begin with the letter “I”– information, incentives and innovation.

I highly recommend Vedder’s piece.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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