Perspectives - College Tuition and Fees at Independent Institutions: The Real Facts

By Tadu Yimam posted 12-03-2010 11:59 AM

College Tuition and Fees at Independent Institutions: The Real Facts
by James L. Doti
Traditional measures that compare rising college costs with the rate of inflation not only misrepresent the facts but also perpetuate the belief that all postsecondary institutions generally, and independent colleges and universities specifically, are actively engaged in pricing strategies that make higher education increasingly unaffordable. This report advocates for a more careful analysis of pricing trends that takes into account the rapidly rising amounts of institutional grants awarded by independent colleges and universities.

A recent article in BusinessWeek (“The Benefits—and Costs—of College” by Tara Kalwarski) presented data that strongly point to the high financial returns of having a college degree. The article noted, for example, that the unemployment rate for those with bachelor’s degrees or higher is 5 percent versus 10.5 percent for those with only a high school diploma. College graduates command a median salary of $69,056, which is more than double the $32,522 median salary of high school grads. Although annual average pay raises for college graduates since 2000 have exceeded inflation by only 1 percent, that’s a lot better than the annual one percent decline in salaries for those with only a high school diploma.

The BusinessWeek article, however, went on to point out that these obvious monetary benefits must be measured against the rising cost of attending college. That cost, according to the article and based on a Bureau of Labor Statistics (BLS) seasonally adjusted price index for “College Tuition and Fees,” increased a whopping 92 percent from 2000 to 2010.

Unfortunately, such a measured rate of inflation not only misrepresents the facts but also perpetuates the belief that independent colleges and universities are actively engaged in pricing strategies that make higher education increasingly unaffordable. It also has created pressure for independent colleges and universities to be placed under greater govern¬mental scrutiny and regulatory oversight, particularly on the pricing side.

Could there be a problem with the application of the BLS numbers? Let’s begin to answer this question by examining more carefully the reported 92 percent increase in tuition and fees from 2000 to 2010.

The Details Behind the Data
That increase is based on the seasonally adjusted BLS price index for “college tuition and fees,” which increased from an index value of 324.7 in January 2000 to 624.1 in January 2010. It includes not just baccalaureate education but also community colleges, professional schools (law, dental, and medical), and postgraduate studies. In addition, public institu¬tions represent roughly 60 percent of the BLS sample.

So if one really wants to focus on the cost of tuition and fees for undergraduate degrees offered by independent or private colleges and universities, the BLS data presents a distorted picture. The BLS survey simply does not specifically represent independent institutions, nor are there BLS subindex categories for private versus public institutions. To the extent, for example, that tuition and fees for public colleges and universities are increasing at a faster rate than for independent institutions, the broader BLS index will show a higher rate of inflation than what is actually occurring in the independent sector, especially since public schools represent more than half of the BLS survey. For example, according to the College Board’s Annual Survey of Colleges, average tuition and fees in current dollars for public institutions increased 108.8 percent from 1999 to 2009 compared to a significantly lower increase of 69.3 percent for independent institutions.

An even more important factor to consider is that the BLS doesn’t fully account for financial aid and scholarships. Students who receive full academic or athletic scholarships are not eligible for consideration in the BLS survey. That may seem like a relatively small number of students receiving some form of tuition and fees discount, but even the many receiving partial awards are not picked up.

Here’s why. Let’s say a student living in one of the 87 BLS sampling areas, such as Chicago, is included in the survey. If that student is attending an independent baccalaureate insti¬tution in Los Angeles, that school will be included in the BLS survey. It will be queried about its tuition and fees for a student living in Chicago as well as being asked the typical financial aid or scholarship package offered to such a student. But how many respondents will have this information on a geographic basis? Many times the institution will respond that financial aid or scholarship information is proprietary. When the institution is willing to respond, but doesn’t have specific scholarship information for a student living in a specific area, only the full amount of tuition and fees will be picked up in the BLS survey.

A More Reliable Measurement
A more reliable measure of tuition and fee changes for independent colleges and universities can be obtained by analyzing data from the National Association of College and University Business Officers Tuition Discounting Survey. This survey has been administered by NACUBO every year since 1994 and prior to that by the Eastern Association of College and University Business Officers. It includes such character¬istics as undergraduate enrollments, tuition and fees levels, and institutional financial aid and grants. The survey’s sample size has grown from 221 independent colleges and universities in 1990 to 346 in the most recent survey. For the purpose in this study of measuring price change, the relevant data set includes only the 90 colleges and universities that have responded to the NACUBO survey every year from fall 1999 to fall 2009. Using the same sample set for this period means the resulting change in net tuition and fees is based more on price rather than any qualitative change that might otherwise occur if the schools being compared were not consistent in their participation in the survey.

The resulting analysis of the same 90 schools shows that tuition and fees, on average, increased from $17,930 in fall 1999 to $31,409 in fall 2009, a cumulative increase of 75.2 percent. However, financial aid and scholarship grants to students increased from an average level of $6,356 in fall 1999 to $13,046 in fall 2009, a cumulative increase of 105.3 percent. Net average tuition and fees, therefore, increased from $11,574 ($17,930 less $6,356) in fall 1999 to $18,363 ($31,409 less $13,046) in fall 2009, a cumulative increase of 58.7 percent. Compared to the 92 percent increase in tuition and fees reported by the BLS, this is significantly lower.

Converting the NACUBO net tuition and fees levels to index numbers allows a direct annual comparison to the BLS price index as shown in Figure 1. Notice how the NACUBO data show a marked slowdown in tuition and fees during the recessionary 2008 and 2009 academic years compared to the BLS data that show steady increases. Several factors may account for this difference. For one, public school tuition and fees, which are included in the BLS price index, continued to rise despite recessionary forces. The College Board reports that current-dollar tuition and fees at public, four-year institutions increased 6.5 percent from 2007 to 2008 and another 6.5 percent from 2008 to 2009. This compares to a significantly lower increase in constant-dollar tuition and fees at independent institutions of 2.7 percent from 2007 to 2008 and 0.4 percent from 2008 to 2009.

Figure 1 is available in the PDF version. The BLS Price Index for College and Tuition and Fees vs. the NACUBO Price Index for Net College Tuition and Fees Index (1999=100)

A more important reason for the difference, however, is that institutional grants rose sharply for independent colleges in 2008 and 2009. When adjusted for those grants, net tuition and fees in constant dollars at independent institutions actually declined –0.8 percent in 2008 and –3.9 percent in 2009. Given that the BLS misses the full impact of institu¬tional grants, it shouldn’t be surprising to see the widening deviation between the BLS and NACUBO-based price changes, especially in later years.

A Comparison With the Consumer Price Index
If one accepts the view that the NACUBO-based increase in net tuition and fees during the last 10 years of 58.7 percent is a more realistic measure of inflation for independent colleges than the BLS figure of 92 percent, one might argue that the 58.7 percent figure is still too high. After all, as shown in Figure 2, the overall Consumer Price Index has shown less inflation during the last 10 years than the NACUBO-based index. Between 1999 and 2009, the NACUBO-based price change for net tuition and fees increased at an average annual rate of 4.7 percent compared to 2.8 percent for the CPI.

Figure 2 is available in PDF version. The NACUBO Price Index for Net College Tuition and Fees vs. the All-Items CPI Index (1999-100)

However, other components of the CPI, as shown in Figure 3, increased nearly as fast as or even faster than net tuition and fees for independent colleges and universities.

The slowdown in net tuition and fees changes in more recent years is also apparent when comparing average annual percentage changes in price during the last four years. From 2005 to 2009, the overall CPI increased 3.3 percent per year—virtually the same as the annual increase in net tuition and fees of 3.4 percent.

Figure 3 is available in the PDF version. Average Annual Rate of Inflation 1999-2009

It should be noted that the net tuition and fees figures used in this calculation are averages of the 90 colleges and univer¬sities included in the NACUBO sample. In 2009, the average grant per student of $13,046 is subtracted from the average stated tuition and fees of $31,409 to arrive at average net tuition and fees per student of $18,363. Although since 58 percent of institutional aid is based, at least partially, on a student’s financial need, net tuition and fees for most lower-income students will be lower than the $18,363 average, while most higher-income families will have a higher net tuition and fees. This doesn’t suggest that the inflation rates for high- versus low-income families differ, but it does suggest that the wide variation in net tuition pricing in higher education leads to greater affordability across different family income levels.

A Test for Quality
Finally, in any quantitative analysis of price changes over time, it’s important to understand that the quality of higher education is subject to change. Education is not a commodity like wheat or corn. The level and quality of services being provided to students vary across institutions and time. As a result, price changes reflected in the BLS and NACUBO samples will not necessarily measure only inflation. Tuition and fees can also change as a result of qualitative enhancements.

Measuring such enhancements is difficult and imprecise. Indeed, that difficulty explains why qualitative changes are often ignored in various price indices. All the same, one way to test for quality is to differentiate colleges and universities on the basis of changes in student selectivity over time. It seems reasonable to assume hypothetically that institutions able to increase student selectivity at a faster rate are also experi¬encing relatively higher qualitative changes.

To test this hypothesis, the 83 colleges and universities in the NACUBO sample that reported SAT scores can be segmented into three groups by change in SAT. Figure 4 shows changes in net tuition and fees for these three groups during two time periods.

Figure 4 is available in the PDF version. Net Tuition and Fees by Changes in SAT** Average Annual Percentage Change

The results clearly show that higher changes in SAT are associated with higher changes in net tuition and fees. While the inflation rate dropped markedly for all three SAT groups during the recession years of 2007–2009, schools experi¬encing relatively higher changes in SAT still showed higher rates of inflation.

These findings suggest that at least some of the price change in net tuition and fees is likely related to changes in perceived quality. Future work should be directed at measuring that change more precisely so that price changes can be adjusted to reflect more accurately the level of price inflation while keeping quality constant.

About the Author
James L. Doti has been president of Chapman University since 1991 and holds the Donald Bren Distinguished Chair in Business and Economics. He earned his B.S. degree in economics from the University of Illinois, Chicago, and his A.M. and Ph.D. degrees from the University of Chicago. Dr. Doti’s articles have appeared in academic journals as well as periodicals such as The Wall Street Journal and The Chronicle of Higher Education. He is the co-author of two econometrics texts and co-editor of a collection of readings in free enterprise that received the Templeton Honor Award for Scholarly Excellence. Dr. Doti is a recipient of the Horatio Alger Award and the Ellis Island Medal of Honor. In his spare time, he enjoys reading, distance running and mountain climbing. He recently published a children’s book, A Christmas Adventure in Little Italy, which was selected by Italian America magazine for its fall Book Club.
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12-01-2010 03:17 PM

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