The Cost of a College Education: Why It Is--and Is Not--So High

As high school seniors across the country confront the costs of a college education, parents and students wonder with mounting concern why colleges must charge so much, why expenses for an academic year are beginning to reach the $20,000 level and why these costs keep escalating when the cost of living increases have settled down.

To deal with these concerns, it is helpful to differentiate between the cost of education and the price of education. At most first-rate universities, public or private, the cost of education is much higher than the price--the tuition and fees actually charged to students. At Stanford, the $10,475 “price” of tuition for this year (excluding room, board and books) is between $4,000 and $7,000 below what is the university’s actual cost of education. And for the 60% or so of our students who receive need-based financial aid, the actual price is substantially below this.

At public universities, however, the price is even lower, much lower than the actual cost. The reason is that in the public universities, the difference between cost and price is made up by a tax-derived state subsidy that is given to all students, independent of their financial need.

At a private university like Stanford, public funds are a relatively minor factor in the real cost of educating our undergraduate students. Federal grants and the Cal Grant Program accounted for about $4.5 million out of Stanford’s $28 million annual undergraduate scholarship aid bill. The rest comes from a variety of sources: tuition, current gifts, grants, research overhead payments and interest from our endowment.

A number of commentators, including U.S. Secretary of Education William J. Bennett, have referred to the private institutions as “expensive” and wondered aloud whether it is in the public interest for the federal government to support, through Pell Grants and other devices, the payment of high private-university tuitions on behalf of qualified students. The answer is yes; it is very much in the public interest to do so. If those same students move from private to public institutions, the taxpayers shoulder a much larger burden through state taxes.

Parents who ask why it is necessary for tuition to rise so far so fast are facing some harsh economic realities; but so is the university their son or daughter is attending. At Stanford, balancing the budget each year has become a painful process of expenditure reduction, conducted amid agony over the salaries we are able to pay and over the tuition we must charge. We have little immediate policy control over most income lines in our budget, except tuition.

We see ourselves as lean, even stressed; we are perceived as being “rich.” Yet in order to finance very modest levels of improvement in salaries and program quality, we have had to make moderate to severe cuts in our expense budgets 13 out of the last 16 years.

It is also important to keep in mind that the cost of knowledge is increasing.

The explanation, I think, lies in the very nature of intellectual inquiry: Behind our growth is an implacable law of the economics of knowledge. As German physicist Max Planck pointed out, new findings in science become increasingly difficult and expensive to obtain. After all, we tend to answer the easy questions first, and then proceed to the harder ones.

On the expense side, 80% of our budget consists of salaries and benefits. Our non-academic staff salaries are based on a position that is near the middle of the local market; for our academic salaries, we insist on remaining competitive with the best.

Thus, like most salary-intensive “service” industries, our inflation rate is two or three points higher than the consumer price index and other goods-based estimates of inflation. That requires us to move tuition ahead faster than the regularly reported inflation indicators for the economy as a whole. And that explains why sending a son or daughter to college has become more expensive a little faster, over the years, than a mid-sized automobile.

If one takes account of the increased financial aid we are contributing to our students, and then calculates the net payments made by families for tuition, a remarkable fact emerges: tuition here, and I’m sure elsewhere, takes almost exactly the same proportion of the family budget in 1985 as it did in 1960.

That surprises a great many people with long memories; they often dissent vigorously, saying, “It’s a much tighter squeeze now.”

They are right, and there are good reasons why. The first is that the overall data on disposable income conceal some important differences between age groups. A recent study by the Urban Institute for the Joint Economic Committee of Congress shows a remarkable change in the real income improvement, over time, of men between the ages of 40 and 50. That is the decade in which most fathers are asked to help meet tuition bills.

Between 1953 and 1963, the men in that decade improved in real income by 36%. Between 1963 and 1973, the gain for the equivalent cohort of men dropped to 25%. And in the decade that ended in 1983, there was actually a net loss of 14% between ages 40 and 50.

Even for families with constant or growing real incomes, tuition payments are harder to meet because families are forced to devote much larger proportions of their income to other things than they did in 1960.

A family living on the San Francisco Peninsula sending a freshman off to join the class of 1964 probably spent less than 15% of disposable family income on housing. During the succeeding 25 years, the price of a four-bedroom home in our area has increased about eightfold, and rentals show a parallel increase.

I doubt if there is any part of the country in which housing costs have not doubled in proportional family expenditure since 1960. It is not at all unusual now for families with college-age children to be spending 35% or even 40% of disposable income on housing. That has had a profound effect on family economics: Not only does it tend to crowd out competing expenditures, like college tuition, but it has radically altered past saving patterns, leaving families more poorly prepared to meet college expenses.

Moreover, families sending children to college in 1985 are likely to find themselves in very different situations from those of 1960, even when one equalizes for income. Today’s parents have probably had considerably less ability to save than their parents, given the escalating costs of living the past two decades and the spiraling costs of a college education.

Also, a much higher proportion of family incomes today represent either single parents or families in which both parents have found it mandatory to work, simply to make ends meet. Both situations represent a lowered capacity to deal with changed economic circumstances and a greater vulnerability to unexpected expenditures. Thus both the economy and the sociology of contemporary American life make tuition a harder stretch today than it was in 1960.

It is, in short, not merely a perception that tuition payments are harder to make; it is a harsh reality.

Unfortunately, I cannot say that things are likely to get much better in the near future. Colleges and universities are threatened with a number of cuts from government agencies. That situation is exacerbated by proposed changes in the tax code, as well as by proposals to under-reimburse universities for the costs they incur in conducting federal research and dramatic proposed cuts in student grants and loans. This potential loss of income to colleges and universities puts considerable pressure on the price of tuition.

Middle-class parents may be particularly hard hit by the proposed cuts in student grants and loans. Those students who, in the past, have relied on such help to pay for tuition will find their college educations jeopardized, either because many of these loans either will no longer be available or because eligibility will be severely restricted.

Our country has long recognized the value of higher education, and we have done much to see that all who are qualified and want to can achieve it. We are now failing to pursue aggressive national policies that would improve the quality of education and provide access for our ablest young people to post-secondary education.

That kind of shortsightedness will penalize exactly those institutions--and those parents and students--who carry the hope for enlivening our national spirit and for improving our national productivity.