Define Liberty: Why Is College So Expensive?

Education in the United States is expensive. In 2010, the average annual tuition and expenses cost for students at a private not-for-profit four-year college or university was around $35,000, according to U.S. News and World Report.

Some argue that tuition costs are so high because schools are burdened to pay growing salaries to professors. From James Surowiecki of The New Yorker:

Teachers today aren't any more productive than they were in 1980. The problem is that colleges can't pay 1980 salaries, and the only way they can pay 2011 salaries is by raising prices. 

Others disagree. Mark J. Perry, a professor of economics at the University of Michigan, writes on his blog CARPE DIEM:

The significant real increases in college tuition over the last thirty years have not been caused by increases in faculty salaries.

He adds, citing a chart from the National Center for Education Statistics that correlates increases in college tuition with increases in faculty salaries and consumer prices (inflation) from 1978 to 2007:

College tuition has increased annually since 1978 at about twice the overall rate of inflation, 7.9% vs. 4.1%. In contrast, faculty salaries have increased annually at only 4.5%, just barely above the overall inflation rate.

Why, then, have college tuitions risen so dramatically since 1978, nearly twice the rate of inflation? Perhaps we should, first, look at the Law of Unintended Consequences, which states:

actions of people -- and especially of government -- always have effects that are unanticipated or unintended

The Law of Unintended Consequences is often attributable to the world's inherent complexity, which prevents policy-makers from considering all possible consequences for a particular action. 

Consider the following three examples to see the Law of Unintended Consequences in action:

Prohibition in the 1920s United States, which banned alcohol to suppress the alcohol trade, actually consolidated large-scale organized crime in the illegal alcohol industry. (Wikipedia.org)

The War on Drugs in the United States, intended to suppress the illegal drug trade, has actually increased the profitability of drug cartels. (Wikipedia.org)

The Streisand Effect, which states that an attempt to censor or remove a certain piece of information instead causes the piece of information to become more widely known and distributed. (Wikipedia.org)

Perhaps the Law of Unintended Consequences can be applied to rising college tuition costs, as well. Economist Thomas Sowell argues that the government-guaranteed loans -- which are intended to make college more affordable for millions of Americans -- may, in fact, lead to rising costs of education for everyone:

Those who want the government to provide subsidies to help meet the cost of college seem not to consider whether government subsidies might have contributed to the high cost of college in the first place.

Peter Schiff, CEO of Euro Pacific Capital, states more directly on Occupy Wall Street:

High tuitions are no fluke. They exist as a direct result of government-guaranteed student loans.

Schiff argues that "without such loans, tuition could not rise beyond students' or families' ability to pay." 

 

In perfect capital markets, the price of good represents the price at which the supplier is willing to supply the good and the price at which the buyer is willing to buy the good. With a government subsidy to the cost of education, however, buyers are less price-sensitive and willing to accept a higher price -- hence a $35,000-per-year cost.

 

Schiff ties the cost of education to the forces of supply and demand:

Because students have almost unlimited access to credit, universities are able to raise tuitions without the limits market discipline would otherwise enforce.

The Bottom Line: "It's ironic that as a direct result of government-subsidized student loans, students now need those loans to pay tuition that, in the absence of such programs, they could have afforded to pay in cash. It is a good example of a government "solution" to a problem of its own creation." (Peter Schiff)
 
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