Monday, January 30, 2012

Obama Plans To Slow Rising Tuition

See Obama Details Plan to Curb Tuition By LAURA MECKLER and STEPHANIE BANCHERO of The Wall Street Journal.

Part of the problem is "...concern about the rising costs of college tuition, which have increased by an average of 136% over the past 20 years, adjusted for inflation."

Here are some key excerpts:

"[Obama] wants to withdraw federal campus-based aid from colleges and universities that increase tuition too rapidly or fail to provide a "good value" for the money."

"William Powers Jr., president of the University of Texas at Austin, said he supports using a threat of funding as a lever to get specific outcomes, but said there could be nasty debates about how those outcomes are measured. "This could be fabulously successful, or not, depending on the details and implementation.""

"Mr. Obama would change that by rewriting the formula so that schools that keep tuition down and that provide "good value" would be rewarded with more money. The White House did not say what would constitute "good value," but said the new formula would include measures such as graduation rates and debt repayment.""

This might put pressure on teachers to pass students so they can graduate and keep their school's graduation rate high enough.
"Some critics warned that federal efforts to control tuition costs amount to price controls, while others pointed out that the $2.7 billion the plan affects is tiny compared to total spending in colleges and universities."

There is always a danger that a price ceiling (the type of price control mentioned) can cause shortages, as I mentioned in class last week. A lower price enforced by the government raises the quantity demanded while lowering the quantity supplied.

Now it may be more complicated than what a simple supply and demand graph would show. Higher education might be what is called "monopolistic competition," where firms have some pricing power. That does not mean, though, that price controls will work. The government would have to somehow know the right level of tuition for every school.

With competition intense, schools bid for superstar faculty which raises tuition. Also, they have been competing with amenities like better dorms and facilities. Colleges also offer scholarships to the best students, meaning others pay more. See chapter 18 of the book The Economics of Public Issues, 16e.

But some of the higher tuition has been covered by financial aid. See a post from March, 2010 called As college costs rise, sticker shock eased by student aid. From 2004-09, the net price that students pay, once financial aid is taken into account, actually fell.

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