Ask Mr. Econ: Whatever Happened to the American Dream of a College Education?

Dear Mr. Econ,

What happened to the American Dream of a college education and home ownership?

–      Anonymous Iguana Reader

This is the third part of a three-part series addressing the reader’s question about the American Dream. In this installment, Mr. Econ tackles college education.

Now let’s look at the specific factors, in addition to the general ones, that place a college education beyond the grasp of many middle class people.

The basic factor here is price.  The price of a 4-year college education has skyrocketed. From 1980 to 2010, the estimated cost of earning a 4-year degree has risen from  $ 2,550 per year at a 4-year public college/university, or $ 15,014 at a private school, to $ 5,594 and $ 32,800 in 2010.  Increases of around 490%.  At the same time, middle class wages and their purchasing power are stagnant or falling.  Further, during this period, the consumer price index role only 165%.

So we need to take a look at the components that contributed to this astronomical cost increase of a 4-year college degree.

One of the main factors is the decrease in government support for higher education.  At major state colleges and universities, state legislatures have drastically cut back the support they have provided to 4 year state institutions.  We can see this locally in the more than $ 38 million that was recently cut from the University of Florida’s budget by the state legislature.  UF is not alone.

In addition, Federal spending on higher education has been stagnant, with the exception of the increases from 2009 through 2011 due to the American Recovery and Reinvestment Act.  According to the National Center for Education Statistics, federal funding has fallen from a high of about 18% of a college or university’s revenue to below 10%.

While we have heard of the very public and very large gifts foundations and individuals have given to universities and colleges, private corporate funding has not kept pace. Several studies ranging from the Department of Education’s National Center for Education Statistics, to the Chronicle of Higher Education, to private research studies have shown corporate support for higher education at best stagnant. Instead, corporations that used to give research dollars to colleges and universities have chosen to keep those dollars in house, or at best form joint research ventures with schools.

These public private partnerships may have benefits for the institutions; research jobs, graduate assistantships, future employment opportunities, laboratories and equipment that the university can’t afford that can now be used or shared.  The real money stays outside the university.

Real money you ask? Yes, real money.  Ever think of who benefits from that bottle of Gatorade you just purchased, or the milk infused with Vitamin D, or the poison you use to kill rats or the blood thinner your elderly uncle takes?  In each of these examples a major state research university is funding a significant portion of their costs through these products.  In the case of Vitamin D in milk, and Coumadin (the blood thinner)/Warfarin (the rat poison) are patents held by the University of Wisconsin and its patent holding arm, the Wisconsin Alumni Research Foundation, often called WARF (hence the name of the rat poison).  Gatorade was developed by the University of Florida.

As newer patents are developed by these public private partnerships, less of the income comes to the university.

Tied to real money, is the return on what is called the university’s endowment.  Universities invest their savings accounts, usually called endowments, in the stock market and other risky places in the hopes of high returns.  With the stock market under-performing expectations this in some cases has a 2 fold consequence.  The first is there is less income from the endowment to add to the revenue side of the university’s budget.  Universities tend to save the corpus or the endowment’s principle for capital projects or for “rainy days”.   Rainy days being those times when money gets so tight it threatens the core operations of the institution.

The second has to do with contributions to pension funds.  Both public sector and private sector colleges and universities at one time offered defined benefit pensions plans.  With the stock market and other investment vehicles underperforming expectations, in order to meet pension obligations universities are being forced to add sums to their pension funds to make up for the short fall of expected revenues.

To some extent this is being exacerbated by the fact that a large number of faculty and staff currently at colleges and universities are from the baby boomer era, and are just now reaching retirement age, and are in fact retiring.  Hence, these pension obligations are real and becoming due right now.  Universities are therefore, having to augment pension investment income with current revenues to make up for the shortfall.

It should be noted that not all college and university pension funds are in this predicament.  There are several that either through more prudent investment policies, more fiscally sound contribution policies, or by decreasing promised benefit or instituting or increasing faculty staff contributions, have avoided this problem.  Further, many system have now gone to what is called a defined contribution pension plan.  This works more like an employer funded or jointly funded 401(K), and gets the institution off the hook for any future guarantees.

Faculty salaries are another reason for the increasing costs of getting a college education.  Faculty salaries have been under tremendous upward pressure in many fields.  College and universities now have to compete with private sector firms for top talent.  This has led many institutions to establish different salary rates for university faculty positions in such fields as law, engineering, business, and the research sciences.  To a lesser extent this has pulled other faculty salaries up, but nowhere at the rate of those professions that directly compete with the private sector.

Overall median faculty salaries have risen from just under $ 13,000 in 1970, to around $ 66,000 in 2010.  An increase of approximately 400%, or less than the rise in the consumer price index for the same period of time.

In addition to rising faculty salaries, more and more college and university staff became organized.  This includes graduate assistants as well.

What was previously very poorly paid employment with few or no benefits now had more market rate wages and benefits.  Thus the pool of low paid workers that kept the university clean, the community fed, the grounds manicured, and the buildings heated and cooled, the introductory level courses taught, and the research project going, became more expensive.

With Federal and State Government support waning, faculty and staff salaries rising, private sector funding decreasing, the need to jointly enter into public private partnerships to develop new patentable products, and foundations turning to shore up the social safety network that was decimated in consecutive order by the Reagan, Bush, Clinton and Bush II administrations, there were few other places to turn for additional revenue outside of tuition and student fees. Hence, the price of a 4-year college degree shot up.

What made matters worse, is that some universities turned to some very creative tuition and enrollment solutions, which only made the situation worse.  A couple of very high profile, public research universities attempted to privatize either the entire university, or parts of it that they thought could become self-sustaining. Also, a number of schools have experimented with differential tuition for various majors.  The theory being that students can expect to earn more once they graduate from some majors, so they should pay more.

Finally, some major research universities have limited the size of the undergraduate class.  The theory behind this move is that many tenured professors see teaching undergraduates as a burden.  Classes are large, papers and exams take a long time to grade and review, and courses take a lot of time to prepare. This all takes away from research, writing books, developing patents, writing and working on grants, presenting lectures at conferences, consulting and developing outside businesses all of which can lead to additional income.

As a result the revenue tuition is expected to generate is spread over fewer enrollees.  Hence, higher costs.

So we have a situation where middle class income and purchasing power is falling, at the same time the cost of going to a 4 year college to earn a bachelor’s degree is rising faster than the general rate of inflation.  The unfortunate result is that many people are forced into the labor market working at low paying jobs just to survive, or to earn enough money to go to a community college.  In the vast majority of cases, neither of these 2 tracks will provide the education and training necessary to secure a job that will enable a person to achieve the middle class dream of a 4 year college degree, or given current circumstances the opportunity to own a home.

Comments are closed.