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Fiscal Notes

A Review of the Texas Economy from the Office of Susan Combs, Texas Comptroller of Public Accounts · July 2011

A “Bubble” in Higher Education?

An Interview with Glenn Reynolds

“I predict strong financial pressure on colleges and universities that aren’t a good investment for students.”

– Glenn Reynolds,
University of Tennessee
College of Law

By Bruce Wright

There was a time in our nation’s history when college was reserved for a privileged and well-heeled few. And today many worry that those days may be returning, given the spiraling cost of tuition.

According to the National Center for Public Policy and Higher Education, average U.S. college tuition and fees rose by an astonishing 439 percent between 1982 and 2007 — more than four times as much as the inflation rate for that period (106 percent), and about three times the increase in median family income (147 percent).

Texas hasn’t been immune. Between 1999 and 2010, average tuition and fees at the state’s 10 largest public universities rose by about 120 percent, to nearly $8,000 annually.

Such increases are forcing recession-battered students and their families to assume increasing amounts of long-term debt. According to the Institute for College Access and Success, 58 percent of Texas’ 2009 college graduates were carrying student loan debt — an average of $20,015 each. And debt can range much higher, of course, particularly for those attending private schools and pursuing advanced degrees.

Such debt can be daunting for families and crippling for young people just entering the job market, particularly one as rocky as today’s.

So where does it end? College costs can’t continue climbing indefinitely, can they? And what happens if our universities price themselves out of their market?

Such speculation has led many observers to begin describing higher education costs as a classic “bubble” — and one that may eventually give way, with potentially disastrous effects on our schools and society at large.

One such commentator is Glenn Reynolds, Beauchamp Brogan Distinguished Professor of Law at the University of Tennessee College of Law. As “Instapundit,” Reynolds is one of the nation’s most widely read and influential political bloggers, and a leading voice in the ongoing debate over college costs.

1999 and 2010,
average Tuition
and FEES at
the state’s
10 largest
rose by

FN: Everyone agrees that the cost of college is soaring, but in what sense would you define the present situation as a “bubble?”

Glenn Reynolds: Definitions of bubbles vary, but this is an economically unsustainable run-up in prices, fueled by cheap credit. As economist Herb Stein once said, something that can’t go on forever, won’t. What we’ve been seeing in terms of costs and tuition can’t go on forever, so it won’t.

FN: There’s a lot of press bemoaning the fact of skyrocketing tuition and fees, but relatively little that attempt to pinpoint why the cost is rising so fast. Various causes have been cited, such as overambitious building programs, administrative “bloat” and an emphasis on “star” scholars and research programs. What do you see as the major factors driving the sharp increase in college costs?

Reynolds: There are a lot of factors, but the biggest is that there are no real constraints on running up costs. Most of the people buying the service — students — aren’t paying for it, at least not right away, and as a result they’re not very sensitive to prices.

Ever Upward

The cost of a year’s tuition at Texas’ 10 largest universities has risen by an average of 120 percent since 1999.

refer to  table below

Source: Texas Higher Education Coordinating Board, the College Board and The Chronicle of Higher Education

FN: Because they’re relying on family resources and student loans, right?

Reynolds: Right. And this means that there’s not much constraint on them. If students had to come up with cash to enroll, tuition would be lower and colleges would be more sensitive to costs, as they used to be.

FN: You’ve written about the “trap” of student loans. What are the likely effects of soaring college debt?

Reynolds: If for-profit corporations operated by getting 18-year-olds to sign on to ruinous debt loads based on often-fraudulent promises of employment, they’d be treated as virtual slavers, particularly if the debt was not dischargeable in bankruptcy. Universities, however, get a pass on this.

The flood of cheap credit has encouraged an explosion in tuition. Meanwhile, the high debt loads facing graduating students will make things worse for the economic recovery. Graduates with $50,000 to $150,000 in student loan debt are in a poor position to buy houses, for example, because in effect they already have a mortgage.

FN: Given the present economy, do you think that student loans will continue to be available in sufficient amounts?

Reynolds: The loans are likely to be available, but there’s evidence that students are already growing more reluctant to take them out. This will start to put pressure on colleges and universities to lower prices.

FN: And what do you see as the outcomes if the higher-ed bubble bursts?

Reynolds: Well, when bubbles burst there’s always pain. People who have made financial bets on the bubble continuing will lose money. Expectations are unsettled, and there’s disruption until a new equilibrium is reached.

I predict strong financial pressure on colleges and universities that aren’t a good investment for students — particularly lower-tier private schools that are nonetheless very expensive. In addition, majors that don’t promise reasonable earnings will cease to attract students, except for those with indulgent parents or trust funds.

FN: Which raises the issue of what some call “the value proposition” — the relation between college costs and graduates’ earnings. Is college simply overpriced?

Reynolds: Well, it depends on the major. “College” is not a single product. A major in business or engineering is probably a better value proposition than a major in women’s studies or anthropology, yet the tuition is the same. Here’s a thought experiment: what would happen if student loan interest rates, or eligibility, were based on the earnings prospects offered by the different majors?

FN: And if the bubble bursts, what about the colleges and universities themselves? How would they react?

Reynolds: Some schools are already responding. The University of the South at Sewanee has cut tuition by 10 percent. Several law schools have announced tuition freezes. And several states are looking at closing marginal public institutions or laying off faculty.

FN: Is there anything colleges can do to keep their costs down, and exert some control over these continuous price increases?

Reynolds: Well, there’s some conspicuous waste. Today, lots of colleges have expensive “sustainability offices” — clear evidence of an approach to spending that is in itself unsustainable.

But more seriously, many introductory courses could be done online, and at least two-thirds of administrators [don’t affect] the students’ actual education at all.

FN: Here in Texas, our governor has called for the creation of a “$10,000 bachelor’s degree,” despite considerable skepticism from academia. Is this a fruitful approach?

Reynolds: I think it’s entirely possible. It would require a program that was focused very narrowly on educational value to the students, at the expense of other, more powerful stakeholders in the university. But it could certainly be done.

FN: So, in general, can colleges cut their costs meaningfully? And is anything likely to force them to do so?

Reynolds: Yes, they can. And economic pressures will force them to. The only question is how soon and how painful the adjustment will be. FN

Texas parents saving for college should investigate the state’s prepaid tuition plan, the Texas Tuition Promise Fund.

Data for “Ever Upward.”
School 1999 Tuition
and Fees
2010 Tuition
and Fees
University of Texas-Pan American $2,870 $5,699
University of Texas at El Paso $3,408 $6,537
University of North Texas $4,569 $7,496
Texas State University - San Marcos $3,928 $7,838
Average $3,621 $7,945
Texas Tech University $2,310 $8,260
Texas A&M - College Station $4,155 $8,387
University of Texas at San Antonio $3,822 $8,140
University of Texas at Arlington $4,128 $8,500
University of Houston $3,000 $8,997
University of Texas at Austin $4,020 $9,418

Source: Texas Higher Education Coordinating Board, the College Board and The Chronicle of Higher Education

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