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Education Reporter

Will Higher Ed Be the Next Bubble to Burst?
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The cost of attending college has increased 439% since 1982, more than four times the rate of inflation. (For comparison, health care costs rose around 250% over the same period.) Still, students and parents have thus far continued forking over ever-increasing amounts of cash, expecting their investment to pay off in the long-term.

But with an average graduation debt of $24,000 and unemployment running at 10% for 20-to-24-year-old college graduates, higher ed may be set to go the way of the housing market. If consumers decide college education isn't worth the money, they will stop investing in it and the higher education bubble will burst.

How did college degrees get to be so expensive? Just as with the housing market, government has injected huge subsidies into the market, driving up costs. These funding supports come in the form of directly subsidizing university budgets, guaranteeing student loans, and giving grants to students, all of which inflate student purchasing power and allow institutions to evade accountability for spiraling costs.

Exhibit one is Pell grant subsidies, which have nearly doubled during the first two years of Obama's presidency at a cost of more than $32 billion. Since 1980, Pell grant spending has increased 475%. In conjunction with veteran's benefits, Pell grants now account for 44% of the $94 billion in grants awarded to students during the 2009-2010 school year, up from 34% the year before. "The balance is shifting more toward the federal government," noted Sandy Baum, co-author of a report on college costs from the College Board.

Economist Richard Vedder explains that, "When someone else is paying the bills, people want to buy more of the good or service in question. . . . Just as third-party payments in medicine have led to escalating health care costs, so increased student financial payments have contributed to soaring tuition costs." Vedder estimates that every dollar in grant aid leads to tuition increases that are 35 cents higher than they would be otherwise. Patrick Callan, president of the National Center for Public Policy and Higher Education, likens the trends in federal aid and costs to a treadmill — prices rise, the feds pump in more cash, and prices rise again in a never-ending cycle.

Another complaint gaining traction is that the more taxpayer money is funneled into higher ed, the more colleges and universities resemble bloated government bureaucracies. Most money isn't even going toward academics, say Andrew Hacker and Claudia Dreifus, authors of Higher Education? How Colleges Are Wasting Our Money and Failing Our Kids and What We Can Do About It. They point out that the number of administrators per student has almost doubled over the past 30 years.

And compensation for college presidents now rivals corporate CEO salaries. Vanderbilt University, for example, pays its president $1.2 million per year. (Though a private university, Vanderbilt still benefits from government loan subsidies and grants to its students.) "College loans and grants are another example of well-intentioned government programs that [have] been captured by an organized political constituency, the higher-ed lobby, and punishes those whom it is intended to benefit [by raising costs]," said James A. Bacon, writing in The Washington Times.

The National Center for Education Statistics offers more evidence in its finding that operating expenses for all U.S. postsecondary institutions increased 16% between 2003 and 2007. Where did that money go? The categories that saw the biggest increases were institutional support (19%), academic support (19.9%), student services (20%), and operations and maintenance (25.4%). Instructional salaries and wages rose a generous 16.8%. What about money spent for student scholarships and fellowships? A comparatively paltry 9.6%.

With more and more government money pouring in and no profit motive or accountability to shareholders, public colleges have no pressure to use resources efficiently. The result, according to higher education financing expert Andrew Gillen, is a virtual "arms race" where schools direct vast resources toward non-academic areas such as athletics, building improvements, and administrative overhead costs in an attempt to compete for students.

Lindsey Burke, education policy analyst at the Heritage Foundation, said transferring the costs of college from the students who directly benefit to taxpayers-at-large raises questions of equity. "Transferring the burden of student loan financing [and other taxpayer subsidies] from university graduates — who earn on average twice that of someone with a high school diploma — to the three-quarters of taxpayers who did not attend college is unjust." (The Wall Street Journal, 10-28-10; The Washington Times, 10-29-10; RealClearPolitics.com, 9-21-10; Heritage.org, 11-16-10)

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