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Commentary

Markets Work in Higher Education: Tuition Fees Are Starting to Fall



In the first couple of weeks of studying Principles of Economics at any decent university, students learn that as the demand for something falls while the supply remains the same, both the equilibrium market price and the quantity of the good or service consumed will decline. New data from the College Board shows that from 1988-89 to now, tuition-adjusted published tuition fees at four year public institutions over tripled, rising an extraordinary 3.8 % annually. Yet the same data show in the last year those fees, adjusting for inflation, actually fell slightly,about 0.4%.

The demand for higher education is falling for several reasons. Many cite demographic factors, especially the birth dearth. The pool of 18 year old Americans is actually starting to decline, and demand from foreign students is also falling because of increased visa problems. Yet more Americans were born in 1999 and 2000 (the birth years of current entering freshmen) than in the two previous years, so the freshman class decline really should not be felt yet for demographic reasons (this will become more of a factor in coming years). A secondary reason for the demand decline is tightness in labor markets. Low unemployment rates mean relatively uneducated persons have more job opportunities than normally, so they forego schooling for work.

But I think the biggest factor is that the financial benefits of a college education have fallen relative to the costs. As I have commented previously, the real earnings advantage associated with a bachelor’s degree is actually declining, while the costs of higher education, until now, have been rising. Thus the rate of return on higher education investments has been falling.

I do think another factor is playing a secondary role in enrollment decline. Americans are increasingly irritated with our universities. The campus rioting, suppression of free speech, and heavy politicization prevalent on some campuses have taken a toll. The campus diversity bureaucracy has been screaming about a campus “rape culture,” probably unsettling to many young persons and their families. The largely correct perception that campuses have a highly left-of-center orientation probably puts off many persons of moderate or conservative leanings.

Adding to the increasing skepticism about college is the enhanced publicity about the huge amount of student loan debt outstanding and the difficulty of many students in making payments. High school seniors used to be relatively clueless about the risks associated with accumulating student debt, but that awareness seems to be increasing.

Colleges are ill-equipped to handle enrollment declines. They have enormous fixed costs given the institution of tenure and also bond indebtedness associated with their edifice complex—large-scale building spree. The culture of economizing and of maximizing productivity that is the heart of profit-seeking competitive capitalism is almost totally absent. Colleges are filled with people who have bleak prospects for alternative employments, individuals who will fight hard to stay on campuses even as enrollments and revenues decline. It is recognition of this that lead people like Clay Christensen and myself to predict a big uptick in the closure of colleges—often via mergers. To me the issue is not, “will colleges be forced to close?” but rather how many will close and over what time period. Will it be 500? 2000? Will it largely happen in the next five years, or 10 years or more? I am not certain about the details, but the broad contours of the forthcoming changes seem pretty clear.

Some would argue that I am wrong. The current very low unemployment economy cannot continue forever, and some kids will start seeking higher education to improve their skills in a changing economy as employment opportunities dwindle. Some believe that the progressive vision of Bernie Sanders and others will be realized after the nation’s short-term flirtation with Trump style populism passes, and we will see free tuition becoming a reality, with the accompanying rise in enrollments. Even if the nation moves to the left politically, however, the possibility that slow growth and mounting public obligations (a huge debt to output ratio, massive unfunded Social Security and Medicare liabilities) will thwart “business as usual” in America’s institutions of higher education is very real.


Richard K. Vedder is a Senior Fellow at the Independent Institute, Distinguished Emeritus Professor of Economics at Ohio University, and co-author (with Lowell Gallaway) of the award-winning Independent Institute book, Out of Work: Unemployment and Government in Twentieth-Century America.


From Richard K. Vedder
CAN TEACHERS OWN THEIR OWN SCHOOLS?: New Strategies for Educational Excellence
In Can Teachers Own Their Own Schools?, Richard Vedder examines the economics, history, and politics of education and argues that public schools should be privatized. Privatized public schools would benefit from competition, market discipline, and the incentives essential to produce cost-effective, educational quality, and attract the additional funding and expertise needed to revolutionize school systems.







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