1. Chapter 34 College and University Education: Why is it So Expensive

2. CHAPTER OUTLINE Introduction Why Are the Costs so High
Why Are College Costs Rising So Fast
Why Have Textbook Costs Risen So Rapidly?
What is a Degree Worth?
How Do People Pay for College?

3. Introduction: Basic Numbers
$471 Billion
21 million students
$22,429/student
Tuition, Room and Board have risen 629% since 1981 (overall CPI 131%)

4. Tuition & Books Rapidly Outpacing CPI

5. Modeling External Benefits
Tuition
Enrolled Students S T’ S’
Social Benefit
What Schools Get
External Benefits T*
Tuition from students D S*

6. College and University Education
Costs are higher than K-12
Teachers spend less time in the classroom
6 to 12 hours per week
Spend time on research, committees, keeping up with the latest in their fields.
Equipment and lab costs are substantially higher.

7. Who Pays

8. Revenue to Universities

9. Textbook Costs Rising almost as fast as tuition
High fixed Costs – Low Variable Costs
Fixed Costs
Author time to produce
Ancillaries (PowerPoints, Testbanks, Instructor’s Manuals, etc.)
Reviews, Editing, Typesetting, Marketing
Variable Costs
Paper

10. The Vocabulary
Advance The amount of money paid to authors typically counted against future royalties.
Royalties The amount of money paid to authors. Typically paid on a percentage basis.

11. Who Gets the Green Bookstore Markup, $25 Publisher fixed expenses
Ink, paper,
printing cost,
$5-$10
Author
royalty
$15
$125
Publisher
fixed expenses
and profit,
$75-$80

12. New vs. Used
Used books are typically price 25% to 33% less than new ones.
A book only makes money for the publisher and author on its first sale.
Bookstores make (about the same) profit selling new as used.
Publishers will (usually) not ship old editions even if faculty request them.

13. When Prices Do Not Matter
Faculty Decisions
Faculty get the book for free.
Faculty do not typically inquire about the price of books they assign.
Student Decisions
There is little to no ability for students to substitute one book for another.
Not having the book is a signal to faculty.

14. The Market Form Monopolistic Competition Oligopoly Monopoly
Entry level books in most areas
Intermediate level books in many areas
Oligopoly
In a few upper division areas
Many graduate school areas
Monopoly
Very narrow areas with small markets

15. Avoiding Increasing Costs
Failure to roll
Faculty purposefully choosing not to move to the next edition so as to save students money.
Renting Books
Pay about half the new book price and return the book at the end of the semester to avoid being charged the other half.
Ebooks
Same as renting but the book is only accessible in electronic form

16. What is a College Degree Worth
Present Value of Costs
Opportunity costs of lost work time
Tuition
(not living expenses…you have to eat)
Present Value of Benefits
Increased expected earnings over a lifetime
Net Present Value
Estimates vary between $300,000 and $500,000 for the positive net present value

17. How Do People Pay for College
Out of Pocket Payments
Institutional Aid
Often through gifts to the University
State Appropriations to Universities
Federal Loans
Subsidized
Unsubsidized
Federal Grants
Pell (etc.)
GI Bill

18. The Grant-Loan Mix Some Aid Loans Grants ’92: 59% ’08: 79% ‘92: 31%
‘08: 53%
Grants
Relatively stable (around 33%)

19. More College Graduates