Out of control college spending

Here’s a good deep dive by a team of WSJ reporters, who analyzed the operating budgets of all 50 state flagship public universities between 2002 and 2022.

Readers of LGM won’t be surprised to learn that, over this time, spending at these schools increased nearly twice as fast as enrollment at the median (figures are inflation adjusted, and in most cases exclude affiliated hospital systems, which would have made the increases even more extreme if they had been included).

University administrators love to blame all this on cuts in state appropriations, but:

(1) Tuition increases were much larger than cuts in state appropriations; and (something not mentioned in the WSJ piece)

(2) Overall public spending, including federal spending, on higher ed increased a great deal in real dollar per capita terms. State appropriations now make up less than half of the public money these institutions get, but this fact is almost never taken into account in these sorts of analyses. See here for an exception.

So what’s going on?

Through it all, schools operated in a culture that valued unrelenting growth and prioritized raising revenue over cutting costs. Administrators established ambitious strategic plans and tried to lure wealthy students with luxurious amenities. Influential college rankings rewarded those that spent more.

Many university officials struggled to understand their own budgets and simply increased spending every year. Trustees demanded little accountability and often rubber-stamped what came before them. And schools inconsistently disclose what they spend, making it nearly impossible for the public to review how their tuition and tax dollars are being used. 

“These places are just devouring money,” said Holden Thorp, who was chancellor at the University of North Carolina at Chapel Hill from 2008 to 2013 and is now editor in chief of Science. Offering everything to everyone all at once is unsustainable, he said. “Universities need to focus on what their true priorities are and what they were created to do,” he said.

Colleges invested money inside and outside the classroom, including to improve technology, expand counseling and intramural sports, and build facilities such as modern dorms and new stadiums.  

A huge and underrated factor in all this is the incredibly amateurish way in which these institutions tend to be overseen, or rather not overseen, by state governments. Boards of regents are routinely made up of people who know essentially nothing about the finances of higher education, state legislatures pay little attention to what’s going on, and the federal government treats the cost of higher ed as if it were governed by the laws of thermodynamics as opposed to political choices . Why, for example, are discussions of student loan forgiveness, which is an excellent idea on the whole, almost never accompanied by any real demands for cost controls on the institutions who created $1.6 trillion in federal student loan debt, the vast majority of which is not being — and is not going to be — repaid?

The professional administrative class that runs these institutions is governed by a wildly perverse set of incentives, that can be summarized as “excellence” consists of spending more money this year than last, especially on their own compensation. (The preposterous US News rankings literally formalize this principle, rewarding schools for spending more money per student, all else being equal).

It’s a gigantic mess, which isn’t going to be solved by intoning that higher education is “priceless,” so let’s spend $13 million to renovate a monastery in Italy for our study abroad program.