For release: Dec. 30, 2005

Contact:	Charles Henderson
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	E-mail:	charles.b.henderson@stls.frb.org
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College Tuition: Are We Getting Our Money's Worth?

St. Louis, Mo. — As the cost of educating students at institutions of higher learning throughout the United States increases, the quality of graduates doesn't seem to be keeping pace. Consequently, colleges and universities may want to consider improvements in productivity—specifically, a reduction in costs and a better definition of what their graduates should accomplish.

That's a suggestion by Thomas A. Garrett, a research officer and economist at the Federal Reserve Bank of St. Louis, and William Poole, president and chief executive officer of the St. Louis Fed. Garrett and Poole's analysis appears in the January issue of The Regional Economist, the St. Louis Fed's quarterly publication of business and economic issues. The publication is also available online at the St. Louis Fed's web site: http://www.stlouisfed.org.

Between 1991 and 2003, undergraduate tuition and fees per student, adjusted for inflation, increased by 49 percent at public institutions and 39 percent at private institutions. Garrett and Poole catalog several reasons for the rapid rise, including an increase in universities' costs, and the recent recession and ensuing budget crises for many states.

They also cite financial aid, including loans, as another possible problem, because financial aid now covers a larger percentage of tuition expenses. Universities increasingly charge different tuition to different students, depending on ability to pay and the universities' efforts to recruit students with special academic or athletic skills. This has allowed more students the opportunity to attend places of higher education than they otherwise could. "But," said Garrett and Poole, "there has been almost no discussion of productivity enhancements that might constrain university costs and, thus, tuitions that arise in part from the increase in student enrollments caused by financial aid."

The economists suggest that legislators and education officials must address several issues before any cost-saving or quality-enhancing policies can be implemented. Those issues include:

1. Defining the objectives of the university. Garrett and Poole say that although universities and legislators may have opposing views regarding the most important objectives, "both groups typically agree that improving student quality is the most important higher-education objective."
2. Defining productivity. Garrett and Poole say that measures to cut costs are helpful, but "sound management practices to improve productivity...must look at the effectiveness of the organization, be it an academic department or the entire university."

They note that measuring productivity in a university can be difficult, but one way would be to assess community or client conditions, and to benchmark them relative to community standards or those standards of other institutions of higher learning. "An example," they write, "could be the number of graduates who find a job within three months of graduation. Another option is to measure accomplishments, such as the number of graduates or the percentage of students taking a class that requires relatively advanced work, such as a technical research paper."

Garrett and Poole outline several strategies to increase productivity, such as privatizing services, decentralizing the bureaucracy, and improving student quality. They caution, however, that these approaches would require changes in both the administrative culture and in the mindset of faculty and administration. "Attempts to implement these strategies may be met with resistance or even legal challenges from the various professional organizations and associations that support faculty and administrators," they say. They offer Antioch University in Ohio as a case study in successful decentralization. Antioch involved all employees in the decision-making process, which fostered a collaborative atmosphere in which difficult decisions were reached.

Garrett and Poole say that to rein in costs, universities also must have the flexibility to hire more faculty or increase teaching loads of current faculty when demand for a major increases. Conversely, they argue, the university must have the latitude to reduce the number of faculty when demand for a major decreases.

They also cite what they say is perhaps the greatest obstacle to increased flexibility of faculty: tenure. "Tenure prevents significant staffing changes in response to changes in student demands," say Garrett and Poole, "and also prevents lower-quality faculty from being replaced by higher-quality faculty."

While maintaining that universities are capable of delivering "high quality education at an attractive price that will make an enormous difference to society," Garrett and Poole say that some of the ideas they offer for discussion will be dismissed out of hand. "And that attitude," they conclude, "is part of the reason universities have a productivity problem."

With branches in Little Rock, Louisville and Memphis, the Federal Reserve Bank of St. Louis serves the Eighth Federal Reserve District, which includes all of Arkansas, eastern Missouri, southern Indiana, southern Illinois, western Kentucky, western Tennessee and northern Mississippi. The St. Louis Fed is one of 12 regional Reserve Banks that, along with the Board of Governors in Washington, D.C., comprise the Federal Reserve System. As the nation's central bank, the Federal Reserve System formulates U.S. monetary policy, regulates state-chartered member banks and bank holding companies, and provides payment services to financial institutions and the U.S. government.

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