Slide 1CHAPTER OUTLINEIntroduction: Basic NumbersTuition & Books Rapidly Outpacing CPIModeling External BenefitsCollege and University EducationWho PaysRevenue to UniversitiesTextbook CostsThe VocabularyWho Gets the GreenNew vs. UsedWhen Prices Do Not MatterThe Market FormAvoiding Increasing CostsWhat is a College Degree WorthHow Do People Pay for CollegeThe Grant-Loan MixMore College Graduates34-1©2015 McGraw-Hill Education. All Rights Reserved ©2015 McGraw-Hill Education. All Rights Reserved Chapter 34College and University Education:Why is it So Expensive34-2©2015 McGraw-Hill Education. All Rights Reserved 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?34-3©2015 McGraw-Hill Education. All Rights Reserved Introduction: Basic Numbers•$471 Billion•21 million students•$22,429/student•Tuition, Room and Board have risen 629% since 1981 (overall CPI 131%)34-4©2015 McGraw-Hill Education. All Rights Reserved Tuition & Books Rapidly Outpacing CPI2002.Ja n2002.May2002.S ep2003.Jan2003.May2003.S ep2004.Ja n200 4.Ma y2004.S ep2005.Ja n2005.May2005.S e p200 6.Ja n2006.Ma y2006.S e p2007.Jan2007.Ma y2007.S ep2008.Ja n2008.May2008.S ep2009.Ja n2009.Ma y200 9.S e p2010.Ja n2010.Ma y2010.S ep2011.Ja n2011.May2011.S ep2012.Ja n2012.Ma y2012.S e p2013.Ja n100120140160180200220College Textbooks Tuition CPIYear and MonthP r ic e I n d e x 2 0 0 1 = 1 0 034-5©2015 McGraw-Hill Education. All Rights Reserved Modeling External BenefitsSocial BenefitExternal Benefits0Enrolled StudentsDSTuitionT*S*T’S’What Schools GetTuition from students34-6©2015 McGraw-Hill Education. All Rights Reserved 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.34-7©2015 McGraw-Hill Education. All Rights Reserved Who Pays34-8©2015 McGraw-Hill Education. All Rights Reserved Revenue to Universities 1995-961996-971997-981998-991999-20002000-01#VALUE!2002-032003-042004-052005-062006-072007-08 2008-092009-102010-11$0.00$50.00$100.00$150.00$200.00$250.00$300.00$350.00Total Revenue Tuition Aux-Non-HospitalAppropriations OtherPubic Deree Granting University Revenue (billions)34-9©2015 McGraw-Hill Education. All Rights Reserved 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•Paper34-10©2015 McGraw-Hill Education. All Rights Reserved 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.34-11©2015 McGraw-Hill Education. All Rights Reserved Who Gets the GreenBookstoreMarkup,$25Ink, paper,printing cost,$5-$10Authorroyalty$15$125Publisherfixed expensesand profit,$75-$8034-12©2015 McGraw-Hill Education. All Rights Reserved 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.34-13©2015 McGraw-Hill Education. All Rights Reserved 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.34-14©2015 McGraw-Hill Education. All Rights Reserved The Market Form•Monopolistic Competition•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 markets34-15©2015 McGraw-Hill Education. All Rights Reserved 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 form34-16©2015 McGraw-Hill Education. All Rights Reserved 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 value34-17©2015 McGraw-Hill Education. All Rights Reserved 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 Bill34-18©2015 McGraw-Hill Education. All Rights Reserved The Grant-Loan Mix•Some Aid•’92: 59%•’08: 79%•Loans•‘92: 31%•‘08: 53%•Grants•Relatively stable (around 33%)34-19©2015 McGraw-Hill Education. All Rights Reserved More College Graduates 05101520253035WhiteBlackHispanicYearE d u c a t i o n a l A t t a i n m e n t : B a c h e l o r s o r G r e a t e