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Running head: FINANCIAL CRISIS

Financial Crisis through the Lens of a Higher Education Administrator and a Student
Haniyyah Bashir
University at Buffalo
ELP 507: Financing Higher Education in the US
Fall 2015

FINANCIAL CRISIS

Financial Crisis through the Lens of a Higher Education Administrator and a Student
Over the past five decades, there have been drastic changes in the students who to
college, the institutions that produce higher education, and most importantly the way its
financed. Since inception, the meaning of college and the reasons for going has changed. There
has been a population increase in female, minority, disadvantaged, and older students on campus.
Furthermore, there have been changes in the funding sources to help students and schools defray
the costs of higher education. Even through all these sufficient changes, people debate the value
of higher education. In this paper, I will examine the economic and social benefits of higher
education to individuals and to society, the reasoning behind the rise in prices and cost, funding
sources, and suggestions for affordability.
Benefits of Higher Education
People should pursue higher education for three main reasons: knowledge and skill
growth, competitive motivation, and financial gain. Pursuing a college degree provides students
with an expanded base of knowledge, skills, and practical applications. When students attend
college, they learn about the background of their chosen field to jumpstart their career. My
liberal arts background influences my views that higher education is an important tool to learn
about all the career options as students narrow down their focus. With experiential learning
components embedded in the curriculum, students receive the options to study abroad, complete
research with their faculty, and complete an internship to apply knowledge to real world
application. For the students who are unsure of what they want to do prior to college, it gives
them the opportunity to test all career avenues from performing artistry to sociology to biological
sciences and more.

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When discussing the benefits to college, many people neglect the societal and personal
growth benefits and instead become obsessed in the financial costs and benefits. Research shows
those who attend college are more likely to live a healthy life longer, improved quality of life of
offspring, better consumer decision making, increased personal status, and more hobbies, leisure
activities (Baum, Kurose & McPherson, 2013). From a social perspective, college provides
multiple opportunities for networking, which tend to be varied and more diversely populated
than those who do not attend college. This is important for individual personal growth, as well
as, also career development. In reflecting on the needs of the public, higher education benefits
includes reduced crime rates, increased charitable giving/community service, increased quality of
civic life, social cohesion/appreciation of diversity, and improved ability to adapt to and use
technology. (Baum, Kurose & McPherson, 2013) Our democratic system in America is heavily
centered on an educated population. In order for democracy to work, we need critically thinkers
who want to contribute to our society as active citizens equip with the empathy, creativity, and
collaboration skills for the 21st century. Some students might be able to acquire these skills
without the support of a university, while others need the guidance and structure of an institution.
In reflecting on the reasons why all people should pursue higher education, I consider a
reason why specifically black students pursue higher education in this competitive society. Prior
to the 1900s, African Americans struggled with social inequality, as well as, receiving
educational opportunities. Pan-African civil rights activist W.E.B. Du Bois stressed for African
Americans to understand the importance of looking beyond the track system of labor in industrial
education and start to critically think utilizing classical education to uplift the race. In his
Talented Tenth speech, the importance of critical thinking for black men to reach their full
potential leading for uplifting the race is highlighted:

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How then shall the leaders of a struggling people be trained and the hands of the risen
few strengthened? There can be but one answer: The best and most capable of their youth
must be schooled in the colleges and universities of the land. We will not quarrel as to
just what the University of the Negro should teach or how it should teach it-I willingly
admit that each soul and each race-soul needs its own peculiar curriculum. But this is
true: A university is a human invention will suffice, not even trade and industrial schools.
All men cannot go to college but some men must (Du Bois, 1903)
The racial uplift ideology is one that is still prevalent today in which African Americans in
leadership positions have the responsibility of improving the outlook of the black identity by
making it more positive. In specifically looking at the Earning by Race/Ethnicity, Gender, and
Education chart in Education Pays 2013, it is evident that black males are not worth as much as
an Asian male. Although it is discouraging, it is motivation for minority students to work harder
for social equality for equal pay for all based on skills and not racial or ethnic backgrounds. (See
Chart 2 in Appendix: earnings by race/ethnicity, gender, and education) Ultimately, for many
students, college is moving in the right direction of uplifting themselves and their community.
Higher salary is most popularly discussed reason for attending higher education who
decide to attend college. During a 40-year full-time working life, the median earnings of
bachelors degree recipients without an advanced degree are 65% higher than the medium
earnings of bachelors degree recipients without an advanced degree are 65% higher than the
median earnings of high school graduates, according to 2013 U.S. Census Bureau. (See Chart 1
in Appendix: lifetime earnings) When students are researching career path options, they notice
that people who attain higher education gets paid for more than those that do not. Money is the

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motivation for many students from low socioeconomic backgrounds. Research shows that
additional economic private benefits include employment, higher savings levels, improved
working conditions, and personal/professional mobility. (Baum, Kurose & McPherson, 2013)
In examining the reasons to pursue higher education, I argue that higher education is both
a private good, as well as, a public good. It all goes hand in hand as both sides benefit. Higher
education is viewed as a public good because there are positive externalities. Although people
with college degrees earn more money than others, their higher earnings do not reflect the whole
of their contribution to their employer or society as a whole. Research shows that educated
citizens add flexibility, innovation, and productivity to the labor force. People with a college
education tend to be more active citizens, with their volunteering and other activities benefitting
those around them. Many students consider service programs post-college such as AmeriCorps,
PeaceCorps, and Teach for America. There should not be arguments on private good versus
public good, but more importantly, who holds the responsibility of paying for higher education
when its shared benefits by all members of society. (Baum & McPherson, 2011)
There are worries and concerns about who can attend because without the consumer to
demand, we would not have an institution as a supply based on the economic theory of
competitive market. Supply and demand curves come from the decisions made by individuals
and organizations as described either, according to Paulsen & Toutkoushain. (Paulsen &
Toutkoushain, p. 15) Upward-sloping happens at an institution when there is a raising price as
enrollment increases. Normally, when an institution does not have excess capacity, it has to bear
the cost to accommodate more students. For example, if Wells College increases their tuition and
enrollment is higher than normal, they might decide to build another residence hall to

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accommodate those students costing them more money. Horizontal sloping happens at an
institution when the price remains the same, but demand increases because of excess capacity.
Usually, the reason is because the marginal cost is low so it would not hurt their expenses to add
more students. Vertical sloping happens at an institution when price increases but demand
remains the same, since when students are willing to pay full prices. For example, if Brown
Universitys tuition and fees increased by 60%, the applicant pool would be the same because
their ivy league reputation. Curved supply curve happens at an institution when the price remains
constant due to excess capacity, hence, the institution needs to raise price in order to
accommodate increasing costs of adding more students.
Ultimately, if higher education is too expensive for all to afford, then students would not
be able to enroll. When it comes to finance of higher education, the economists have to consider
the equity and efficiency to ensure that there is equal treatment to individuals who are in similar
circumstances and also treating people in different circumstances in different ways. Equity is
who helped and who is hurt by a particular decision considering fairness. A prime example of
equity, specifically vertical, is when a family who has a higher income gets less aid for higher
education based on expected family contribution (EFC). Efficiency is whether or not we are
using funds or developing policy that makes the best use of our resources for our intended goals.
For example, an institution decides to use the funds to make improvements on the athletic facility
instead of improving the residence halls.
Rise in Price and Cost of Higher Education
Before diving into the analysis of the rising cost of higher education that is a problem for
everyone involved, it is important to distinguish between the terms cost and price of higher

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education since they are often used interchangeably. Cost is the value of all the resources used to
create a product or a service, in this case, higher education. It is how much an institution covers
or spends per student to provide educational services. Price is the differing amounts of money
students pay depending on their financial circumstances, or the amount of tuition an admitted
student pays. Subsequently, the sticker price of education, which falls under the definition for
the price of higher education, is the full tuition minus any financial aid. According to Gordon
Winstons theory, the higher education prices are set to this formula: Price = Cost subsidy.
Essentially, all institutions use subsidies from multiple finance sources to reduce the price
charged to students. (Paulsen & Toutkoushian, 2006)
The inflation is a weighted average of the price changes of products that make up the
consumer price index. Changes in cost are the most important driver of tuitionor college price
over long periods of time. However, there are other forces that affect tuition independent of
changes in the costs schools incur. Reasons for rising costs of higher education includes general
inflation (increases consumer price), specific inflation (books, equipment, insurance, etc.),
technology (tends to increase cost sector) as it does not substitute the expense of human capital
(faculty), rather it is in addition to the cost of faculty. (Archibald & Feldman, 2011)
From a historical perspective, the rising cost of college is part of the larger story of
technological change that has restructured the American economy in the 21 st century. Archibald
& Feldmans three-part explicitly explains the technological forces that have transformed the
financial situation that helps highlight the six decade progression of higher education costs. Their
story describes the long upward trend in cost, and the pause and slight reversal during the 1970s.
Technological advancement is the driving force behind cost disease. When machinery usage
slows, cost disease loses its power. From 1973 to 1981, this period is referred to as the great

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productivity slowdown, because higher education costs stopped rising. Technological progress
again hastened starting in the early 1980s, so cost disease yet impacted this period. In addition,
the returns to a college degree that drives the costs of employing highly educated workers
declined in the 1970s, but accelerated starting in the 1980s. The mixture of those factors brought
the growth in the real costs of providing higher education to a standstill in the 1970s while
causing them to accelerate again starting in 1980. (Archibald & Feldman, 2011)
The primary costs of instruction includes a function of faculty-student and staff-student
ratios, average salaries and benefits (which are partly a function of the ratio of regular full-time,
to adjunct or other part-time, staff), and other operating and capital costs attributable to
undergraduate instruction. The real variance in per-student production costs among institutions is
very great. It is possible for American college students to be taught at a very low cost especially
if the faculty are paid very little, go largely without benefits, are given heavy teaching loads, are
absolved from expectations of research, institutional governance, and academic or community
service, and given minimal support in the way of facilities or professional staff. Or, they can be
taught at very high cost if the college has the resources to compete for the best faculty, to support
research, and to attract a bright and diverse student body, purchased, in part, with generous
financial aid, abundant library and computing facilities, and a rich array of student activities and
other support services. (Johnstone, 2001) However, colleges are very competitive and
continuously looking for ways to increase their rankings to be better than the next college or
university. If every college and university were to focus on their cost affordability, everyone
would be better off.
Tuition is another principal reason for raising costs. Average annual tuition increases for
public and private colleges in unadjusted dollars, as compiled annually by the College Board,

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increased well over 600 percent in the 25-year period from 1974-75 through 1999-00, with
annual tuition increases in the private sector averaging 15 percent in the last half of the 1980s,
according to College Board. (See table 3: Average Tuition and Tuition Increases, Public and
Private 4-Year Sectors: 1974-75 to 1999-00 in Appendix) The average annual tuition increases
are expected in a financial sector. The unit cost and prices increases basically reflect the average
increases in total compensation, which in turn approximates the average real increase in total
economic output. (Johnstone, 2001) The tuition has to increase to match the rising trends.
The student cost packages that drives students and parents insane include tuition, fees,
room, board, transportation, and other expenses are not under the control of the college or
university and vary based on several factors. In viewing the comparisons of the costs based on
institution type, prices are higher than others depicting those other schools are able to provide the
same services for a cheaper price. (Johnstone, 2001) However, most of those costs are out of the
control of the institution or the government. It is simply the cost of living anywhere, whether its
in the residence hall, or private apartment, or at home. The reality is that the cost of living is
expensive and will continue to increase.
Another reason why the costs are rising out of control is due to students and families net
of financial assistance. Depending on current income, certain assets, and other family
obligations, the total available financial aid (loans, work study, and grants) has significantly
suppressed the increase in total expenses for public and private four-year colleges. Ultimately,
the greatest percentage increase in college expense net of financial assistance of all kinds has
been in the public sector, and especially in community colleges. The least percentage increase in
net expense has been (on average) in the four-year private sector. It all depends on the students
institutional type of interest. When examining this portion of costs, there is a discussion of

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affordability versus accessibility. Affordability is the true discounting provided by grant aid and
the loan repayment subsidies, while accessibility is the ability to attend. If access only is the only
object of financial assistance, then loans are appropriate and adequate. For example, for graduate
school, the financial plan usually only includes subsidized and unsubsidized loans, and if you are
fortunate enough to receive it then federal work-study. More students are bound to just take out
the loans and increase their student debt.
Large student debt can distort life plans of achieving the American Dream. Most
students particularly students from low socioeconomic status are culturally against debt. Students
do not want to add any debt that they are not positive that they can repay. Research shows that
college seniors who decide to borrow to finance their education will now graduate with an
average of $24,000 in debt, and student loan debt now tops credit card debt among Americans.
When there is a third party source paying for a huge majority of the bills, students pay less
attention and more kean to accept the price, as a result, it seems as though colleges could care
less about keeping prices under control. Additionally, the not-for-profit nature of institutions
diminishes incentives for colleges and universities to be resourceful. (Vedder, 2011)
Economics view the change in average costs as being equal to the change in
price/inflation, which is equal to the change in wages minus the change in output per worker. The
costs of higher education always increase above inflation. Changes in cost equal changes in wage
in higher education, then the costs go up. It is largely either because the wages are going up or if
they are going down, it means wages are going down compared to other sectors of the economy.
If a familys income rises at the rate of inflation plus the rate of growth in the economy, W = P +
O, which equals the rise in prices and costs for higher education, wage equals price equals cost.

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In order to understand investment decisions and structure of wages/earnings, it is


important to understand human capital theory. Human Capital Theory is the view that an
individual is a piece of capital and that the more you contribute to that capital by providing a
higher education, the more output that piece of capital is capable of. The more investment that
has gone into that human capital that assumes more skills and output are expected over the long
term of that individual. For example, many companies will provide higher wages for having a
higher degree because they are investing in you. The five different versions of Human Capital
are Becker, Howard Gardner, Schultz/Nelson-Phelps, Bowles-Gintis, and Spence/Signal Theory.
Beckers perspective shows that human capital increases productivity in all tasks, even
though it possibly different in tasks, organizations, and situations. Gardners view shows that we
all have different strengths in different areas and that human capital is multidimensional. It is an
emphasis of mental versus physical abilities as different skills. Schultz/Nelson-Phelps view on
human capital focuses on the ability to adapt in unfamiliar environments. Bowles-Gintis views
the society as a hierarchy meaning the employees are following demands in an organization
setting. (Acemoglu, n.d.) This view contributes to and enforces negative stereotypes. Currently,
the top of the most organizations are white males and that power dynamic contributes to
everyone having a specific assigned role in society based on your background. Spences theory
on human capital claims the observable measures are more a signal of ability than the
characteristics individually useful in the job market. This theory might contribute to the debate of
hiring employees because of acquired degrees instead of experience. Credentials do not have to
have any intrinsic value as long as it signals something.
State and Federal Funding Assistance

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U.S. federal government has been supporting students with financial assistance by
providing work study, grants, and loans. After World War I, the Servicemens Readjustment Act
of 1944, also known as the G.I. Bill, provided higher education expenses for all disabled World
War I veterans and returning soldiers to attend any institution. Although the term all is used, it
was excluded minority populations. The National Defense Education Act (NDEA) of 1958 was
implemented as a student loan program administered in part by public and non-profit institutions
for the creation of low-interest loans to struggling students. During the 1960s era, the civil rights
movements occurred focusing on equality for blacks that influenced changes. There was the
recognition of the appropriate role of equal educational opportunity for all students provided the
context for a national dialogue focused on an appropriate, expanded federal role for funding
higher education. Higher Education Act of 1965 was built upon the student financial aid system
started with the NDEA by increasing federal aid eligibility to colleges and institutions that
equipped students with the necessary skills for gainful employment and supporting the
development of institutional need-based grant aid programs distributed through Title IV in the
form of loans, grants, institutional aid, and work-study programs. (Mullin, 2013)
In 1968, the financial assistance considerations were summarized into five broad options:
direct aid to institutions, direct aid to states, direct aid to students (and parents), direct aid for
research, and aid in the form of tax benefits for students. It is helpful to review as it explores
options and reasons why those aid distribution could not possible work effectively. (See
Appendix 4: Typology of options for a Federal Role in Financing Postsecondary Education)
According to the table, direct aid to students was perceived as the best option at the time as it
helped families from lower economic backgrounds, which reduced economic barriers to
enrollment. It reinforced a market-based method to college education, maintaining institutional

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neutrality with respect to power and control, and identifying the private returns to noncompulsory education. TRIO programs were initiated during this time for low-income students,
students with disabilities, and first-generation college students who needed financial support.
Inspired by President Richard Nixons ideals that equal educational opportunity should be
available to the youth of the United States regardless of their economic background, Congress
developed the Basic Educational Opportunity Grant (BEOG), later retitled Pell Grant. The
Middle Income Assistance Act of 1978 expanded loan eligibility. Parent PLUS loans were
established in 1980 that expanded borrowing limits. Unsubsidized Stafford Loan Program was
established in 1992. Pell amounts increased in 1998 and loan interest rates lowered. Although
these programs were useful financial assistance programs, they should focus more on college
completion, institutional eligibility, and abuse of federal student aid.

Suggestions for Affordability Concern


(All Johnstone)
Affordability problem may be a problem for everyone, however it is the low-income
minority students who struggle the most with financing higher education. It is possible for most
institutions of higher education to provide instruction (ignoring, for a moment, scholarship and
other outputs that are legitimate and important products of many institutions) at less cost perstudent, also, if necessary, to price this instructional product at even less net tuition. It is
intuitively likely that there are some, and perhaps many, students who could profit) who are
dissuaded from college in part because of this expense (tuition less aid), even if other factors,
such as poor academic preparation and low interest, also contribute to their failure to pursue a
higher education. We also know that these dissuaded students are disproportionately from low-

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income, African, Latino, and Native American families, and are older, and even dropouts from
high school. And finally, we know that without at least some higher education, the chances of
middle class opportunities are greatly diminished.
The waste of higher educational resources under this construct is an extreme case of
misplaced priorities, in which some would claim that most expenditures (at least in publicly
supported higher education) can be considered wasteful until the grossly unequal participation
rates have been more nearly equalized-at least to the limit of what can be remedied with the
reallocation of public resources. The remedy would feature very substantial increases in financial
aid. These could be paid for, if necessary, by substantial cuts elsewhere in the institution-in this
case not to appease budget cutters or to meet some ephemeral standard of efficiency or
productivity, but to attain this new priority, which is the more nearly equal participation by
socioeconomic class, at least to the limit of what can be secured with financial aid. Or, the
necessary and substantial increases in need-based financial assistance could be realized from
very high tuition increases to upper-middle and upper socioeconomic class and from introduction
of a high tuition-high aid policy.
High tuition-high aid, however, has serious practical and political liabilities. For
example, governors and legistators like the part about high tuition, but less so the part about
high aid. Also we know little about the enrollment behavior of this marginal student-that is, the
student whom the decision to go to college, and where to go, and wehter to persist is truly an
open decision and particularly susceptible to variations in tuition and financial aid. The need for
a major increase in need-based financial assistance (or even a rollback in some tuitions) is not
what conventional critics have in mind when they speak and write of waste and out-of-control
costs in higher education. The brightest and most highly motivated students-especially if they

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are from affluent families-are going to continue to go to the most selective college. Greater
equality will be served if only public colleges foreswear all other traditional funding priorities in
order to pour maximum resources into financial aid for the poor and the ambivalent. A tentative
answer to the insensitivity charge then, is that the issue, however profoundly important, is
probably not one that can be solved by shifts in higher educations spending priorities.
Kalamazoo Promise program was an attempt to help with the affordability concerns. The
Kalamazoo Promise provides an unusual model for revitalizing an urban school district and its
community. Announced on November 10, 2005, the Kalamazoo Promise provides large college
scholarship benefits to graduates of Kalamazoo Public Schools (KPS), a midsized school district
(numbering a little over 10,000 students) with a racially and economically diverse student
population. Anonymous donors promised to pay up to 100 percent of college tuition for any KPS
graduate attending a public college or university in Michigan. Tuition subsidies start at 65
percent of college tuition for students enrolling in KPS from 9th grade, and gradually increase to
100 percent for students attending since kindergarten. The scholarship does not require any
minimum high school grade point average (GPA) or financial need. Students must simply get
into college and maintain a 2.0 college GPA. In sum, the Kalamazoo Promise is unusual among
scholarship programs in its universality and generosity.
To remedy the problem of underinvestment in and underproduction of higher education in
the presence of positive externalities, a number of entities, including governments and
individuals, subsidize some of the costs of higher education. In the public sector, the primary
source of each subsidies takes the form of state appropriations to institutions, whereas the
primary source of such subsidies for institutions in the private sector arises from fundraising and

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endowment income. Growth in these subsidies slows the growth of tuition, which stimulates
greater enrollment. (Paulsen & Toutkoushian, 2006)
Overall, the finance crisis in higher education is a work in progress. One may argue that it
is getting better because more people can afford to participate, while others may argue that it is
getting worse because people are no longer interested in being involved with the debt that comes
along with attaining higher education. There is no right answer. As much as I want to think to say
that decreasing tuition would solve the problem, I know that the costs of higher education are so
high that it would not solve the issue. It will take many more years of research and study to solve
this financial problem.

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References
Acemoglu, D. (n.d.) The Basic Theory of Human Capital. [UBL]
Archibald & Feldman (2011). The Anatomy of College Tuition [UBL]
Bartik & Lachowska (2012). Short-Term Effects of the Kalamazoo Promise Scholarship
on Student Outcomes [UBL]
Baum, Kurose & McPherson (2013). An Overview of American Higher Education [UBL]
Institute for Higher Education Policy (1998). Reaping the Benefits: Defining the Public
and Private Value of Going to College [UBL]
Baum & McPherson (2011). Is Education a Public Good or a Private Good? [UBL]
Dubois, W.E.B. (1903) The talented tenth. In The Negro problem: A series of articles by
representative Negroes of today. New York, NY: J. Pott.
Johnstone, B. (2001) Higher Education and Those Out of Control Costs [UBL]
Kitroeff, N. (February 10, 2015). College Graduates Dont Think Their Degree Pays Off.
Theyre Wrong. Bloomberg Business. [UBL]
Mullin (2013). Past, Past, Present and Possibilities for the Future of the Pell Grant Program
[UBL]
Paulsen, M. B., & Toutkoushian, R. K. (2006). Overview of economic concepts, models, and
methods for institutional research. New Directions for Institutional Research, 2006(132),
5-24. doi:10.1002/ir.193
Vedder & Denhart (2011)- CNN-[UBL]

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Appendix

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Table 1: Lifetime Earnings

Table 2: Earnings by Race/Ethnicity, Gender, and


Education

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Table 3: Average Tuition and Tuition Increases, Public


and Private 4-Year Sectors: 1974-75 to 1999-00

Table 4: Typology of Options for a Federal Role in


Financing Postsecondary Education

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