Mr. Chairman and Members of the Subcommittee:

    Thank you for this opportunity to testify before the Subcommittee about the increasing price of college and the possible steps that might be taken to make college more affordable for students and families.

    At previous hearings before this Subcommittee, several witnesses—most prominent among them being Dr. Sandy Baum—have done an excellent job of outlining the dilemma of rising college prices and the challenge of addressing rising tuitions from a federal perspective. I will not repeat those observations, but instead will focus on three central issues. First, I will briefly discuss why rising college prices are a legitimate concern for students and families, and why college pricing is such a complex area of analysis. Second, I will discuss why, despite these important concerns, federal price controls like those that have been discussed over the last several months are not the solution to the rising price of college. And third, I will discuss what all of the participants in the financing system—especially the federal government, states, and institutions—can and should do to collectively tackle the college pricing dilemma.

    I would like to begin with a brief introduction to the Institute for Higher Education Policy and our role in the policy process. Established in 1993, the Institute is a non-profit, non-partisan research and policy organization whose mission is to foster access and success in postsecondary education through public policy research and other activities that inform and influence the policymaking process. The Institute’s work addresses an array of issues in higher education, ranging from technology-based learning to quality assurance to minority-serving institutions. However, the Institute is probably best known for its studies and reports concerning higher education financing at all levels. Our studies and reports address topics ranging from federal and state student financial aid to state funding formulas to trends in institutional expenditures and revenues. We even have worked on higher education financing issues in the context of other nations, especially in southern Africa and Eurasia.

     The Institute’s independent voice on these issues is well-known. Our primary funding is derived from major foundations that are interested in supporting independent higher education research and analysis. We also have conducted a fair amount of analytic work at the behest of state governing and coordinating boards for higher education, and national governments outside the U.S. The Institute is involved in very little federally funded research, with one exception. Since 1998 we have served as a subcontractor under the National Center for Education Statistics’ Postsecondary Education Descriptive Analysis Reports series. I mention that in this context because we were the principal author of the 2001 Study of College Costs and Prices: 1988-89 to 1997-98, which was mandated under the 1998 Higher Education Amendments.

     The 2001 Study of College Costs and Prices is but one of a series of federally-supported initiatives over the last decade or more designed to gain a better understanding of the college affordability issue and to inform federal policymaking. As "The College Cost Crisis" report issued by Chairman Boehner and Chairman McKeon points out, a prior study was conducted by the Congressionally authorized National Commission on the Cost of Higher Education, which issued a report in 1998 called "Straight Talk About College Costs and Prices." Earlier in the 1990s, a bipartisan federal commission called the National Commission on Responsibilities for Financing Postsecondary Education, for which I served as Executive Director, issued a widely-circulated report called "Making College Affordable Again." Numerous other, privately conducted studies also have taken place just in the last decade.

     While each of these studies and reports uses various techniques and approaches, they all agree on many key issues. Perhaps the most important is that the concern about rising prices is a legitimate one for students and families, especially those from low income backgrounds. Average four-year public college tuition is increasing much more rapidly as a proportion of income for the poorest quintile of families compared to other income groups. This means that the lowest income students and families are confronted with the greatest "sticker shock" compared to those from other income levels. So I don’t think it is sufficient to explain away these concerns as simple hand-wringing among consumers.

     The factors that contribute to tuition increases are complex and vary by type of institution. The single most important factor associated with changes in tuition at public four-year institutions is reductions in state spending to support institutional operating costs. As my colleagues and I at the Institute pointed out in the 2001 Study of College Costs and Prices, this trend actually emerged as a critical issue earlier in the 1990s, before the double hit of an economic bust and reductions in federal support that have had such a draconian impact on state budgets.

    For private institutions, the equation is more complex. While there is no single overriding factor as strongly related to tuition as state appropriations revenue is in the public sector, there are both internal institutional budget constraints and external market conditions that contribute. The internal factors include higher costs for institutional aid and faculty compensation. The external factors include things such as the availability of institutional aid, the price of attending a public institution in the same state, and per capita income in the state.

    Another important contributor to escalating tuitions is that the market allows it. Public sector tuitions have now increased faster than the rate of inflation for more than 20 years—longer than many traditional-aged college students have been alive—even as enrollments have continued to ratchet upwards. Simply put, the students keep paying, so tuitions keep rising.

    State and institutional planning and budgeting processes don’t help either. While some institutions have evolved, most still build their budgets by using the baseline of the prior year and simply adding to it, all in the name of increasing academic quality, improving student access, and enhancing overall institutional prestige. Few develop academic plans with any serious consideration of the likely sources and amounts of revenue needed to support those plans. State planning for higher education also tends to be limited in scope, usually linked to a state’s annual or biennial budget process.

    In short, while it’s important to tackle these root causes head-on, no one one-size-fits-all solution will work across the nation. This is one reason why I believe that a federal foray into controlling the prices charged by institutions would be unwise and potentially destabilizing. Higher education functions in a very complex and competitive marketplace, one where the price charged for the good being sold can vary from less than $1,000 to more than $30,000 at the undergraduate level. That is an astonishingly diverse pricing system. One important reason for this diversity is that there are many different actors involved in tuition setting, including state governing and coordinating boards, legislatures, independent boards of trustees, and institutional leaders. Each brings a different set of priorities and perspectives to the tuition setting process.

    In my view, federal price controls therefore would represent an enormous federal attempt to control the prices of a competitive market. I am particularly concerned about the proposal to uniformly limited the price of college based on inflation. As you know, inflation as measured by the Consumer Price Index is a reflection of a market basket of goods and services. Some are above the CPI, and some are below. The fact that the average tuition increases are above the CPI doesn’t mean that all institutions are at or above that level—in fact, many are below it. So any attempt to control the price by linking it to the CPI strikes me as a severely anti-competitive move on the part of the federal government.

    Moreover, one potential unintended negative effect of federal price controls linked to inflation is that it could result in a dramatic increase in tuitions at those institutions that are below the average. If the standard is set so that federal law would limit tuition increases to, say, twice the rate of inflation, the effect could be a significant spike in tuitions at many relatively affordable schools.

    Further, the complexity of higher education would require a fairly large and complex bureaucratic machinery to regulate the pricing behavior of institutions. I don’t like the idea of federal bureaucrats overriding the decisionmaking of publicly accountable boards and elected officials, and I don’t think more federal bureaucrats are the solution to keeping college affordable.

   I also would urge you to consider the history of the federal government’s efforts to control prices in other industries. Previous federal efforts at cost containment in other policy areas—where the government has attempted to act on behalf of consumers’ interest in the face of rising prices—have often created more problems than would have necessarily occurred if the market had been left alone. For example, in 1973 the federal government passed the Emergency Petroleum Allocation Act in response to the OPEC oil embargo, which disrupted petroleum supplies and escalated prices. In passing this legislation, the U.S. sought to shield the economy from the effects of the price hikes. Instead, the regulation had an adverse effect. It discouraged domestic oil exploration because of controls placed on domestic oil. As a result, American crude oil production declined, and instead of remaining one of the leading exporters of oil, the U.S. became a leading importer. Regulation caused the undervaluing of American oil, and made it cheaper and more profitable to import crude oil, rather than produce it. Prices remained higher than they would have under normal market conditions.

    Prior to the 1973 regulation of the oil industry, the government was involved in regulating the airline industry. The Civil Aeronautics Board—established in 1938—exercised regulatory control over almost every aspect of the airline industry. In regulating the airline industry, the government restricted fares to first class and coach and all but eliminated price competition which subsequently caused higher airfares than those that would have occurred under free market conditions. The regulated ticket prices were 20 to 95 percent higher than the unregulated prices. With fares on short routes unprofitable and simply too high on long routes, the airlines were unable to attract passengers. Deregulation in 1978 provided airlines with greater flexibility in setting prices and fare classes, which in turn induced more travel and revenues than had been or could be produced if all the customers were charged the same.

    Moving beyond the federal arena, I also do not believe that the solution to dramatic tuition increases in public colleges and universities lies in the recent trend of promoting short-term marketing gimmicks. The decision in Illinois earlier this year that allows public institutions to guarantee a fixed rate of tuition over four years of college is one example of this drive to stand apart. While these unique efforts may create a modest market advantage for an institution or system in the short-term, they will do little to slow the troubling long-term trend of unpredictable swings in college prices.

    So what can be done to address the dilemma of rising prices? Here are some simple yet effective ways for these various system actors to work together to address the rising price of college:

    Invest in need-based financial aid. While I realize that the current budgetary climate is an unfavorable one for new spending, I nevertheless continue to believe that investment in need-based financial aid is the best and most important contribution that the federal government can make to keeping the dream of a college education a reality for all Americans. The declining purchasing power of federal aid continues to be a critical barrier to access to higher education, and must be part of any holistic attempt to tackle the college pricing problem.

    Create incentives for institutional innovation in budgeting, cost containment, and new pricing structures. One important new federal contribution to solving the college pricing dilemma would be to create a modest competitive grant program to support institutional innovation. A FIPSE-type program funded at $20 or $30 million could be targeted on developing, refining, and disseminating new ideas for more effective budgeting and cost control, while continuing to support and enhance institutional quality. In fact, this program might also include an effort to attract corporate and foundation support, extending the partnership to other key players in the system.

    Link institutional strategic and academic planning with financial planning. While many institutions now conduct sophisticated enrollment projections to match overall plans for program development and improvement, few take the next step and link such planning to the likely financial conditions they will face. It may make more sense for a school to develop different revenue scenarios first, and then match those with the different strategic goals for the institution. This would be particularly useful for states to encourage among public institutions.

   Change the way institutional budgets are built. This step requires that institutions or states set parameters for tuition increases first, and then determine other revenue needs. Clearly some flexibility would need to be built in to take into account the fluctuations in state budgets and revenue scenarios, but it still would be easier to handle if the tuition level was set at an earlier point in the process. It also would be useful for institutions to engage in multi-year budgeting so that year-to-year spikes can be softened.

    Make public institution tuition increases predictable, within an appropriate range. The solution proposed at the federal level for price controls might actually make more sense at the state level; that is, linking tuition increases to an indicator of overall state economic capacity, such as per capita incomes or the state’s consumer price index. This may be worth piloting in a few states to see if it is viable, and to gauge the possible unintended effects of such a strategy. However, freezing tuitions for four years or more probably goes too far: it limits the flexibility of the institution or state to make modest adjustments up or down as economic conditions fluctuate.

    Allow greater price differentiation by level of instruction and program of study. In particular, allowing higher tuitions at the graduate level, and in some professional programs, would ensure that subsidies for undergraduate education are protected.

    These are just some beginning points for discussion about how the various actors in the higher education financing system can act to address the rising price of college. I believe that all of these players need to take a different approach to setting tuitions, one that emphasizes predictability for consumers and does not get buffeted by the fierce winds of economic boom and bust. A more strategic and long-term approach to tuition and budgeting policies would go a long way toward improving student access to higher education and fulfilling the American dream of a college education.

   Thank you again for this opportunity to appear before the Subcommittee on this vital issue. I would be pleased to answer any questions you may have.