Student loan forgiveness won’t rein in tuition costs

The Biden administration has been teasing a plan to forgive $10,000 of student loan debt per borrower, with an official announcement expected later this summer. The plan could offer a small measure of relief to the one in five Americans (and one in three of those aged 25-34) who owe the federal government a combined $1.7 trillion in student loan debt.

Most Democrats favor some kind of forgiveness to help indebted students — particularly those from underprivileged backgrounds. Republicans are generally opposed, arguing that debt forgiveness would be “an affront to the millions of people and borrowers who worked hard to pay off their loans,” as Rep. Ted Budd (R-N.C.) recently told the Wall Street Journal.

Both sides make valid points. But neither side is addressing the underlying problem: the skyrocketing cost of higher education. Since 1978, college tuition has increased by 1,375 percent, more than four times the rate of inflation. By focusing on debt forgiveness rather than what caused the debt, we’re treating the symptom rather the disease.

Here’s the thing: We’ve known the cause of this disease – and how to cure it – for more than half a century, ever since the economist William Baumol identified it in a famous 1967 article in American Economics Review. Economists today call it “Baumol’s cost disease.”

Baumol observed that when productivity rises in most of the labor market, you get a problem in the industries in which it doesn’t. It’s a supply-and-demand issue: In sectors where productivity increases, one hour of a person’s labor goes farther, so labor becomes less scarce and prices fall. But as that happens, prices rise in the sectors where productivity doesn’t increase.

The application of this theory to college tuition is clear. College professors today are about as productive as they were in the 1800s. It still takes them an hour to deliver an hour-long lecture, and they still can deliver that lecture to, at most, only a few hundred students. Because their productivity hasn’t changed, even as the productivity of workers in other sectors has, the relative cost of their labor has gone up.

This reality led Baumol himself to predict that “rising educational costs are no temporary phenomenon.” Rather, “as productivity in the remainder of the economy continues to increase, costs of running the educational organizations will mount correspondingly, so that whatever the magnitude of the funds they need today, we can be reasonably certain that they will require more tomorrow, and even more on the day after that.”

But Baumol’s cost disease also points the way to a cure: Increased labor productivity among faculty. How might that apply to universities?

Economists define productivity as output divided by input. So, if universities want to increase their productivity, they need to increase their output (educated students) relative to their input (faculty time). Half a century ago, when Baumol wrote his article, college teaching had bumped up against its natural productivity limit. But that was before personal computers, the internet, big data, artificial intelligence (AI) and the remarkable suite of new technologies and services made possible by the digital revolution.

Over the past quarter-century, these digital technologies have revolutionized nearly every aspect of how we live, work, communicate, collaborate, shop and entertain ourselves — and boosted productivity in the process. Yet higher education has largely been immune to such changes.

Even though my colleagues and I study these transformations in other industries, many of us are unwilling to embrace them in our own industry. New technologies increase productivity by requiring less faculty time (the input) per educated student (the output). This puts faculty jobs at risk, while those of us with job security have little incentive to change how we do things. “A professor must have an incentive to adopt new technology,” a fellow academic recently told me. “I’m a tenured old-fart and can simply wait out this shock until retirement. Innovation adoption will occur one funeral at a time.”

Another common argument I hear in the academy is that our work is just special. To talk about higher education in economic terms is somehow demeaning. One academic recently told me, “Universities are not subject to the same market forces as profit-seeking businesses since shares are not priced and traded on public exchanges.” Another opined that universities aren’t businesses at all “because they have public missions and must interact with the political system.”

That might sound reasonable in the faculty lounge, but it ignores a broader truth: Like it or not, there are ways in which higher education is a business. Students pay colleges and universities to provide them a service, and students have the freedom to stop paying and go elsewhere if they find better alternatives. For a long time, universities were the only game in town. But new alternatives like Outlier, LinkedIn and Coursera have emerged as ways for students to gain knowledge, grow their professional networks and signal their skills to future employers.

It’s easy for faculty to feel threatened by these new options or to suggest that they’re somehow ill-suited to provide “real” education. But we need to accept the enormous value digital transformation can create. Digital technologies can revolutionize how we deliver higher education in ways that boost faculty labor productivity and halt runaway tuition costs.

Even if taxpayers were to forgive every cent of the student-loan debt Americans carry today, that won’t stop tuition costs from rising in the future if higher education continues to resist technological transformation. Absent fundamental change, future generations of college students will accumulate ever larger debt, putting borrowers – and taxpayers – in an even more untenable financial position than we’re in today.

As taxpayers contemplate a $1.7 trillion bailout of the university system, maybe it’s time for universities to fully embrace their public mission and recognize the promise of productivity-enhancing digital technologies to deliver educational material customized to the needs of our students at a fraction of the cost of today’s university degrees. 

Michael D. Smith is a professor of information technology and marketing at Carnegie Mellon University.