Learning Some Lessons in Economics From the Horror of Penn State University and the Allegations of Misconduct and Crimes

The Future of Higher Education – Get Ready for Big Cost Increases

The Sports Section of the Wall Street Journal (what, you didn’t know the WSJ had a sports section – this is a Rupert Murdoch owned entertainment journal, what did you expect?) has a report on the aftermath of the accusation of sexual assault on children by a former PSU assistant football coach (and are the PSU people glad to see that word “former” in front of “football coach”

Much of the story centers around how the alleged crimes have affected applications for admissions to the University.

So far, nonresident students represent only 24% of Penn State's total paid acceptances for next fall's freshman class. That's down from 36% at this point last year. The 24% for out-of-state students "is not the final count," said Lisa Powers, a PSU spokeswoman.

and that’s important news, because despite the fact that Penn State University is a Pennsylvania state college, it really doesn’t get much support from the state.

Because Penn State receives barely 6% of its revenues from the state legislature—one of the lowest marks for a public college in the country—the out-of-state students who fork over $28,000 in tuition and fees annually (compared with about $16,000 for Pennsylvania residents) are more crucial than ever. 

This is the first lesson here in economics, namely that Penn State, a Pennsylvania taxpayer supported University  must rely heavily on out of state students to survive financially.

Of the freshman class that started last fall, 40% were from elsewhere. That's among the higher rates for public colleges in the nation.

The second lesson is a much more serious one, and one only partly related to the Penn State story.

A majority of states, meanwhile, including Pennsylvania, are facing a shrinking number of home-grown high-school graduates to choose from. Nationally, the number of high-school graduates will decline 3.7% in the five years ending in academic-year 2014, according to a 2010 research paper from Noel Levitz. During that time, Pennsylvania will suffer a 9% decline.

The economics lesson here involves the distinction between fixed and variable costs, a lesson that almost all politicians ignore.  That lesson is this.  In education the large majority of costs are fixed costs, and within narrow ranges these costs do not decrease when enrollment decreases.  This means a smaller number of students have to pay more per capita just to keep the funding level constant.

So college costs will not only keep rising because of the inefficiency of America’s system of higher education, they will keep rising because of lower government support and they will keep rising because a smaller level of out a state students will be available to fund public college and they will keep rising because the number of students attending colleges and universities will drop, partly due to declining high school graduation numbers and partly due to less financial aid.

So how is all of this going to make college more available and more affordable to those students who do not have Mitt Romney like wealth?  That’s the third lesson economics, one everyone is still working on.