WHY COLLEGES COST TOO MUCH

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When I graduated from the University of Pennsylvania in 1976, the base tuition was $3,790. I paid the bill with a combination of cash from my parents, wages from my summer job as a park supervisor and from a school job cleaning pig sperm from laboratory beakers, and a bank loan guaranteed by New York State. I still managed to have a pretty good time. In addition to learning to recite Pushkin in Russian, I got to experience such wonders of campus life as seeing a friend jump up on a barroom table and pull her bra out through the sleeve of her blouse. The rapid tuition increases that occurred after my graduation were only vaguely interesting to me, like reading about a bank robbery in a distant town. Now, however, at the age of 43, with three smart daughters and having just begun to save for college, I find myself acutely interested. Make that horrified.

This year Penn, a private institution, is charging students tuition and fees totaling $21,130. Add to that the cost of room and board, books and supplies, health insurance and personal expenses, such as travel between school and home, and the actual total--as Penn recently informed students accepted for early admission--comes to $31,582. This is real money. In 1975 my summer job alone covered a significant chunk of my senior-year costs. The pig sperm was gravy. If my three daughters decide to go to Penn--or Harvard, Princeton, Yale, Swarthmore, Brown, Stanford, M.I.T., Columbia, Dartmouth, Cornell, Chicago or Johns Hopkins--the entire bill for 12 years of school will exceed $350,000. And that's assuming tuition never rises another penny.

But how did tuition get so high? Too often parents learn about tuition through scare stories about how we must begin saving impossible quantities of money before our children are even born, but never do we get a detailed explanation of what drove tuition up in the first place. Inflation can't explain it; over the past 20 years, tuition increased twice as fast as the overall cost of living. Tuition even outpaced a special price index deployed by colleges to help defend themselves against mounting criticism. Nor does anyone ever explain why schools with very different endowments--like Harvard, with more than $9 billion, and Penn, with just over $2 billion--charge roughly the same tuition--or just exactly where this vast torrent of tax-free revenue goes. Should it matter to parents of incoming Penn students that tuition helps cover the annual deficit at its faculty club, which in past years has reached $700,000, and contributes toward the average $121,000 in compensation that Penn pays its professors, including a tuition-reimbursement program that lets professors send their children to Penn or anywhere else at a steep discount equivalent to half of Penn's annual tuition?

On behalf of baby boomers everywhere, many of whom are just now filling out financial-aid forms for children accepted under early admission, I set out to track the tuition dollar by focusing on a single institution. I chose Penn, much to the chagrin of its director of communications, because it had the misfortune of having accepted me, because I wouldn't mind sending my own daughters there and because the forces that drove up Penn's costs are fundamentally the same as those at every other major university. My journey--taken at a time of great tumult in higher education, with many schools at last responding to pressure to slow tuition growth--led me to a discovery: real-cost increases do explain some of the run-up in tuition over the past 20 years.

But there's no good reason for the rest.

Tuition began its climb in the '70s, when universities suddenly found themselves confronting a fiscal landscape more hostile than any they had faced in the previous quarter-century. Although I did not know it at the time, in my freshman year, 1972, Penn was emerging from a fiscal crisis. The stage was set in the '50s, when, awash in the ever rising tsunami of federal spending triggered by Sputnik's assault on the nation's pride, Penn and its peers went on a building-and-hiring binge. A surge of Great Society financial-aid money helped them expand even further. New faculty could be supported with minimal strain because the salaries were largely covered by federal grants. From 1960 to 1970, operating expenditures at Penn quadrupled, a rate of increase 10 times that of inflation. More buildings were constructed, including three high-rise dormitories, and more faculty and administrators were hired. Martin Meyerson, president from 1970 to 1981 and now president emeritus, agrees that his predecessors "probably overextended themselves."

Then, in the mid-'70s, federal funding abruptly slowed and had to be spread among the swollen ranks of professors bearing Ph.D.s earned at Penn and other schools during the boom years. The government, moreover, began distributing its money among a wider range of schools and insisting that institutions pick up more of the costs of research. And inflation began to accelerate. Even before the oil crisis of the late '70s, energy costs began climbing. From 1969 to 1975, Penn's heat and electricity costs rose nearly 300% while its income from investments declined and the growth of funding from the state of Pennsylvania began to slow.

To help make ends meet, Penn threw open its doors to vermin like me, admitting 4,491 students, a thousand more than in 1970. I wasn't aware of this either, but Penn clearly was and no doubt looked upon my class the way a bankrupt duchess might view the tourists using her castle as a bed-and-breakfast. Universities may lack the profit imperative that drives corporations, but they are just as fiercely competitive, always striving to get the best students, the best scholars, the best grants in order to attain the most prestige. Like every other top-tier institution, Penn seeks to attract as large an applicant pool as possible so as to admit as small a percentage of it as possible to fill its available places (a low "admit rate," considered an index of exclusivity). But it hopes most of those admitted will actually enroll (a high "yield," considered a mark of quality). Harvard, the gold standard, last year admitted only 11% of applicants for this year's class; three-quarters of them decided to enroll. Penn's admit rate my freshman year was more than 50%, a figure Penn officials recall with about as much nostalgia as a Vietnam vet recalls the siege of Khe Sanh.

Penn was in a bind. It was running at a deficit, but to avoid losing its place in the Ivies, it had to spend heavily to recruit and keep the best faculty and meet the growing demand by students for more course choices, more diversity, more access to professors and--one of the most salient trends of the post-'60s student body--more amenities, including comfy dorms, indoor tennis courts and pools. Meyerson had been acting chancellor at Berkeley during the height of student unrest. At Penn, he says, "the worst sit-in I experienced was when we tried to shut down the hockey rink."

Competition began driving up faculty salaries. Big-name professors not only drew top students but also improved a university's chances of winning harder-to-get federal research funds. (Competition for faculty can be fierce. Right now three professors at Penn's Wharton School are being aggressively recruited by other schools; one suitor is offering a 100% raise in pay.) To sweeten the pot, universities reduced the amount of time professors were required to spend performing such loathsome tasks as teaching undergraduates, serving as advisers and managing administrative operations. Courses proliferated: the course catalog for my senior year was 271 pages; today it's 375 pages. Yet the number of full-time arts-and-sciences faculty members remained stable. Graduate students and adjunct faculty increasingly shouldered the load, while professional counselors and administrators and their retinues of support staff took over tasks once within a professor's job description. In 1970 the number of full-time university employees was 12,155; by 1993 it had risen to 15,706. Yet the number of undergrads, with the exception of my class and a few others, changed little.

Despite such pressures, Meyerson managed to restrain Penn's tuition increases. By 1980 Penn's base tuition was $5,270, more than double the cost a decade earlier, but inflation had risen at roughly the same rate. So had median family income. If tuition was higher, so was America's ability to pay it.

The age of rational increase, however, had come to a close.

It has been called the "Chivas Regal effect." In the '80s a new ethos evolved among university officials--and parents--that equated price with quality. A collateral force ensured that tuition would not only rise but also rise at the same rate for comparable schools. Colleges in the Ivy League have always kept close watch on one another, setting their tuition to make sure no one school became so much of a bargain that it drew the best students just on the basis of price. Less prestigious schools set their prices in relation to what the Ivies charged. Says Meyerson: "We were building up a kind of notion about colleges and universities that the higher the price, the better they were."

In 1980 inflation and Penn's tuition rose in concert; in 1981 they parted company. From the 1980-81 school year--when Meyerson retired--to the next, Penn's base tuition increased 15%, to $6,900, far more than the 10.3% boost in the cost of living. The following year the disparity became starker. Penn's tuition rose 16%, 2 1/2 times the slowing rate of inflation and more than three times the growth in median family income.

This disparity can be partly explained by the sudden drop in inflation, says Glen Stine, senior Penn budget official from 1982 to 1990, who is currently vice president for finance at the University of Colorado. "Nobody believed inflation would come down as much as it did, so you were always making projections of inflation that were perhaps too high." But from 1982 to 1989--long enough, presumably, for Penn's analysts to adjust to the new inflationary landscape--Penn's tuition hikes consistently outstripped inflation, rising annually from two to four times as fast.

The underlying premise of the Chivas Regal effect proved to be correct. "The theory of it was, basically, we will raise the tuition as much as the market will bear," says William Massy, a former Stanford University finance officer, now a consultant on the subject. And parents bore it. Throughout the '80s, says Meyerson, parents came increasingly to feel that a college education was a necessity, a direct conduit to a high-paying job. Easy financial credit, moreover, made it possible for parents to borrow large sums of money; doing so for college became more socially acceptable. From 1983 through 1988, the number of applications to Penn rose 25%, despite the cost. "It was a crescendo," Meyerson says. "People were willing to spend an awful lot more for collegiate education."

Penn, of course, was not alone in raising tuition. Despite having markedly different underlying cost structures, the top schools increased their tuition at nearly identical rates, behavior that persists today. From 1990 to 1994, Harvard and Princeton did a tuition tango that raised tuitions at virtually the same rate each year and consistently resulted in base prices within $10 to $195 of each other. Penn and Columbia did likewise, ending each year in an even steamier embrace--within $36 to $110 of each other--even though the costs of doing business in Manhattan are far higher.

Conspiracy may have played a role. For years a group of America's most influential schools traded data on tuition policies. Penn, Harvard, M.I.T., Princeton, Brown, Columbia, Cornell, Dartmouth and Yale shared information about future tuition rates and fees, agreed never to grant aid solely on the basis of a student's academic merit, and met to negotiate how much need-based financial aid should be offered to individual students accepted by two or more of the member institutions. Ostensibly the goal of this "Overlap Group," dismantled in 1991 after a two-year federal antitrust investigation, was to equalize the amount of money a given student's family would be required to contribute and thus keep price from clouding the student's decision. In practice, by liberating schools from price competition, the arrangement may have allowed them to boost tuitions to artificially high levels and, thanks to imitation by others, drive up tuition throughout the country.

Surprisingly little of what went on during meetings of the Overlap Group ever made it into the press, but documents generated by the federal investigation challenge the popular view of academe as a bastion of high-minded collegiality. At regular intervals, financial-aid officers met to compare the aid packages each planned to offer individual students. When variances arose, the group agreed to split the difference. In one case, M.I.T.'s assistant aid director found himself compelled to increase a family's contribution more than 30%. Next to the student's name, he wrote, "Don't like it, but..." then went ahead and raised it. The cost to a school of defying the group was simply too high. A Dartmouth official fretted, "We would effectively be out of the Ivy League, and this would have a serious impact on our applicant pool."

Things got downright bitchy when Princeton, in October 1986, launched its Scholars Program, which awarded $1,000 "research" scholarships to top students regardless of need. According to the minutes of a January 1987 Overlap meeting, "everyone agreed that this program has caused much unhappiness at all levels of the administration at other schools." Princeton denied that the program was an end run around the Overlap pact. A Dartmouth official called the denial an act of "sophistry." Yale's president, Benno Schmidt, wrote, "This looks like a blatant merit scholarship to me," prompting Princeton's president, William Bowen, to sniff during a deposition, "I would really not have thought a person as well trained in the law as Mr. Schmidt would make such a blatantly foolish assertion."

The Overlap arrangement, says Keith Leffler, a University of Washington antitrust economist who testified for the government, allowed member schools to raise their gross tuition (now often called the "sticker price") to very high levels without scaring off talented low-income students. The wealthiest students would come no matter what, and might even be attracted by the high prices. Says Leffler: "There's no doubt [Overlap] artificially inflated tuition prices."

In the end, a combination of forces--inflation, hubris, competition, the Chivas Regal effect, perhaps even conspiracy--drove up Penn's tuition. In comparable dollars, says former president Meyerson, a year at Penn today costs about twice what it did in 1970. Yet from 1970 through 1994, government figures show, median family income in constant dollars increased only 10%. In more recent years it has actually fallen below the 1986 figure. Taken together, these trends make tuition a very painful prospect for any parent whose kid has just been accepted by Penn or, for that matter, Harvard, Yale or Princeton.

Should parents be outraged?

"No," Meyerson says. The education offered by the top schools, he argues, is much better, with more courses, bigger libraries, more sophisticated research laboratories. As a nation, he says, "we have the best educational pattern in the world...But having said that, there's no reason why we cannot have a better ratio of benefits to costs."

Which still leaves the question, Where does all that money go?

The single most coveted stream of money at Penn is tuition because unlike federal grants, it is entirely "fungible"--it can be spent anywhere within the university on anything. It gets mixed with other fungible streams, like investment income, to the point where trying to follow the tuition trail becomes about as easy as tracking a particular cup of water through a faucet. It is almost impossible to say exactly what tuition pays for and what it doesn't, other than to say that it constitutes the major portion of the university's general fund and that anything paid for from the general fund is thus paid for in part by tuition.

Like any other university its size, Penn is a dauntingly complex entity. It had more than $1 billion in revenue last year, even without including income from its vast hospital complex. Its two biggest sources of revenue were research grants--$300 million, mostly from the Federal Government--and tuition and fees, which totaled $320.1 million after payouts for financial aid. In turn, Penn educates 18,000 full-time students (9,571 of them undergraduates) and supports about 15,821 employees plus a temporary work force of 7,146.

Measuring Penn's overall health turns out to be a tricky matter. The numbers it reports to the IRS are very different from those it discloses in its annual reports to the university community. Its latest federal tax return shows Penn finishing fiscal 1995, which ended last June 30, with an apparent surplus of revenue over expenses totaling $182.8 million, which is more than its undergraduates paid in tuition. But its annual report for the same period, compiled under a different set of accounting rules, shows a surplus of $63.4 million--which then, through the miracle of university accounting, disappears to yield a kind of deficit.

A big chunk of this surplus goes back out the door as "mandatory transfers," such as payments on university debt. The rest of the money disappears through a mysterious category called simply "other transfers"--money that is moved around at the discretion of the trustees. Some gets plowed back into the university's burgeoning endowment, some pays for services provided by one portion of the university to another, and some is transferred into surplus accounts for use by those departments lucky enough to have spent less than they were budgeted for.

In the past, such maneuvers have allowed universities to conjure up an image of poverty, useful when trying to raise money or justify an increase in tuition. But this year, for the first time, a change in accounting rules will require universities to present a more realistic picture of their financial health. By requiring more rational disclosure of the origins and destinations of money, the new rules will probably make universities look a lot healthier than the common wisdom might have presumed, says Morton Schapiro, dean of arts and sciences at the University of Southern California and an expert on academic finance. "It's going to be harder for presidents to write those letters about why they had to raise tuition."

In particular, the change will clarify the long-mysterious relationship between a university's endowment and its operating budget. An endowment functions like a charitable foundation but with a single recipient, the university. Each year universities transfer to their operating budgets a percentage of the total value of their endowment. They set a "spending rule," which typically requires that they transfer 5% of the total value of the endowment. In practice, says Schapiro, schools often don't contribute even that much. "Everybody says it's a 5% rule, but that's bulls___."

Penn's endowment rose 25.9% last year, to more than $2.1 billion, much of the increase coming from market appreciation. The university's spending rule calls for it to spend 5%--but not of that full amount. Rather, Penn limits itself to spending 5% of an average of the total endowments reported for the latest three years. For this school year, that moving average is $1.5 billion. But Penn gets even stingier. This year it projects that it will spend only 3.7% of this average, or $58.3 million, on university programs. Which works out to 2.8% of the current total of $2.1 billion.

Everybody does it. "We can be out in a boom market making money hand over fist, and very little of it will show up in the operating budget," says Gordon Winston, co-director of the Williams College Project on the Economics of Higher Education. Yale, says Gordon Lafer, research director of the Federation of University Employees, Locals 34 and 35, "could afford to have nobody pay tuition, and still the endowment would increase."

In fact, Penn is set to have its trustees consider increasing its spending-rule percentage, says Judith Rodin, president since July 1994--but to pay for major capital projects, not to limit tuition.

Despite the new accounting rules, tuition will remain the packhorse of academic finance. Parents may think their checks to Penn pay for a specific basket of services, such as the few hours a professor actually spends in class. In fact, tuition money flies rather far afield. Much of it supports legions of administrators, secretaries, groundkeepers, maintenance crews and campus cops--security being an especially crucial and large expense at Penn, which is located on the tough west bank of the Schuylkill River.

Just how far afield the money goes is made starkly clear in Penn's latest indirect-cost proposal to the Department of Health and Human Services, which the government uses to determine how much money Penn can recoup from each federal grant to cover the overall cost of operating the university and which TIME acquired under the Freedom of Information Act. In a stack of paper as thick as a large-type Bible, Penn laid itself bare, disclosing everything from the $208,795 allocated to cover the cost of operating the university president's $1.4 million, 5,500-sq.-ft. house to the volume of water and sewage that flows through College Hall, university headquarters.

Penn's electric bill alone came to $21.2 million, equivalent to 1,004 tuitions. The school spent $329,419 on admissions catalogs and bulletins, $700,142 on its alumni magazine, $66,873 on voice mail. It paid $6,275,904 for fire insurance and $726,943 to escort students home at night. Its chemistry department spent $38,716 on entertainment, its physicists only $7,049.

Folklore spent $354.

Even processing and acknowledging gifts from alumni cost money: $267,604.

One of the biggest expense categories at any major university is faculty salaries. Gone are the days of shabby gentility. On average, a full professor at Penn (excluding the faculty of its self-supporting medical operations) received total compensation last year of $121,000, about the same as at Princeton, Columbia and Yale; Harvard paid $131,000. From 1980-81 through 1995-96, Penn's compensation package increased in value more than 200%, twice the rate of inflation.

Families of Penn applicants who make that kind of money won't get financial aid, but Penn generously reimburses its faculty members for their children's college tuition. This benefit alone cost Penn $11 million in fiscal 1994, according to its HHS application--equivalent to 617 tuitions at that year's rates. A General Accounting Office audit found that four major universities

Because of competition, however, tuition reimbursement has become as much a necessity as tenure and summers off. Such programs will become costlier now that the Federal Government has decided to stop picking up the tab for the portion once classified as indirect costs. The money will have to come from somewhere--namely Penn's various sources of general revenue, including tuition.

The fastest-growing expense at Penn and nearly every other university is financial aid. Although the percentage of Penn students receiving aid has remained stable at about 45%, the amount of money each one gets has soared; the average grant totals $13,485.

All in all, well-heeled parents who pay the full freight at Penn help support not only other, needier students but also the tuition reimbursements of very comfortable professors. They pay again through federal taxes to help cover the costs of federal financial-aid programs. And if they live in Pennsylvania, they pay yet again, through taxes that not only produce the $36 million state appropriation that went directly to Penn last year but that also subsidize the state's public colleges and universities.

But there is hope for us baby-boom parents. Schools nationwide have abandoned the Chivas Regal ethos of the 1980s as they cope with sharp increases in demand for financial aid and the first signs that some high-caliber students are choosing to attend flagship public universities rather than go into eternal debt.

Penn too has begun drawing in its belt. Rodin says she hopes to cut as much as $50 million from the school's administrative budget during the next few years. She stresses that Penn has frozen its room-and- board charges for the past two years, taking advantage of new efficiencies in residential and food-service operations. But the costs of providing a premium education--everything from complying with new federal regulations to keeping up with changes in automation--have skyrocketed, she says. Even the expense of data has risen sharply. An online index of physics abstracts, for example, costs Penn $50,400 a year; when the index was just a series of books, it cost $7,748. "None of us anticipated it," says Rodin. "When it's electronic, we're charged for every hit."

Tenure remains sacred; so does tuition reimbursement. But John Fry, executive vice president for finance, questions whether Penn's reimbursement program should cover graduate as well as undergraduate studies, a generous benefit not often provided at other institutions. "We want to be market competitive," he says, "but at the same time, we shouldn't be excessive."

Can Penn ever cut its tuition? Probably, and without the loss of a single program. In October the board of Penn's medical school debated eliminating tuition entirely. To ease the cost to undergraduates, Penn could resolve to spend annually a full 5% of its endowment or boost the amount to, say, 6%, a level some universities consider normal. With its $2 billion endowment, Penn, if it increased its spending just 2 percentage points, could generate an extra $40 million, enough to reduce the tuition of each undergraduate by $4,000. Harvard, with its $9 billion endowment, is in an even more advantageous position. A 1-percentage-point increase in endowment spending would yield an extra $90 million, enough to cut its base undergraduate tuition nearly in half.

A far trickier question--one that shows the Chivas Regal effect hasn't quite burned off--to pose to a university executive is, If you could cut tuition without sacrificing anything, would you?

"Absolutely," Rodin says. But Fry is a bit more hesitant. "Put it this way," he says. "I'd want to test this thoroughly through research." His gut instinct, he says, would be to give it a go; there might even be a market advantage in being the first to break ranks. "But I know the sort of instinctive response is, Hey, we won't look as good as Harvard. It is a tricky thing. You don't want to get into a situation where doing the right thing ends up boomeranging and hurting you." Lee Stetson, Penn's admissions dean, frets that a cut in tuition might indeed produce an impression of reduced quality. Parents perceive that "quality is expensive," he says. "They don't vote based on cost. They join knowing it's very expensive."

Here's a paradox: despite the rising outcry about tuition and the fact that Penn's tuition and associated costs just broke the $30,000 barrier, Penn this year received nearly 16,000 applications, 3,000 more than its previous best year and nearly twice the number when I applied--meaning it is now twice as selective. Which makes Penn very, very happy. Last year, says Stetson, with thinly disguised glee, "we turned away 11,000 plus."

The main engine driving this demand is fear--fear of a capricious new economy; fear of the new disposability of workers; fear of being disadvantaged in the hunt for a job. Parents, says Robert Zemsky, director of Penn's Institute for Research on Higher Education, see the tuition they pay as buying not so much an education as a "medallion" with the power to open doors. "And it's probably worth every penny," he says. Indeed, three Penn economists tried to quantify the edge conferred by top-tier universities, including their own. They calculated that a student who graduates from Penn will earn 56.6% more than if he graduates just from high school. If he graduates from a flagship public university, he will earn only 31.7% more. Their complex statistical analysis yielded a surprising discovery: how well a student does after graduation depends partly on how much money his professors made. The higher the salaries, they concluded without so much as a wink, the better.

As to the fate of parents like me, the paper was silent.

For more information on college costs, see our Web report at time.com/tuition