Decoding the Rising Costs of College Tuition

The escalating cost of college tuition has become a significant concern for students and families alike. Many remember a time when summer jobs or part-time work could cover college expenses. However, over the past few decades, tuition at public universities has nearly quadrupled, reaching over $9,750 per year. Private four-year institutions have experienced an even more dramatic increase, with tuition and fees hitting $41,540 per year. These rising costs have led to increased scrutiny and a search for the underlying causes.

The Blame Game: Unraveling the Factors Behind Tuition Hikes

While it's tempting to point fingers at overpaid professors or unnecessary expenses, the reality is far more complex. Several factors contribute to the rising cost of college, and understanding these factors is crucial for finding effective solutions.

The Shrinking State Support

One narrative often cited by college administrators is the decline in state and federal funding for higher education. Over the past few decades, state support has diminished, forcing institutions to rely more heavily on tuition revenue. The idea that state support is down, and students are covering the difference, is a story that’s pounded into everyone’s heads all the time in the higher education arena.

The Federal Aid Factor: A Double-Edged Sword

Federal student aid accounts for most of the college tuition increases between 1987 and 2010, according to the National Bureau of Economic Research. The more money students can borrow, the more colleges are able to charge, playing off the government’s ability to offer student loans to anyone who qualifies. Over the last few decades, the amount of aid available to students has increased dramatically with subsidized loans expanded greatly, and unsubsidized loans also came into existence. Colleges increased tuition even more because they knew federal financial aid could cover the difference, leaving college students and their families at the mercy of the federal government and colleges everywhere.

However, some critics deny this train of thought. David Feldman, an economics professor at the College of William & Mary, says that increasing federal aid will rarely change how high a college sets its tuition. Especially at private colleges, federal aid may replace existing scholarships. At public universities, increases in Pell Grants typically lower net tuition. As states increased their funding, the net price dropped, and it was a statistically significant drop.

The "Shaping" of Student Bodies: A Pricing Strategy

Adam Davidson in New York Times Magazine said the single most important factor behind the rise in tuition is that high tuition allows colleges to “shape” their student bodies. A school that charges a high amount is able to offer a huge range of inducements to different sorts of students. Some could pay a lower amount, others more. Only a handful can pay the full price. A college is able to then recruit a diverse set of students with competitive test scores and accomplishments. This, of course, explains primarily the reason for tuition increases at private universities and colleges that don’t get any state funding.

The Baumol’s Cost Disease and Faculty Salaries

The idea that faculty salaries increase tuition is a popular one, and the reason is something called Baumol’s cost disease. In the 1960s, economist William Baumol said that specific sectors become more productive over time, which allows them to cut labor costs and lower prices. But according to researchers, Baumol’s hypothesis doesn’t hold up. In Gray Gordon’s model, costs were up, but instead of raising college tuition, the response to the higher costs was to increase enrollment. The cost is not a per-student cost, it has not become more costly to educate an additional student. It’s hard not to blame rising costs on faculty salaries. That may be the case with some colleges, but it’s more often the exception rather than the rule. In fact, colleges rely more and more on part-time faculty members - not tenured faculty positions - who frequently work for low pay and no benefits.

Administrative Bloat and the Amenities Race

The growth in spending on non-academic services and administrators at universities and colleges is another major factor driving up the cost of college. The number of full-time administrators per 100 students at America’s leading universities grew significantly, while the number of employees engaged in teaching, research or service only grew modestly. Many institutions need to increase tuition to continue operating as they have been. Colleges have been investing heavily in new buildings and amenities as part of an "arms race" to attract students. Schools are competing to offer luxury dorms, recreation centers, dining halls, and other expensive facilities. Ultimately students end up paying higher tuition to fund these lavish facilities. This amenities race drives up the cost to attend these schools.

Tuition Inflation vs. General Inflation

College tuition, which measures how much college costs increase each year compared to previous years, has been climbing faster than regular inflation for decades. Unlike general inflation that affects all goods and services, tuition inflation has consistently outpaced it, and it’s easy to see costs have ballooned when you look at the big picture. While the current general inflation rate has been fluctuating, college tuition inflation averages significantly higher annually.

The Invisible Menu and Oligopolistic Competition

Colleges don’t display clear pricing upfront, unlike restaurants or stores. Elite colleges face limited competition because they offer prestige that can’t be easily replicated. For the majority of college students finding a college constrains them to their local geographic area. The invisible menu and oligopolistic competition also contribute to high prices.

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How Families are Covering the Costs

Families can pay the higher net price in a few ways: Parents can use their current income and savings; parents and students can borrow; and students may use earnings from employment while in school or during the summer to help pay for college. Lower-income families typically do not have the ability to contribute more from their income or savings to pay for college. Parents in these families would likely be reluctant to take on additional debt and may have difficulty obtaining it anyway. Higher-income families may have a greater capacity to help pay the higher bills from income or savings, and the parents have more access to loans.

Potential Solutions: Addressing the Crisis

Addressing the rising cost of college tuition requires a multi-faceted approach involving institutions, policymakers, and families. Here are some potential solutions:

Transparency

Better data on financial aid and net prices should be made available and accessible, along with data on typical earnings after graduation. This will help inform students whether a particular college degree is worth the cost.

Competition

Opening the higher-education marketplace to competition by removing accreditors from their role as gatekeepers of federal financial aid, and instead allocating funds based on student outcomes. Not only will this encourage new entrants, but it will force existing universities to search for cost efficiencies and lower their prices to compete.

Cost Containment

Institutions must find ways to control costs, such as reducing administrative bloat, limiting spending on non-essential amenities, and exploring more efficient teaching models.

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Alternative Educational Models

Offering more online courses is a good place to start in reducing tuition costs. The cost-savings is even easier to capture in the post-pandemic landscape. Many universities and colleges have rapidly introduced technology to support increases in distance learning due to emergency regulations that were put in place due to COVID-19. Plus, this approach also frees up expensive real estate on campus while significantly increasing the size of the student population. With tens of thousands of additional students, tuition costs can be lowered. Bring costs in line with revenue. For example, if a school costs a high amount to attend for a four-year degree, you can reduce that cost by reducing tuition per year and making the appropriate cuts to ensure that it doesn’t lead to bankruptcy; or provide a mechanism so that students only pay full tuition for three out of those four years.

Two-Step College Option

Many students are now starting off at an affordable two-year college, either getting an associate’s degree and then transferring to a four-year university to earn their bachelor’s degrees or transferring the credits without getting associate’s college degrees. This is known as the two-step college option, and it has been shown to drastically cut your higher education expenses. Community colleges cost a fraction of what it costs to attend a four-year college.

Increased Financial Aid and Scholarship Opportunities

Expanding need-based federal college grants and adjusting lending rules can help make college more accessible for low- and middle-income students. If you want to learn more about how your child can avoid student loan debt by winning scholarships, including how to find legitimate scholarships, attend our free webinar.

Political Action

Parents and students need to make some real noise to get politicians to notice this horrible crisis and finally do something about it.

Choosing a Degree with a Positive ROI

If you are looking to use postsecondary education solely as a way to step into a career, make sure the degree you want to earn will actually pay off.

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