Causes of Increased College Tuition in America

Introduction

College tuition has been increasing at a rate surpassing what people believe to be sustainable. That has led to overwhelming student debt in America, reaching so high that some call it a ‘Student Loan Crisis’. Many people blame greed on the part of colleges and student loan providers for the high prices. However, it also has a lot to do with the simple laws of supply and demand as they relate to the supply of and demand for a college education, increased money to pay for school, and competition for students between colleges.

One of the largest problems American students are facing today is the ever-increasing cost of attending college. The issue of student loans and repayment of those loans is a very polarizing political issue in the United States today, as the total student loan debt pushes ever higher, reaching $1.56 trillion as of February 2019. There are over 44.7 million borrowers today, who each owe amounts ranging from $1 to well over $200,000.

People push for various solutions, ranging from keeping things the way they are to having college tuition completely covered by the government. With tuition increasing year after year, often at a pace surpassing inflation or the consumer price index, many people are left wondering how to possibly pay for college, needing to turn either to ever larger, unescapable student loans, or being unable to attend college. Neither of those options is preferable, with large debt delaying the time that people can afford to make large purchases, such as homes, or invest and save money for retirement, and not having a college degree leading to many people never being able to capitalize on how much they would have been able to make in their lifetimes.

The question arises, then, what made college so expensive? With so many programs around today to help people afford college, such as federal grants or work-study, scholarships, state need based grants, and more, why are people increasingly unable to afford college? This isn’t a one cause issue, as there are many things that have helped lead to the snowball of debt people have to put themselves into to afford college. Some may say that it’s the fault of colleges for being greedy, even if they aren’t a for profit college.

Others say that it’s the fault of borrowers for taking out more loans than they could handle and perhaps not working enough during college to avoid that mistake. Instead of pointing fingers, it’s better to find the degrees of truth within people’s claims. College tuition has increased dramatically due to increased demand, the rise in lenders, and college competition for prospective students.

Increased Demand

Two basic concepts of microeconomics are that of the laws of supply and demand. Simply put, the law of supply states that as price goes up, suppliers will offer more of a product. That is a positive correlation. On the other hand, the law of demand states that as price goes up, consumers will consume less of a product, which is a negative correlation. Typically, a rise in both demand and supply will increase the quantity of a good supplied, while the price remains somewhat stable, and at times indeterminate. There isn’t an unending supply of spots however, so more room must be made, or more colleges built. This requires more highly educated professors, a small group of people who can demand higher wages.

William Baumol and William Bowen, in their 1966 book Performance Arts: An Economic Dilemma, wrote about a process known as “cost disease”. The basic premise is that service prices rise rapidly because they are following the trend of service industry costs rising faster than the cost of producing most goods. College professors, being unable to produce at a higher capacity, cause cost to go up over time. As there is a higher demand for college professors, they are able to charge more for their services. In addition, because of their limited production capacity, colleges must hire more teaching assistants to assist professors. While a cheaper option than hiring more professors on an individual basis, cumulatively they work to drive up the cost paid in salaries to a college’s workers.

Students want a quality education, and so to attract high quality professors, colleges often have to have high salaries offered for those professors. In Tuition Rising, Ronald G. Ehrenberg writes about how “central administrators want their [professors] to be paid generously” in order to both “attract and retain high quality faculty”. However, “in the absence of a willingness to cut the number of faculty and staff at an institution, there is an inevitable tradeoff between the administrators’ efforts to moderate the rate of tuition increases... and to provide generous salary increases for the faculty”. The increase in demand leads to a necessity of more professors, which can saturate the market, so to appease staff, salaries are bumped up, which in turn bumps up tuition.

A college education wasn’t always within reach for many people. In The Student Loan Mess, Joel Best and Eric Best explain how schooling, even primary and secondary education, was seen as “a private, individualistic affair; if you wanted your child taught, you paid... all the way through college”.

However, a more knowledgeable population is more beneficial for society. “More education reduces all sorts of social problems: educated people live longer, are healthier, have more stable families, are less likely to get into trouble with the law... more education benefits individuals at the same time that it benefits the community”. And so, as time passed, state and federal governments began building public schools, and required schooling up to a certain point, at first only to eighth grade, and by today until the age of sixteen or seventeen in most states.

Many people were being educated to a certain level that got higher as time progressed, but college remained elusive to those not rich enough to afford it or the private tutors needed to attain the grades for entry. That was set to change however, and the event that contributed the most to the rise in college enrollment was the passage of the Servicemen’s Readjustment Act of 1944, more commonly known at the GI Bill, by President Franklin D. Roosevelt. Benefits for veterans wasn’t a new idea.

In The GI Bill, Glenn C. Altschuler and Stuart M. Blumin write about what veteran’s received in the past. “Veteran’s benefits laws stretched back at least as far as the measure adopted by the settlers of Plymouth... to maintain for life any soldier maimed in the colony’s service. Virtually every military conflict... has produced at least one veteran’s benefits law”. The difference is that those benefits almost always took the form of pensions. They were also only paid out to soldiers who were disabled during their service, or to the families of soldiers who died.

The GI Bill allowed all veterans access to benefits once they left service, from healthcare to affordable housing to access to a college education through subsidies. 120 Years of American Education, a study conducted by the National Center for Education Statistics, shows the monumental leap in bachelor’s degrees conferred by higher education institutions. There is a small rise in the 1920s, as “young people complete high school and consequently become eligible for college admission”, but the true rise comes right as the GI Bill is passed.

Between the 1945-46 and 1947-48 school years, the number of bachelor’s degrees handed out doubled, from 136,174 to 271,186, and it continued to rise quickly. Occasionally, it would slow during wars, but it would always come back, and stronger than it had left. America now had more access to college than ever before, and the college fever wasn’t going to die down any time soon.

The Rise of Lenders

Many students resort to taking out loans to pay for their schooling, as the cost is often too high to pay out of pocket. Loan borrowers have undoubtedly heard of Sallie Mae, one of the largest student loan providers in the country. It was started as a government-sponsored enterprise back in 1972. Their purpose was to provide students with loans since “students rarely have an established credit record or sizeable assets”, making them unattractive to commercial lenders. A market had opened, with millions of people looking for money, and Sallie Mae swooped in to fill that gap.

Early on, Sallie Mae had access to low interest rates from the Federal Financing Bank until 1984, and when that dried up, they replaced that advantage with the Treasury Department allowing Sallie Mae access to variable interest rates for terms up to 15 years. These advantages, among others, helped Sallie Mae’s capital to rise rapidly, from $300 million in assets in 1975 to $39 billion by 1990, a monumental rise of 13,000%, while the S&P 500 and United States GDP rose only approximately 470% and 341% over that same period respectively. Eventually, Sallie Mae transitioned over to a private entity, and took along with it the massive amount of cash and name recognition that it had acquired over the years.

A problem that lenders faced early on was the risk of borrowers declaring bankruptcy to clear the debt they had accrued. In Student Loans in Bankruptcy, Duke Chen writes “the reason most often cited for making student loans non-dischargeable is to prevent fraud. The legislative history of the 1978 Bankruptcy Reform Act contains warnings that making student loan dischargeable would be ‘almost specifically designed to encourage fraud.’” To ease lenders’ fears of non-repayment, “In 1976, Congress amended the Higher Education Act of 1965 by forbidding borrowers to discharge students loans through bankruptcy during the first five years of their repayment periods; in 1990, the ban was extended to seven years”.

However, as credit card debt rose, bankruptcies continued, and so Congress passed the Higher Education Amendments of 1998, which “made [governmental] student loan debt non-dischargeable through bankruptcy unless the debtor could clear the relatively high bar of demonstrating undue hardship”. Chen writes that “in 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) which amended the Higher Education Act of 1965 to make private educational loans non-dischargeable, when in the past it had only applied to governmental loans.” With the passage of that amendment, borrowers now no longer had their loans treated as unsecured loans, but as secured obligation, such as alimony, child support, and criminal fines.

More Fun, More Funds

As more and more people are vying to go to college and have access to the money to go to those colleges, colleges are now having to compete to get those prospective students. While there is still an admissions process, and not every student can get into the college that they want, students have more options now. As a result, colleges must now do whatever they can to look more attractive.

In American Higher Education in Crisis, Goldie Blumenstyk briefly discusses the beginning of the U.S. News and World Report’s college ranking publication, starting in 1985. “As critics of U.S. News have noted, its ranking are heavily driven by factors that are tied directly to how much colleges spend. For example, by spending more on merit aid for top students, colleges can improve the academic profile of their student body, which helps them in the rankings”. There are other places to find rankings about colleges, such as Niche, but U.S. News is seen as “the most influential [ranking] of America’s colleges”.

In his book Breaking Point, Connell says that colleges suffer from an “amenities war”. Even throughout the recession, college spending on building infrastructure has increased dramatically. “When averaged together, the cost of college infrastructure projects has increased... an average annual increase of 25 percent... since 1997”. Those are increases on spending for buildings like libraries, science buildings, and residence halls. And while these buildings may be necessary, as they are constructed and renovated throughout the years, it adds on tremendous cost to each student’s tuition.

Those costs aren’t in vain however, as prospective students want to know about a college’s educational standing compared to its peers, as well as the cost of attendance. This leads to the rise in infrastructure spending along with the increased competition between colleges. Beyond spending on academics, colleges have also ramped up spending on more ‘luxury’ items that are unrelated to the quality of the education they offer.

As stated in Breaking Point, these include such items as “student activities, cultural events, intramural athletics... intercollegiate athletics... and college stores”. While these may not seem like items with big ticket prices at first glance, they often require much larger and more expensive buildings to accommodate them, such as various sports facilities for intramural athletics and intercollegiate athletics. These buildings help pile on to the already higher cost of infrastructure that colleges seemingly need to have in order to compete with others in their peer group.

Students value a quality education, but that also coincides with a value placed in the extra things that a campus has to offer. In a study conducted by the Delta Cost Project, the authors attempted to determine how students value “academics, costs, and social amenities” in a college setting. They found that students tend to “value institution’s spending on consumption attributes... but do not value spending on instruction”. This explains why although colleges may be increasing spending on academic factors, they are also increasing spending on non-academic factors.

As many colleges now offer the same degrees, one factor that can set a college apart from the rest is the size and scope of their facilities. However, many of the facilities that colleges spend money on are unrelated to academics. While some might say that having buildings like gyms are a good thing for the students, others are calling the phenomenon a “‘country-clubization’ of the American university” as colleges spend tens of millions of dollars on facilities completely unnecessary to academic purposes, such as a “$10 million renovation project to include an ‘Olympic-sized swimming pool, co-ed sauna, juice bar, golf simulator, and rock-climbing wall’ at the University of Pennsylvania, or a “new $130 million ‘super dorm’” at George Washington University (Connell, 2016, p.33). While those extra things are undoubtedly a nice feature to have, they don’t contribute to how well students do academically, and are in place solely to attract prospective students to those colleges.

Possible Objections

One objection some may have to bringing up collegiate athletics as unnecessary spending for a university is that those sports games can create a positive revenue stream for the colleges. The idea is that broadcasting deals, team merchandise sales, and other revenue streams typical of professional sports teams would help colleges not only recoup the cost of the initial investment for the facility, but also for continuing costs.

However, this is rarely the case. “Data that is regularly compiled by USA Today and Indiana University’s National Sports Journalism Center show that of the 228 public universities that operate Division I programs, only twenty-three took in more from tickets, licensing, broadcast deals, and donations than they spent on athletics in 2012. And even among those that generated surpluses, sixteen still received subsidies from other university funds.

Data from USA Today and federal sources... showed that athletics spending per athlete grew faster than academic spending per student from 2005 to 2011. So, not only do sports programs often create an outflow of cash, they also take money away from the education part of colleges. That’s not to say that colleges should do away with sports programs, because many students enjoy participating in them. It is simply important to understand the truth behind collegiate athletics, as many people may think that they are more profitable than they truly are.

Conclusion

College tuition has been driven up by the same market forces as other products in competitive markets. Its price hikes are helped along due to it being a good that many people view as a type of necessity for success in life, and therefore something that must be acquired, somewhat regardless of the financial cost. This allows colleges to justify prices because of high demand, but the rise isn’t only caused by colleges. College being so accessible to the middle and even working class is a rather new reality not seen before the 20th century. The desire for students to have facilities that contribute to a more enjoyable college experience than is strictly necessary for a good education also leads to higher prices.