Why Is College In America So Expensive?

  in Research   Posted on August 28, 2020

Heflin (2019) states that the ramifications of the 2008 recession are still reverberating worldwide, at least in the corridors of higher education, and students are quite literally paying the price. Some issues that may perpetuate the already exorbitant but still-rising costs of college education include the perception of quality and reduced state funding. However, these three reasons alone do not explain why the United States has the second most expensive college tuition among OECD countries (OECD, 2019).

This article intends to look at other factors that contribute to the ballooning tuition fees for tertiary education. We consolidate other sources in order to view American higher education as an aggregate of other elements, including cultural influences and generational shifts. The paper attempts to paint a broad picture of the American college system in terms of costs, whether financial or opportunity, against a historical backdrop with an outlook for the next 5-10 years.

expensive college

Why College in America Is Expensive Table of Contents

  1. The Current State of Higher Education in America
  2. What Makes College Education so Expensive?
  3. The Problem with Student Loans
  4. Outlook and Possible Solutions

1. The Current State of Higher Education in America

Fishman et al. (2018) found that 68% of Americans aged 18 or older believe that education in the country is not as fine as it is. Still, the same study reports that a majority believe that a college education is a ticket to success, with 75% agreeing to this statement. The question is why are many people distrustful of college? And what happened to have disillusioned them so?

Data, which is always a good source of objective information, may shed some light on this phenomenon. The culprit may actually be more expensive schooling; to wit, college tuition fees, which have skyrocketed in the last 30 years. The average cost of college at a public four-year institution has risen 213% over the past three decades, from an average of $3,190 for the 1987-1988 school year to $9,970 for the 2017-2018 school year (Trends in College Pricing, 2017). The increase is just as steep at private schools, with costs rising 129% in the same period, from $15,160 in 1988 to $34,740 in 2018.

In the past decade alone, public college tuition rose by 29%, while private college tuition increased by 25%.

Here are some more numbers from the field:

Numbers at a Glance

  • Over one in four (27%) of Americans have a bachelor’s degree (U.S. Census Bureau, 2004).
  • The cost of college education has increased 8 times as much as wages have (Bustamante, 2019).
  • The average total price of a 4-year college education is $122,000 (Bustamante, 2019).
  • Almost three-quarters (70%) of undergraduate students receive some form of financial aid (CollegeBoard.org, 2019).
  • Students often take out student loans to finance their college education, resulting in a total student loan debt of around $1.6 trillion in 2020 (Friedman, 2020).
  • This $1.6 trillion is shared across 44.7 million borrowers (Friedman, 2020).
  • California has the most number of student loan borrowers—3.8 million—with a total balance of $135 billion (Friedman, 2020).
  • On the other hand, Utah has the lowest average student loan debt, with about $19,728 per student in 2018 (Friedman, 2020).
  • A student has an average debt of $32,731 upon graduation (Friedman, 2020).
  • Students with higher student loans are less likely to drop out than those with lower loans or without loans (Bustamante, 2019).
  • Finally, Chen and Wiederspan (2014, as cited in Beal et al., 2019) found that the merit-based assistance being given in all U.S. States—with the exception of Georgia—does not help student debt burden, mainly due to the low amount of aid involved.

Source: CollegeBoard Research

2. What Makes College Education so Expensive?

There are several reasons college in America is so expensive. Since the 2008 academic year, annual tuition at four-year public and private colleges has increased by 36% or $2,651 (College Board, 2017, as cited in Beal et al., 2019).

Apart from the obvious—demand, which we will also cover below—there are a few things that exacerbate this problem of cost in higher education. Here is a glimpse of the most relevant factors.

Demand

Ultimately, demand is the biggest contributor to rising college costs. The number of students trying to apply for higher education is rising, with a pace that outstrips the increase in wages (Mishel, 2015). Furthermore, higher enrollment numbers also lead to an increase in financial aid and a rise in operational costs to accommodate the influx of students, which all lead to higher tuition fees. In other words, rising college costs can be mostly attributed to a cycle of supply and demand.

To be more specific, the Department of Education has seen about 19.9 million students for the 2019-2020 academic year. While this is slightly lower than in 2017 (NCES, 2019), this is still almost 5 million more than two decades ago.

The rising number of students just means that the advantages of college education still outweigh its costs, even in the most literal sense. However, as these costs interminably rise with wages not following as rapidly—and the economic effects of the pandemic still unclear—college education may yet hit a point of negative return on investment (Hoffower, 2019).

Reduced State Funding

Many states have cut financial support for colleges, which has led these institutions to hike their tuition fees to make up for lost revenue.

Data from the College Board (2019) has shown some correlation with this statement. As states slash or slow down funding, the cost of education at universities and colleges also rises. For example, in the 2015-2016 academic year, state funding has decreased by 11% from the preceding 10 years, leading to a rise in tuition.

That said, state funding appears to have little impact on private institutions, as these schools do not get money from the government. This can be a more exclusive factor for public colleges and students with scholarships and grants.

Rising Operating Costs

Finally, like any other industry, higher education costs money to run. The case is especially true in a labor-intensive sector like education, where automation is often viewed with suspicion and distaste. And it helps little that universities tend to hire highly educated people, who command high salaries. In fact, most institutions of higher education spend much of their funding on compensation and, as tuition fees increase, so do their payouts (AAUP, 2018).

Some schools have begun experimenting with ways to keep staff compensation low, such as larger classes and more adjunct faculty. These have been met with mixed success, however, and in some cases have been negatively received. The American Association of University Professors (2012) has seen this trend, which helps explain why part-time professors now comprise 51% of total faculty compared to 30% in 1975, as can be seen in the chart below.

Source: AAUP.org

Plus, no longer are universities just places of learning and instruction—they are also becoming miniature ecosystems by themselves. Many institutions now have fully functional student services like counseling and healthcare. Operating these facilities can take a major chunk off a university’s strapped budget, which is already strained from administrative expenses like institutional support, research, and dormitories.

3. The Problem with Student Loans

Student loans have always been a thorn on an American student’s side. The last 30 years have seen it jump 213% (CollegeBoard.org, 2019), making it, at present, second only to mortgages as the biggest consumer debt in the country. In 2015 alone, for every 10 graduates, seven students had student loans, with a debt of $30,100 per borrower on average (TICAS, 2016). This—alongside rising prices, relatively stagnant wage growth, and other debts—has made life more expensive today than it is for the previous generation (Martin, 2017).

Still, the cost of college (and the inevitable aside to student loans) has become one of the most hotly contested topics in Washington prior to the rise of the COVID-19 pandemic. The presidential campaign trail for 2020 has included talks about how to fix this perennial problem (Friedman, 2020). They are citing the sobering statistics mentioned above, plus the alarming increase in tuition fees in the last decade alone, as seen in the graphic below.

Source: U.S. Federal Reserve

However, given the job outlook of a college diploma, it falls on parents and families to pursue a path to this education. After all, there is evidence that college graduates still earn more than other demographics—at about 66% more than workers with only a high school diploma (The Annie E. Casey Foundation, 2016). However, as student loan debt among US households increases further, the ensuing debt burden may have various ramifications, such as household well-being and health (Kim & Chatterjee, 2019).

In light of the situation, there are proposals to end student loans or at least mitigate their impact on a young workforce. Legislation will ultimately be a part of the solution, such as the pending College Affordability Act (CAA), but the schools themselves may offer some hope.

Is Financial Aid the Problem?

In general, the more demand a service has, the costlier it gets. This is possibly a reason federal student aid has grown enormously, which has only led to tuition increases. It’s worth noting that the prototype of the Pell Grants was only ratified in 1972, expanded further in 1978 by the Middle Income Student Assistance Act (Gladieux, 1995).

With financial aid available to many students regardless of income, more soon applied for financial aid. And once universities knew that students would get this money, they started to charge more for their services to capture this aid themselves, leading to what is known in education circles as the Bennett hypothesis.

William Bennett, then-Secretary of Education in the late 80s, opined in a The New York Times piece (Feb. 18, 1987):

“If anything, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase … Federal student aid policies do not cause college price inflation, but there is little doubt that they help make it possible.”

There might be a morsel of truth to this statement, however. A Forbes study (2015) found that for every dollar of federal student aid disbursed, universities raised their tuition fees by 65 cents.

While this is not a problem in a perfect world where prices increase proportionally with wages, the latter have become stagnant in the last 30 years (see previous section, under “Demand”).

4. Outlook and Possible Solutions

The outlook for higher education in America looks grim, especially compounded with the pandemic (Shaffer, 2018). Its far-reaching effects may yet see a reexamination of instruction in schools. S&P Global Ratings, however, has recently revised its outlook from negative to stable (Wood, Kuffer-Macdonald, 2020) for non-profit higher education institutions in 2020.

Many graduating students of the class of 2020 are also grappling with job uncertainty in the face of the COVID-19 pandemic. They complain of lost job opportunities, such as for fields that may be changed entirely or decimated (Brownlee, 2020). Consequently, this will make repayment of student loans next to impossible without a high-paying job that would have justified taking out a generous loan in the first place.

Job Outlook for College Graduates

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Source: EducationData.org

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To that end, there are various solutions and initiatives to at least alleviate the burden of student loans on college graduates, as discussed below.

Proposals

There are several proposals put forth to remedy the high cost of college in America. We touch on the five most relevant below.

  • Forgiveness of student loans. Coming in the wake of proposals by presidential hopefuls, notably Senator Bernie Sanders. The recommendation presents some form of student loan forgiveness (Nova, 2019). Sanders, a proponent of free college, speculates that additional Wall Street tax may pick up the slack, but this may run to over ten years.
  • Free college. Speaking of free college, Sanders’s proposed College for All Act entails a $48 billion fund for states in return for making higher education free. While this windfall comes with unexpected baggage, this may come in line with other developed countries, like Denmark, which charges zero tuition fees with a high standard of living. This move may need to be tempered for the American public, however, as even some Danish students prefer not to graduate at all, for which they recently passed legislation to address (Weller, 2017).
  • Student loan refinancing. Student loan debt is second only to mortgages in terms of size of consumer debt in the United States. Unlike the latter, though, student loans cannot be refinanced. That may all change with certain provisions in the CAA.
  • Restructuring of higher education. The aforementioned CAA, if passed, will not simply allow students to refinance their loans. It will also review and update the Higher Education Act of 1965 (Scott, 2019) which will include removing hidden fees, making community colleges free, updating Pell Grants to cover more costs, and enabling high school students to earn college credits for their degrees even before entering a university. Legislative action on this front will also standardize repayments.
  • Online-only education. Some thought leaders expressed ideas that online education may yet solve the ever-increasing college costs. This, however, has been proven to do quite the opposite, as a paper by Casement (2013) reveals that online education does save money for the school, but they do not pass these savings on to their students. The same paper, however, argues that massively online open courses (MOOCs) can change the game by being highly accessible and far cheaper, though it is yet unproven as an educational tool—its dropout rate is up to 90% (Rivard, 2013).

Is College Worth It?

Higher education is founded upon an irony—that the demand for a college degree (among other things, as this article has already outlined) inevitably drives costs up. This demand, then, creates a paradoxical situation in which college education is increasingly less advantageous, as there will come a moment where the cost of college far outweighs the potential benefits of a degree.

This value of a degree is already becoming apparent. Based on Q4 2019 data, the Federal Reserve Bank of New York (2020) found that about a third (33.8%) of college graduates are working jobs that require no college degrees. However, while this does seem counter-intuitive, it is normal to some point as new graduates need a foothold on the jobs market before they can actually be ready for the field they have studied for.

No matter who answers this question, though, college education still opens up many opportunities. Be aware, however, that the American higher education system is due for a change soon. The onus to accommodate increased demand while ensuring that the quality of instruction is on par thus falls on institutions of higher learning in the years to come.

References:

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