Tech and Industry

Why is College Getting so Expensive?

Nearly everyone has noticed that the cost of a college education in America has grown swiftly over the years. The average annual tuition of a private non-profit college has grown from $22,710 in 1998 to $35,830 in 2018. The average tuition of a public four-year university has gone from $5,020 in 1998 to $10,230 in 2018. Yet, despite politicians proposing innumerable “plans” to make college free, not many people address the why behind college costs rising. There are of course many common scapegoats for the rise in college tuition, not least of which is expensive athletics programs that colleges undertake. Considering that the athletics program at UCLA generates more money than it spends, and so is a source of income for the school rather than an expense, it is clear that the issues lie elsewhere. So what is behind the incredible rise in the cost of attending college, which has far outpaced average inflation over the past 20 years as the chart below shows?

(Source: http://www.aei.org/publication/chart-of-the-day-or-century/)

It is no coincidence that in the chart above, the red lines represent markets that are subject to government control while the blue lines are those allowed to operate in a free market. Government intervention is an important part of why college is getting so expensive because its intervention in the education system is half-hearted at best and creates problems just as it does in the healthcare sector. Historically, college costs have gone up with increases in student aid. The healthcare sector has suffered from ever-increasing rise in deductibles and premiums on healthcare insurance, especially since the inception of ObamaCare. In the case of education, the government intervenes mainly through subsidies, mandates and public provisions.

Let us discuss government intervention through subsidies. An important form of government subsidy in the education market is through provision of student loans, especially those that are interest free for as long as the student is in college. Student debt has hit a record of more than $1.5 trillion in the United States and is only going up. Student loans are a significant burden for the average American and the Federal Reserve has linked it to lower homeownership rates among young Americans. Additionally, increases in education spending have only made college harder to afford for students from low-income backgrounds as in 1970, 12% of college graduates came from the bottom 25% of the income distribution, while today only around 10% of grads come from the bottom 25%.

Education loans are federally backed, which means that lenders bear next to no risk of default on student loans. Due to a lack of risk, private institutions have a greater incentive to simply give out as many student loans as they can regardless of any factors that would apply to whether someone is able to get a loan. It is no surprise then that delinquencies on student loans are on the up. This terrible incentive system results in students being burdened with debt for large parts of their lives. Unfortunately, most students are not very financially informed when they decide to borrow money for their education and are not objective in making this decision. High schools usually treat four-year colleges as the only path forward and indoctrinate students to believe the same.

This practise increases demand substantially and overloads the education system making it more expensive to operate. It does not change the quantity of demand as much as it changes the amount that most people are able to afford. Since student loans create a false sense of short-term financial security, young people are willing to spend more on education and colleges usually oblige by charging them more money. It creates a sort of pigouvian tax where college becomes expensive for everyone involved as a result of this subsidy externality. Subsidies sharply affect the education market because quantity demanded for education is inelastic, which means that it does not change much with a change in price.

An almost uncontrollable demand side factor for college tuition is that the gap between the average high school graduate and the average college graduate. A study by Pew Research found that the average college graduate earns around $17,500 more than an average high school graduate per year. It seems natural that young people would be willing to pay significantly more money with the promise of making it back over the course of their life but there is a more practical option: namely trade schools.

An important solution to some of these problems is for the government to divert more resources from four-year colleges to trade schools. Trade school graduates are very employable and have to spend much lesser money in school. Even if these students are taking loans to get through good trade schools, they represent much safer bets than an average 4-year college student to be able to pay back their loans and end up being less indebted since trade school is cheaper and shorter. Trade schools commonly have two year degrees as opposed to four-year colleges. The average total cost of attending trade school is $33,000 as compared to $127,000 for a bachelor’s degree.

Another externality that has affected the cost of going to college is the rapid increase in physical and communication connectivity. Due to increases in both, more and more students are able to attend colleges that are not in their hometown. This means that colleges are now competing much more on a national and global scale than at a local scale. To stand out among the others, they are pushed harder into providing often unnecessary but distinguishable perks. For instance, USC provides students with free Lyft rides to make up for their, alibet subjectively, unspectacular academics and athletics.

Solutions like capping maximum tuition are unlikely to work for a few reasons. First, if the government caps the tuition and pays the excess of colleges expense needs over their tuition revenue, but this would likely result in either higher taxation or higher government indebtedness. Conversely, if the government caps the maximum tuition and does not provide much financial support, most colleges would simply be forced to shut down because they will lose money. The question of why college tuitions are growing as fast as they are is one of the most important problems we need to solve but I do not believe that the solution lies in more government intervention.

A fast-emerging alternative is the rapidly improving space of online education, where institutions face much lower costs of operation as compared to a traditional college. We could also see a rise in interest towards non-research universities. This is because a majority of students go to college to be professionals, not academics. This means that they are often uninterested in availing the resources provided by the expensive research programs that their university funds. These problem do indicate that we as a society need to face the important question of whether an “education” necessarily means a four year college education and if not, we must accept its implications and use them to redesign our education system using technology so that it is more accessible geographically and financially. It will mean letting go of some long-standing preconceived notions of what qualifications an educated person must have but it will almost certainly result in a less-indebted, more learned population.

By: Rushabh Nagori, Supporting Editor

Class of 2020

Business Economics

5 thoughts on “Why is College Getting so Expensive?

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