The High Cost of Higher Education: Causes and Consequences

As widely discussed in the media, college tuition has risen dramatically in recent years, with statistics showing that the cost of higher education has more than doubled since 1986. This surge in expenses has become a major concern for prospective students and their families, prompting questions about the underlying causes and potential solutions to this growing problem.

Economic Factors and Tuition Inflation

One of the biggest factors affecting college tuition is the overall economic climate. Post-recession, states have simply had less money to work with. A 2022 report from the State Higher Education Executive Officers Association revealed that at both two-year and four-year institutions, student affordability, the level of state general fund appropriations, and the cost of instruction were the most significant factors influencing how tuition prices were set. This has created a significant wealth gap in the higher education world, with the top 40 richest schools in the country receiving nearly 60% of all gift revenue. Faced with reduced state funding, many institutions need to increase tuition to continue operating as they have been.

Over the past two decades, published college tuition has increased in price more than any other good or service besides hospital care. Tuition inflation has risen at a faster rate than the cost of medical services, child care, and housing. Higher education costs have increased more than 170% over the last 40 years.

Time to Completion and Program Costs

While undergraduate degree programs are often referred to as "four-year" programs, the reality is that many - if not most - students end up taking longer than four years to complete their degrees. For some students, this extra time represents one or two semesters, but for many others, it could be significantly more. Factors such as changing majors, transferring credits, or balancing work and family responsibilities contribute to the extended duration of degree programs. This is especially true for adult learners, many of whom have stopped and started a number of degree programs over long periods of time. The costs of running a successful institution contribute to rising tuition rates.

Students are also shifting to more expensive programs and institutions, compounding the effect of these costs. Today’s US students can expect to pay an average of $30,884 for tuition, fees, and accommodation over a four-year degree.

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The Traditional College Experience and Overhead Costs

When people think of going to college, they typically have an image of a traditional college experience in mind: a quad filled with students, dorms and dining halls, big brick academic buildings filled with faculty offices and classrooms, and sports teams to cheer for. And this experience is the reality for many students - but it comes at a cost. Offering these programs, operating buildings, providing housing and food for a large student body, and maintaining the onsite staff needed to support students in all areas - including academics, health, and community wellbeing - requires a significant amount of overhead, and is therefore expensive. For an 18-year-old heading off to college for the first time, these elements might feel like an essential component of the college experience - and it's true that younger students often need the structure and support to help guide them through their time at an institution.

These expenses include instruction and administration, athletic programs, student healthcare, food service, housing, maintenance, as well as a more modern expense - marketing.

Alternative Options and Affordability

However, there are many students who can't or don't want to take on the financial burden of a typical four-year college tuition, and still others who simply aren't looking for that traditional experience. For these students, lower-cost options do exist, from community colleges to online degree programs. Program participants can receive an associate degree for as much money as it takes to cover books and fees, then either enter the workforce or transfer to a four-year college.

Sticker Price vs. Net Price

Most schools advertise their tuition rates at what's known as the "sticker price" - the full cost of tuition for someone paying 100% out of pocket with no aid, discounts, or scholarships. The vast majority of students end up paying much less than this amount. For example, at private four-year colleges, the average sticker price is $36,801, but the net price - what the average student ends up paying to attend - is usually much lower. The advertised tuition rates, often referred to as the “sticker price,” do not necessarily reflect the actual cost paid by students. Many institutions offer financial aid, scholarships, and discounts that significantly reduce the net price for attendees. While the sticker price may seem daunting, it is crucial for prospective students to consider the net price, which is typically much lower.

Additional Fees and Hidden Costs

Unfortunately, tuition is just one piece of the financial puzzle at many institutions. Many students find themselves bombarded with additional fees on top of their tuition - and while these amounts can seem small, they add up quickly, and can result in owing the school significantly more money than anticipated. These fees are generally not advertised upfront, and can be charged for a variety of things - orientation fees, commencement fees, textbook fees, lab fees, library fees, parking fees, tech fees and more. To avoid unwelcome surprises, it is essential for students to inquire about potential fees upfront.

The Role of Administrative Bloat

A new paper by economist Beth Akers of the Manhattan Institute asks why college tuition is so high and still rising. The proximate causes of tuition inflation are familiar: administrative bloat, overbuilding of campus amenities, a model dependent on high-wage labor, and the easy availability of subsidized student loans. Administrative overhead and demand for more student services also increase costs.

Some higher education institutions have more administrators and managers than undergraduate students. Higher education institutions increased administrative staff by 164 percent between 1976 and 2018, and numbers continue to rise. While administrative costs can’t take all the blame for tuition increases, studies show that institutions have had to offset the expense of employing more non-academic staff by raising tuition rates.

On a per-student basis, college spending has risen by thousands of dollars over the last two decades. America’s higher education system spends more per student than any other large, developed country. While both instructional and administrative spending contribute to higher costs, administrative spending is rising at a much faster rate. Professors and other instructional staff account for less than half of employees at four-year colleges, and some private research universities have more administrators than professors.

The Market for Higher Education

However, the deeper question is why the market has allowed these cost inefficiencies to persist. In most industries, competition brings down the cost of products over time. The first laptop computer cost over $5,000 in today’s dollars, but now laptops with far more computing power can be bought for $200. Why hasn’t the same phenomenon occurred in higher education?

Akers explores four potential explanations: students overestimate the return to a degree; colleges are not transparent about their true prices; too few institutions operate in each regional market; and there are significant barriers to entry for new educational providers.

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Perceptions of Value and Transparency

Many students treat a college degree as a “golden ticket” to the middle class, Akers argues. The decision to go to college is fundamentally a cost-benefit calculation. If the financial return to college is high enough, then students should theoretically be willing to pay high amounts for tuition, because they still come out ahead in the long run. But few students are sitting down with Excel spreadsheets to calculate the return to college; instead, they rely on impressions of how much a college degree will earn them in the long run. Yet only some degrees are worth paying top dollar. The general impression that every degree is valuable-a “golden ticket” or so to speak-pushes up students’ willingness to pay for college, and consequently inflates college tuition. Only 22 percent of Americans say that the cost of a four-year degree is worthwhile, even if it requires taking out loans.

Even if that is the case, a sufficiently competitive market for higher education should still bring down the price of college. Akers therefore identifies another problem: the true price of a college education is usually hidden. While most students get at least some financial aid, prospective students usually don’t know how much aid they will get until after they are accepted to college. This makes comparison-shopping across a wide swath of institutions impossible. Application fees and time constrain the number of colleges each student can apply to, so the number of colleges among which a student can compare prices may be as little as one. Knowing that students will have few alternatives by the time they actually see what they will pay, colleges have every incentive to be stingy with financial aid.

Competition and Barriers to Entry

Another factor constraining choice is that most students have limited options for higher education. While there are thousands of accredited colleges nationwide, the typical student has far fewer options. Most students attend a college in their home state, thanks to a combination of steep discounts for state residents, familiarity with local schools, and a desire to save money by living at home. With few competitors, colleges face less competitive pressure to provide price discounts or improve the quality of education.

High prices and few institutions should provide ample opportunity for alternative providers of education to enter the market and lower prices through competition. However, most of these alternative providers will find it difficult to access federal financial aid, which means that the playing field is not level between traditional schools and new ones.

All colleges must be accredited to access federal aid, but the accreditation system is typically hostile to new players. Accreditors often judge schools based on factors such as curriculum and faculty rather than whether they achieve better student outcomes for a lower price. This system disadvantages schools with newer and cheaper but potentially more effective educational models.

Strategies for Addressing the Problem

These problems are deeply ingrained in America’s higher education system, and reversing them will take work. Akers has several proposals to address them, which fall into two main groups. The first prong of her strategy is 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. The second prong involves 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.

Industries like higher education have seen enormous cost growth over the past decades, even as the cost of other goods and services has fallen. Price transparency and robust competition have gone a long way towards reducing prices in other industries.

Rising Costs Beyond Tuition

In the last 20 years, college tuition has doubled, making tuition and required fees the major component of the rising costs of attending college. In addition to tuition, EducationData.org reports that between 1999-2000 and 2019-20, when adjusted for inflation, the cost of the average dorm room for one year increased by 65%, while the average meal plan for one year increased by 35%. This lower rate of increase for room and board compared to that of tuition suggests that factors specific to the academic component of higher education are driving the overall cost increases. Room and board cost increases are in line with the inflation rate of 70% from 2000 to 2020 reported by the Federal Reserve Bank of St.

Impact on Affordability

In 2020, the average cost of tuition and fees at a public four-year institution represented over 35% of median household income, up from approximately 18% in 1999. For private four-year institutions, tuition and fees represented 137% of median household income in 2020. This trend has made college less affordable for many families, particularly those in the middle- and lower-income brackets.

Institutional Spending and Priorities

According to the National Center for Education Statistics, faculty salaries and benefits accounted for 34% of overall operating budgets at 4-year public institutions in 2021. While rising faculty salaries can contribute to higher tuition, the American Council on Education, a higher education membership community, argues there are numerous contributing factors which are passed on to students through higher tuition and fees. These include growth in administrative positions and salaries at colleges and universities and investments in new buildings, dormitories, and athletic facilities to attract students and enhance campus life.

State Funding and Tuition Revenue

In addition to the factors discussed above, many public colleges and universities experienced significant cuts in state funding particularly following the 2008 recession, forcing them to rely more heavily on tuition revenue.

The College Board report, Trends in Higher Education Pricing, shows that when using inflation adjusted dollars (2023), there was a steady increase in tuition and fees at private 4-year institutions from $23,300 in 1993 to $44,120 in 2019. In the same 1993 to 2019 period, tuition and fees at public 4-year institutions also increased, though not as rapidly, from $5,380 to $12,490.

The Use of Adjunct Faculty

According to the American Association of University Professors (AAUP), one of the ways colleges and universities have attempted to reduce the tuition increases is to use adjunct faculty rather than hire new tenure-track faculty. Over the last few decades, the proportion of full-time tenured faculty has dwindled while the number of adjunct professors and graduate student instructors has surged. AAUP reports that 68% of faculty positions are now non-tenure-track (as compared to 22% in 1970). While adjuncts are paid less than full-time faculty, other associated costs may reduce the anticipated savings.

Impact of the COVID-19 Pandemic

Data from the College Board shows that during the COVID-19 pandemic, average tuition and fees did not change between 2019 and 2020 at both public and private 4-year institutions. However, the data shows that when adjusted for inflation, average tuition and fees decreased annually from 2020 through 2023. This trend also holds true for public 2-year institutions.

Government Initiatives and Financial Aid

In response to rising tuition, federal and state governments have more than doubled the real value of financial aid they provide to public college students. However, the inexorable rise in underlying college costs means that “net” tuition after aid has still gone up. If tuition revenue per student had not increased in real terms since 1996, expansions in financial aid would have reduced the average in-state public college student’s tuition bill to zero.

The Federal Perkins Loan program and the Higher Education Act of 1965 were instrumental in expanding financial aid opportunities for students.

International Comparisons

America’s higher education system spends more per student than any other large, developed country. The United States spends 2.6% of GDP on higher education, almost twice the OECD average of 1.4%. Altogether, the American higher education system spends just over $33,000 per full-time equivalent student, more than every other OECD nation except Luxembourg. Part of this is driven by America’s residential college experience, with its expensive dormitories and dining halls. These ancillary functions, together with research and development, account for roughly a quarter of higher education expenditures in the United States.

One-third of developed countries around the world provide free higher education while another third cap tuition at very low amounts - often less than $2,400 a year. The United States does not limit how much institutions can charge for tuition, which allows these costs to continue rising without regulation.

Shifting Student Priorities

The rising cost of college education has prompted a shift in students’ perspectives and priorities. Recent surveys indicate that students are increasingly focused on career training and post-college employment opportunities. Many believe that professional success can be achieved with less than a traditional four-year degree, and they are exploring alternative pathways to gain the necessary skills. This shift in mindset is partly driven by concerns about the financial burden of a college education and the desire to enter the workforce sooner. Students are recognizing that a four-year degree is not the sole route to a fulfilling and lucrative career.

Skills-Based Hiring and the Job Market

In 2023, 73 percent of employers leveraged skills-based hiring. The job market is also changing. Skills and talent shortages are forcing employers to look beyond credentials, leveling the playing field for the upcoming workforce.

Impact of Student Debt

Around 45 million Americans have debt from student loans that total more than $1.7 trillion. This debt has skyrocketed in recent years, outpacing most other forms of consumer debt. Interestingly, higher debt from graduate or professional degrees can pay off more consistently with higher incomes. In contrast, students who fail to complete their degrees struggle the most to make good with the bank, and their default rate is three times higher than that of graduates. An average of 8.15 percent of student loan debt is in default at any given time.

Strategies for Institutions

Many institutions already have an actionable strategic plan for containing costs. However, many previous strategies fall short of being achievable in today’s changing economic landscape. Institutions may need to implement a different budgeting model, which begins with gathering data on their allocation processes and outcomes. Data tells institutions where they’re spending the most and whether it’s effective so they can identify opportunities to cut back.

Incompatible tech: The more software tools an institution uses, the more it spends on maintaining licenses and training administrative staff. The more institutions can keep their costs down, the better they can alleviate the burden on students and their families. In any crisis, the first step is to focus on what matters, streamlining administrative processes and reducing unnecessary spending.

Many institutions struggle with siloed data, which prevents them from getting the full picture of their effectiveness. Data centralization is a practical solution that reduces the oversight required to manage several unconnected systems.

The trick is to balance student support and academic quality with course effectiveness. Improve the academic experience: Helping students with financial burdens and academic challenges begins with providing a premium educational experience. Support mental health: Even within budget, institutions should offer beneficial and accessible mental health resources. They can foster holistic well-being through promoting faculty engagement and social resources. Develop actionable intervention strategies: Institutions can use data to identify at-risk students and intervene to get them back on track. Providing assistance when students need it most is essential to any retention strategy. Link course content to meaningful careers: More than ever, students want to see how their coursework links to careers and earning potential. Institutions can cut costs and create roadmaps to successful careers with curriculum mapping.

Accreditation and Quality

Despite the pullback in state and federal funding, students who receive it must attend an accredited institution or program. In many cases, employers of nontraditional students will ascertain whether a program is accredited before providing tuition assistance. Similarly, new employers prioritize graduates from accredited institutions. Despite its importance, the accreditation process is not without challenges. It requires preparation, collaboration, and the right set of tools. With the right approach, institutions can gather accreditation data in one place, seeing real-time insights to continuously improve. Student satisfaction speaks for itself in many ways. Firstly, retention is cheaper than enrollment, so funneling resources into an engaged student body makes sense. The first step is to measure institutional effectiveness using course evaluations, surveys, focus groups, assessment outcomes, and accreditation self-studies.

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