Why Is Tuition So High?

College tuition has risen too quickly, and debt is unmanageable for increasing numbers of students; that much is clear. But to contain college prices, education leaders will need to answer a contentious question: Why does the price keep rising?

Higher education's critics tend to blame high prices on overpaid professors or fancy climbing walls. At public colleges, lobbyists tend to blame reductions in state support. But a new study places the blame elsewhere: the ready availability of federal student aid.

Student aid accounts for most of the tuition increases between 1987 and 2010, according to a working paper from the National Bureau of Economic Research. The more money students can borrow, the idea goes, the more colleges can charge.

Over the last few decades, the amount of aid available to students has increased dramatically: subsidized loans were expanded, while an unsubsidized loan program made its debut. But looking at the big picture, does that money always offset the costs to students?

The researchers say no. Instead, colleges increase tuition even more, because they know financial aid can cover the difference. Student aid may cover more of students' tuition -- but if the aid wasn't available, tuition might not have gone up in the first place.

“You've got to somehow tie aid to lowered tuition if you want to give money to students,” said Grey Gordon, an assistant professor at Indiana University and co-author of the paper. “You have to somehow structure it so colleges can’t just increase tuition and capture that money.”

But the idea that increased student aid drives up tuition is contentious, as is the researchers’ model. The paper’s conclusions depend on a model of one hypothetical college, which is based on data from private and public nonprofit institutions.

“This is an atom bomb mathematical technique on a problem that requires much more nuance,” said David Feldman, economics professor at the College of William & Mary and author of Why Does College Cost So Much? (Oxford University Press, 2010).

Feldman said increasing federal aid will rarely change how high a college sets its tuition. A college’s sticker price is set by its wealthiest students’ ability to pay -- and the wealthiest students never take out loans.

That doesn’t mean colleges never use federal aid to their advantage. Especially at private colleges, Feldman said, federal aid may replace existing scholarships. Take a student who would have gotten $20,000 from a college. If she gets an extra $1,000 in Pell Grants, she may get $19,000 from her college instead. The student pays the same, but the college pays less.

At public universities, increases in Pell Grants typically lower net tuition. “It’s a very different system,” Feldman said. “That's the nuance that’s missing.”

For-profits, on the other hand, are the one sector where the theory “applies in spades,” he said.

While the paper looks at nonprofit institutions, the idea that student aid increases tuition is perhaps most evident in for-profit colleges: in one study, for-profit institutions that participate in the federal aid program charged tuition that was 78 percent higher than those that didn’t.

Ronald Ehrenberg, a Cornell University professor of industrial and labor relations and economics and an expert on higher education governance, also cited the research on for-profits. “However,” he said in an email, “virtually everyone who has looked at public higher education and modeled it concludes that the major thing driving up tuition in public higher education is the withdrawal of state support.”

It’s a narrative that’s ingrained in the higher education landscape: state support is down, and students are covering the difference. This idea, too, is backed up by research -- states that invest more in higher education see lower prices, said John Barnshaw, senior higher education researcher at the American Association of University Professors.

“As states increased their funding, the net price dropped,” he said, “and it was a statistically significant drop.”

But according to the NBER researchers’ model, changes in state appropriations didn’t contribute to tuition increases.

“Even if appropriations have fallen, there are other sources of revenue that have offset that,” Gordon said. “Sports programs, hospitals, endowments. Endowments is the big one.”

Cost Disease

The second, equally divisive finding of the paper has to do with what doesn’t drive up colleges’ price tags: faculty salaries.

The idea that faculty salaries increase tuition is popular, and the reason is something called Baumol’s cost disease. In the 1960s, the economist William Baumol noted that certain sectors become more productive over time, which allows them to cut labor costs and lower prices. But sectors that don’t see productivity increases still end up increasing their workers’ salaries, which drives up the cost for consumers.

Think of a string quartet, the example Baumol used in his original analysis. Even as time passes and technology improves, it will take the same number of people the same amount of time to play a piece of music as it did hundreds of years ago. Productivity isn’t increasing, but the cost of a string quartet will still rise -- and the consumer has to pay the extra cost.

Education, proponents argue, is the perfect example of Baumol’s theory. Instructors stand in front of lecture halls or seminar rooms, interacting directly with a manageable group of students. For centuries, the argument goes, nothing has changed about this model. Faculty members are expensive, and tuition goes up.

But according to the researchers, Baumol’s hypothesis doesn’t hold up. In the model, costs did rise -- but instead of raising tuition, the model college responded to the higher costs by increasing enrollment.

“The cost is not a per-student cost,” Gordon said. “It has not become more costly to educate an additional student. It's become more costly to educate all students in general.”

It’s a hard time to blame the faculty; many education analysts are sympathetic to the challenges faculty members face, and they're happy to see more research that refutes Baumol’s hypothesis. Colleges rely more and more on part-time faculty members, who often work for low pay and no benefits. But it’s perhaps equally hard to blame student aid, often seen as the only way for most students to earn a degree.

“I go to college campuses almost every week and look at their expenses,” said Howard Bunsis, an accounting professor at Eastern Michigan University who does research for the AAUP. “It’s not student aid that's getting a bigger share of the pie. In most places, it’s the administration.”

And then there’s the model itself. While based on real data, it doesn’t represent a real institution. And while the researchers plan to expand on their work in the future, the current model combines public and private data -- a tactic many said was a too-simple way to view a complex problem.

“You need to look at the incentives that different kinds of schools face and understand the process of tuition setting in order to have a good understanding of how those schools are likely to respond to small changes in federal grant and loan policies,” Feldman said.