Wednesday, January 24, 2018

Here’s why college is so expensive

TL;DR - College is so expensive in the United States because federal aid programs intended to make college more affordable have been structured in such a way as to write colleges a blank check – to charge whatever they please without increasing the cost to consumer at all – thereby removing cost-consciousness among students and parents, and eliminating the competitive need for colleges to undercut one another’s tuition prices.

Now here’s the long answer.

The federal government has been trying hard to make college more affordable for a long time.

One of the most important of those efforts was the creation of FAFSA in 1992, which went digital/online in 1997.  FAFSA basically works by calculating an estimate of your “expected family contribution” based on your parents’ ability to pay, and then the government agrees to pay the remainder of your tuition beyond that amount.  FAFSA combined with Pell Grants and several other federal programs which today offer over $120 billion in federal loans and aid to offset the cost of college tuition. In theory, this was supposed to ensure that nobody was denied a college education due to inability to pay, thereby increasing the number of young Americans able to obtain a college education, rewarding hard work in K-12 education, enriching citizens’ private lives, increasing informed democratic participation, and improving our workforce productivity.  What could go wrong???

Well, here’s a graph showing what went wrong, starting around 1992:

And here’s a few more, showing how it accelerated once the FAFSA program went online in 1997.  That the time college prices started increasing so exponentially coincides with the time FAFSA and other programs came around is not a coincidence.

What happened? In effect, the government’s promise to cover whatever tuition exceeded a family’s ability to pay removed the need for colleges to price their product in rough accordance with their consumers’ ability to pay.  So if the average family could only afford to pay $15,000 a year, previously colleges couldn’t charge too much more than that and expect to attract customers.  But when the government promised to cover whatever the average family could not afford, colleges quickly realized they could charge $25,000 a year and get $10,000 of free money from the government per student – and also, that there was theoretically no upper limit to the amount of money they could charge.  As such, FAFSA became a way for university administrations across the country to seek massive rents from American taxpayers by incrementally increasing tuition each year. 

What’s more, no politician could challenge this boondoggle, because if they did, they’d be labeled as anti-education for trying to cut federal aid towards it (and everyone knows education is infinitely important regardless of cost, right?).  And this same tendency to value education as a penultimate public good worthy of ever-more public dollars enabled even non-profit college administrators to justify increasing tuition to the moon.  More revenue meant more resources invested towards the education they valued so dearly, for purely selfless reasons no doubt.

The ripple effects extended beyond higher tuition.  Since the cost to student was now capped at their parents’ ability to pay, students no longer had to shop for colleges based on which was priced most reasonably: in many cases, the cost to them would be the same either way.  As such, competition between colleges to attract the best students instead became a spending race for who could offer the most attractive frills and amenities, regardless of cost.  That’s why colleges have “leisure rivers.”  That’s why they have multiple massive gyms and Fitness Centers, and host concerts, and spring fairs, and spend tens of millions of dollars on the best football coach, and sponsor hundreds of clubs and cafes and health facilities and Greek life.  It’s why colleges compete to offer ever-more luxurious dorms. It’s why they have free study abroad and ever-more expansive dining options. It’s why Hopkins is constantly doing construction and renovating perfectly serviceable buildings less than 30 years old: they all have more money than they know what the fuck to do with!!!  European and Asian colleges don’t spend on that stuff because it’s inefficient and not really related to education.  College in the US has become an all-inclusive resort where much of what you pay for has nothing the hell to do with the actual instruction you receive in the classroom (there is academic evidence for students picking colleges based on these frills too).

Long story short, federal intervention in the market was deliberately designed to drastically increase the demand for higher education, while limits on which universities receive federal accreditation have prevented supply from keeping pace, and unintended side effects of the interventions have wiped out the need for colleges to offer lower prices.  Basic economic theory tells us that higher demand + fixed supply + decreased competition = much higher price, and the statistics have confirmed what intuition would suggest.

Here is a list of
10 scholarly articles with empirical evidence for this theory:

1. David O. Lucca, Taylor Nadauld, and Karne Shen, “Credit Supply and the Rise in College Tuition: Evidence from the Expansion in Federal Student Aid Programs,” Staff Report No. 733, July 2015.

2. Dennis Epple, Richard Romano, Sinan Sarpça, and Holger Stieg, “The U.S. Market for Higher Education: A General Equilibrium Analysis of State and Private Colleges and Public Funding Policies,” NBER Working Paper No. 19298, August 2013.

3. Lesley J. Turner, “The Incidence of Student Financial Aid: Evidence from the Pell Grant Program,” Columbia University, April 2012.

4. Stephanie Riegg Cellini and Claudia Goldin, “Does Federal Student Aid Raise Tuition? New Evidence on For-Profit Colleges,” NBER Working Paper No. 17827, February 2012.

5. Nicholas Turner, “Who Benefits from Student Aid? The Economic Incidence of Tax-Based Federal Student Aid,Economics of Education Review 31, no. 4 (2012): 463-81.

6. Bradley A. Curs and Luciana Dar, “Do Institutions Respond Asymmetrically to Changes in State Need- and Merit-Based Aid? ” Working Paper, November 1, 2010.

7. John D. Singell, Jr., and Joe A. Stone, “For Whom the Pell Tolls: The Response of University Tuition to Federal Grants-in-Aid,” Economics of Education Review 26, no. 3 (2006): 285-95.

8. Michael Rizzo and Ronald G. Ehrenberg, “Resident and Nonresident Tuition and Enrollment at Flagship State Universities,” in College Choices: The Economics of Where to Go, When to Go, and How to Pay for It, edited by Caroline M. Hoxby, (Chicago, IL: University of Chicago Press, 2004).

9. Bridget Terry Long, “How Do Financial Aid Policies Affect Colleges? The Institutional Impact of Georgia Hope Scholarships,” Journal of Human Resources 30, no. 4 (2004): 1045-66.

10. Rebecca J. Acosta, “How Do Colleges Respond to Changes in Federal Student Aid,” Working Paper, October 2001.

Plus another one for giggles:

11. Gary Wolfram, “
Making College More Expensive: The Unintended Consequences of Federal Tuition Aid” in Policy Analysis #531 (Cato Institute, January 25th, 2005)