The Rise in College Tuition and Student Loans-Becker

During the past 30 years tuition at American colleges has been growing at a fast pace. The increase has been greatest at 4-year private colleges and universities, and least at 2-year public colleges, but all college categories have had large tuition increases. For example, real tuition at the 4-year private colleges has more than doubled since 1980, while tuition at 2-year public colleges increased by over 50%.

Many commentators have criticized these large tuition increases. Colleges and universities are said to be too greedy and are charging what the traffic will bear, or  colleges are claimed to conspire together to increase tuition. Although colleges do conspire on some financial issues, such as agreeing through the NCAA to prevent payments to college athletes, conspiracy is not likely to be important in determining tuition since over 4000 colleges and universities compete fiercely for students, faculty, and funding.

The growth in tuition is not explained by any conspiracy theory, but mainly by increases in the cost of producing college education. Professors and other teachers are the principal input in colleges, so that the cost of these teachers is an important determinant of the cost of producing education. College teachers are well educated since they almost always have Masters degrees, and at the better colleges and universities they are very likely to have PhDs or similar advanced degrees.

Colleges have to compete for highly educated persons against employers in both the private and public sectors. Since after 1980 earnings of highly educated persons has risen rapidly in these other sectors, colleges have had to pay a lot more for their faculties and administrative staffs. The greatly increased pay of faculty has substantially raised college costs, which in part have been passed on to students through higher tuition and other fees.

This analysis also explains why tuition has grown most rapidly at 4-year private colleges and other elite schools. These schools tend to have faculties that are considered the most skilled and productive, and they invariably have PhDs or other advanced degrees. Since the rise in earnings in recent decades has been greatest for the most educated individuals, the costs of more elite colleges and universities have risen faster than that of other schools. They too have passed through to students some of these much greater costs via much higher tuition.

The increased return to greater skill means that colleges have an incentive to increase the workload of students, and improve the quality of the education they provide. Higher quality education is more expensive, however, which further has increased the cost of providing education, and the tuition charged students.

Whatever the cause of the tuition increases, to many that indicates that college is no longer a good investment. That is, the costs of going to college are claimed to now outweigh the benefits for many of the students who attend college. This is particularly the case, it is argued, for students who take out large student loans to finance their education.

A benefit-cost analysis of an activity like attending college cannot be based only on costs, in this case represented by tuition, but also requires evidence on benefits. While tuition increased rapidly since the 1980s, so too did the monetary returns from college. In 1980, the average graduate of a 4-year college earned about 40% more than the average high school graduate, whereas now the average college premium is over 80%. The increase in earnings has been even greater for persons who received graduate degrees.

What happened to the value of a college education during the past several decades depends on how the increase in earnings from going to college compares to the increase in tuition and other costs of college. Calculations show that the average gain in earnings during the past 30 years has exceeded the rise in tuition, so that the average rate of return on graduating from college has greatly increased, despite the large growth in tuition.

Nevertheless, the rise in tuition has forced many students to take on larger student loans than students did in the past. This has led to growing calls to forgive much of student indebtedness, even though college is a better deal than it was in the past, and student loans are already significantly subsidized. Moreover, despite a widespread belief that student loans are the main source of debt to younger individuals, in fact student loans remain a relatively small fraction of their total debt. An article in the New York Times of May 11 shows that although student loans have grown rapidly during the past decade, they are still only 15% of the total debt of individuals under age 35 (and a smaller fraction of the debt of those over age 35), whereas mortgages comprise 74% of their debt. The article claims that the “heavy” load of student debt is weighing on economy, but surely mortgages are a far more important influence on the spending of younger families.

Of course, a high level of student debt is a burden for individuals who are not earning a lot, and the default rate on student loans is much higher for low earners than for others with student debt. Students with low earnings mainly went either to proprietary colleges or to 2-year colleges. Their debt problems are not surprising since it is well known that these students are not likely to earn a lot after they enter the labor force. Perhaps greater constraint should be placed on their access to publically subsidized student loans, and perhaps interest rates on student loans should be positively related to earnings.

But any changes in policies regarding student loans should recognize that despite the rapid growth in tuition, college education remains a very good investment for the large majority of students who graduate from college.

 

 

Comments

[Neilehat]

There are six budgetary items that make up the cost of a College Education, public or private. Those being, Tuition, Fees, Books, Supplies, Room, Board and interest on any debt. All of these items have been affected by inflationary pressures over the years like everything else, especially Health Care (but that's a seperate issue). So it's no surprise that Education now costs more.

Yet, there is something more involved in the heavy student debt now carried. That being, the lack of savings for future purchases and its benefits (which is also controlled by inflationary pressures and salary and wages keeping pace with that inflation). Dare we call it the inability to provide for future needs (by either parents, students or relations). Thus driving would be students to the Moneylender and the incurring of debt. As for myself, I can remember my parents telling me after I got my first job as a paperboy, at the age of nine, if I put my earnings into a Savings Acc't. for College, I wouldn't have to pay Room & Board. And so, my financial requirements were less and required less in the taking on of debts to finance my Education. Ever heard of the old Aseop fable of the "Cricket and the Ants"?

[James Gualtieri]

Dr. Becker,

You mention in the article that the returns to college have increased from about 40% to 80% over the past 25-30 years. I'm assuming in that time span the average percentage of workers with college degrees has also increased. So the question is, are those percentages adjusted for the likely decreased treatment effect? That is, the control group of high school degree only workers now represents a much less skilled group of workers relative to the college degree group.

[Skyboxxx]

I really welcome the efforts of this blog to address the rising cost of college tuition and I am glad that you have a healthy outlook on the future of student loan debt. However, I wonder about a few of your assumptions here.

Does your statement that the rise in average pay for college graduates in the 1980s take into account the inflation of the 70s and early 80s? In addition, it seems unlikely that the 40 percent rise in salary disparity between college and high school graduates is related to a rise in the value of a college education. The change could just as easily be accounted for by the rapid devaluing of a high school education over the past 20 years. Thus, although the value of college may not have really changed at all relative to the changes in how high school graduates are perceived.

I also don't understand your claim that competition between institutions and other private/public employers over people with PhDs is a significant part of the dramatic rise in tuition over the past 40 years. If anything, it's an employer's market and has been for some time. In 1991, a mere 23.2 percent of PhD candidates found academic jobs by graduation. In 2001 that number was reduced to 19.4 percent. See http://www.theatlantic.com/business/archive/2013/02/how-many-phds-actually-get-to-become-college-professors/273434/

It's true that some PhDs are recruited for government jobs or in other sectors...but there are not that many jobs that require the specialized analytical skills of a person with a PhD. Given that, I'm wondering how you see competition for PhDs as a factor leading to higher salaries and thus higher tuition.

Finally, it's unclear by what you mean when you say colleges are providing a "higher quality" of education now...I would agree with Posner that quality has probably not changed much in the past 30-40 years. And if it has, I'm not sure that "average increase in earnings" is an appropriate way to measure that. Rather, costs seem to be driven up by the effort to make schools ever more luxurious -- what Posner calls "pandering" to rich kids. There is a greater demand for quality dining options, on-campus entertainment, state-of-the-art housing, and the like -- all of which have nothing to do with the delivery of education. Thus, although we may have more luxurious campuses, the quality of education has not changed.

[Keith Murphy]

I think you have missed some important elements of the causes of rising tuition. First and foremost is the ability to finance. There is a good analogy in residential real estate. Home prices are of course generally much higher than they would be if no banks offered mortgages and a homeowner was forced to pay alone. During the beginning of the crisis last decade, greater availability of financing rapidly drove up home prices.

Similarly, the public policy commitment the federal government makes to student loans has unintended consequences. Over recent decades, financial aid programs and loans have created opportunities for a large percentage of students to attend college that would otherwise not be able to do so for financial reasons. We have gone from a nation where 15% of adults over 25 had a college degree in the late 1970's to one where nearly 30% of adults do today. Supply and demand alone dictates that when a large number of new customers find the financial capability to afford a product, the price of the product rises.

There are a lot of things wrong with blindly accepting as dogma that college degrees equal better job opportunities and that the only public policy option is ample government-backed student loans. Consider the growing problem of for-profit schools spewing out graduates with degrees that do not significantly impact their true employability, despite the high debt levels they take on. It has been estimated that 30% or more of the Occupy Wall Street crowd were those driven solely by issues of unsheddable loan debt and no employability. Further consider that, while in the late 1970's 15% of the over-25 population had college degrees and nearly 30% do today, we clearly haven't cloned those 15% - we've just given the 70-85th percentile achievers some training and a degree. Those degrees help them in some maesure to do better jobs, certainly. But excellent work has shown that, in fact, the resulting salary premium from an Ivy league education versus state university was 2-3% for the education itself, which could be measured by comparing students who were accepted to both an Ivy and a state school and selected one or the other. Assigning that gap to education is actually debatable given the potential for greater impact from the personal network that one builds at a small high end private school.

While we like to think that our college training is imperative to business success, given currently available information there's no way to discern that 80% premium's true cause. It could as easily be greater competition for the 70th percentile and above achievers due to a growing economy as it could be for their actual training. In fact, given that real wages have been stagnant for blue collar workers for some time, it could be rather due to degradation or stagnation in the denominator due to globalization - manufacturing jobs going overseas means lower wages for the middle percentile non-college graduates doing skilled labor.

At any rate, we need to start thinking through the impacts of current public policies on education loans. It is likely that current policies play a strong role in the rocketing costs, and they certainly are responsible for a student loan debt situation that is growing increasingly concerning.

[Peter]

I do not think that student loans explain much of the increase in college tuition. Student loan debt is a fairly recent phenomenom having quadrupled over the last decade. That means of course that a decade ago student loan debt was a quarter of what it is now. But college tuition has been rising much faster than inflation for at least 30 years, long before student loans were such a large part of the equation. Instead, it seems to me that tuition started to increase as the "good" jobs for high school graduates started to disappear. In any case, I think it is the perceived value of a college education (real or not) that is driving students' willingness to pay. Moreover, I think that people view price as a proxy for quality (perhaps incorrectly) which reduces the pressure on universities to lower tuition.

But for the sake of argument, suppose the government student loan program were to disappear. I suspect that a lot of students/families would find other ways to fund college (private loans or other sources of self-funding) as long as they believed that college was worth the cost. In fact, I suspect the recent rise in student loan debt is partly a result of the decline in housing prices which has for many families eliminated home equity loans as a low-cost method for borrowing to pay for college. At least that is my experience.

[Keith Murphy]

It took me one minute of searching to find that student loan debt also approximately quadrupled over the period of 1990-2000, so your first premise is entirely wrong and apparently debt has been growing exponentially for a while.

I care deeply about what you can demonstrate versus what you suspect, so if you know of data of people magically affording tens of thousands a year tuitions in a household making average wages, with no financial aid or loans, I'd love to see them. For now, I'll continue to believe that the 40% increased college enrollment has been driven by that quadrupling in total debt, and that prices are rising in part for the reasons I stated.

[bean spout]

Demand for the credential has increased, bolstered by government subsidy. Universities are charging what the market will bear.

[Glenn Law]

That's true Bean.. As demand increases, price increases too. After all, universities are still into business.

[Doug R]

Dear Professors:

I certainly hope you understand that you are blogging about a subject that you have a deep conflict of interest on. Your own livelihood is traced directly to the financial fortunes of your institutions. Of course, you would defend the increase in prices and being directly related to the increase in the quality of your talent.

Like the health care sector, which is the only other market that defies gravity (or should I say the laws of supply and demand), the higher education sector has been unconstrained by market limiting forces. For health care, the additional costs have been (or will be) absorbed by the US taxpayer, future US Bond holders, future US currency holders, benefits-providing employers, and employees. For higher education, the unpayable debt will be transferred to US taxpayers and college endowments. I don't care so much about the endowments since they have been growing rapidly for years, thanks to grants by rich benefactors, foreign students paying full freight, and a robust stock and bond market. These will collapse along with most mid-level private colleges which will never be able to compete, long term.

At a minimum, professors, you need to present your obvious conflict of interest when commenting on matters such as this.