Why College Is So Expensive

Everyone can agree that college is astronomically more expensive than it should be. From 1996 to 2016, the average cost of annual tuition(when accounting for inflation) rose from $2,126 to $3,758.

But, how did it get this way?

In today’s post, I’m going to summarize the three reasons Preston Cooper, a PhD economist, thinks college is so expensive.

In healthy markets, consumers have lots of sellers to choose between, they know exactly how much they’ll have to pay each seller, and new sellers can enter the market at any time.

As a result, sellers have to compete with each other by lowering their prices as much as possible, otherwise they’ll be kicked out of the market.

Unfortunately though, modern colleges exist within a broken market.

For one, prospective students don’t have many options to choose between. Because in-state tuition is dramatically cheaper than out-of-state tuition, 73% of students attend in-state colleges. And, furthermore, because many students prefer their local area or want to live with their family to cut down costs, 42% of college students attend a college within 50 miles of their home. As a result, most students apply to only a couple of colleges.

And, because of this, colleges have far less of an incentive to compete since they essentially hold local monopolies.

For two, colleges make it extremely difficult to determine how much they will cost. Because students don’t know how much they will receive in financial aid, they are unable to know how much they will pay for college until they have been accepted. And, worse, as Cooper writes, “An analysis of 11,000 award letters by New America reveals that 70% do not clearly distinguish between grants and loans. Often, loans are misleadingly marketed as “awards.” Not coincidentally, a Brookings Institution report finds that almost half of current college students underestimate the amount of debt they have by over 20%.”

Since students can’t tell how much college will cost, colleges are able to raise their prices with immunity from their competition.

For three, it’s extremely difficult to start a new college. Accreditation boards often have extraordinary conflicts of interest since, as Cooper writes, “As of 2016, two-thirds of accreditation commissioners were employed by a school already recognized by that accreditor.” This means that accreditation boards have strong incentives to prevent new colleges from being created. And, as a result, the process of receiving accreditation can cost hundreds of thousands of dollars and often takes over two years.

This has made it so that, over the past thirty years, the number of non-profit colleges has remained stagnant, obviously reducing competition and innovation significantly.

A wide range of careers that didn’t used to require degrees now do. And, as a result, most Americans now believe that, if you want to enter the middle class, you have to get a college education.

This phenomenon is a result of one pretty unfortunate feedback loop.

When employers are seeking out employees, they look for workers with bachelor’s degrees since they tend to be better workers. Then, since workers know that employers are looking for this credential, they are more likely to pursue one.

When the economy is doing well, this effect isn’t very intense, but, during recessions, it gets much worse.

This is because, during recessions, employers can be more selective and choose a higher percentage of workers who already have bachelor’s degrees. Then, since many workers are unemployed and unable to get a job, they go to college.

After the recession has ended, employers continue to be more selective for applicants with bachelor’s degrees, and the system is even worse off than it was before.

The end result of all of this is that colleges, who aren’t required to compete with each other, are able to raise prices as the demand for their product increases.

When the federal government increases grants and loans to students, this enables colleges to raise their prices since they know that students will still be able to afford to attend.

This idea may sound implausible, but there’s a shocking amount of evidence to support it.

As Preston writes, “In a meta-analysis of 25 empirical studies, Jenna Robinson of the James G. Martin Center concludes that the majority of research shows some positive connection between increases in federal student aid and subsequent increases in tuition (though a handful of studies find no effect). A team of researchers led by David Lucca of the Federal Reserve Bank of New York finds that a $1 increase in federal subsidized loan limits generates a 60 cent increase in published tuition, with larger effects for selective private institutions. Lesley Turner of Vanderbilt University concludes that colleges “capture” a portion of increases in the federal Pell Grant by reducing the institutional grants they provide students, a phenomenon which is again more prominent at selective private schools.”

No one claims that this accounts for the full effect of why college is so expensive in America, but most economists agree that it plays an important role.

The state of education in the US can seem pretty gloomy after hearing these arguments, but policy makers have a ton of ideas for what we can do. Here are some that Preston suggests.

First, we need to reduce the inflationary effect that loans and grants have on the cost of college. This can be done by eliminating Parent PLUS loans, punishing colleges when their graduates have low earnings compared to the debt they took on, and making government subsidies track consumer price inflation so that they don’t exceed it.

Second, we need to make it so that more colleges can enter the market place. This can be done by assessing colleges on their outcomes (how well students do after college) rather than their inputs (how low their teacher-student ratio is), giving colleges without accreditation federal aid, and allowing colleges to operate until evidence shows that they fail students.

Third, we need to make the price of college far more transparent. This can be done by standardizing award letters so that students know exactly what the net cost of college will be, giving better estimates of how much college will cost before applying, and piloting giving students a single upfront price.

Lastly, we need to encourage more disruption in the college education system. This can be done by giving more funding to apprenticeships, having more colleges accept exam scores for college credits, and reducing the number of degree requirements for federal jobs.

Obviously, these changes won’t occur overnight so what should you (if you’re a prospective college student) do in the meantime?

Well, Preston doesn’t cover this in his article, but my recommendation is that you should still go to college but be very conscientious about making it cheaper.

Here’s a few suggestions:

First, since you only really know how much college will cost until after you’ve applied, you should apply to every college in your state (and Western Governors University). This way you’ll have more options to choose from, which will save you thousands of dollars in the long run.

Second, since college is so expensive, you should do as many AP, IB, and dual-enrollment courses as you can. This will allow you to skip most entry level courses and to finish college much faster. If you know what exact program of study you’ll be taking, you should look into what exact classes will help you to skip the most courses from your degree. (This literally takes five minutes. If you’re a high schooler and you’re reading this, you should be doing this right now.)

Third, you should try to study for and complete as many CLEP and AP exams as you can. These allow you to test out of introductory college courses and earn college credit for a fraction of the cost that you would pay at a four-year college.

Fourth, you should seriously consider attending a community college before going to university. If you haven’t earned almost any college credits before attending college, community college can reduce the cost of college significantly. This is because many state colleges have feeder community colleges where you can complete the first one or two years of a degree at a much lower price and be confident that your credits will still be accepted.

Fifth, you should be thinking about what exact job you’ll be working after college and how much it pays. It’s easy to think as a seventeen year old that it would be fun to be a therapist because you like giving your friends advice, but it’s important to remember that it will take six years to complete both a bachelor’s and a master’s degree, that it will cost tens of thousands of dollars, and that you’ll only be making $60,000 a year. (This is enough to build up savings but not enough to retire early or donate significant amounts of your income to charity.) STEM (and economics) degrees are a much safer bet if you want to feel financially secure as an adult.

Lastly, you should consider pursuing a 4+1 degree as this can significantly increase your lifetime earnings by allowing you to get a master’s degree for half of what it would normally have cost.