Why Is College So Expensive?

Over the last 20 years, the cost of college tuition at nonprofit institutions rose more than any other U.S. consumer good or service besides hospital care. Now, a college education is the second-largest expense a person will likely ever make, right after buying a house. The cost of a college degree in the U.S. supersedes any large country in the developed world.

In 1978-79, it cost $17,680 per year to attend the average private college and $8,250 per year to attend the average public college, after factoring in inflation. Forty years later, those respective costs increased to $48,510 and $21,370. This constitutes a 174% increase in tuition at private colleges and a 159% increase at public colleges. And these rates show no sign of slowing down.

So, why are education costs rising so rapidly? And where are all of our tuition dollars going? It turns out a few different factors contribute to rising college costs.

America's Student Loan History

Rising Demand and Limited Supply

Between 1990 and 2020, the total number of college students in the U.S. increased from 13.8 million to nearly 20 million. The flock to college campuses comes from the widespread perception of the college degree as the "golden ticket" to the middle class. Employers also contributed to this trend because of their increasing preference for degree-holding candidates.

The pressure to pursue higher education and the competitive admissions process means students will pay higher amounts in tuition, prompting colleges to raise their prices. Unlike other expensive goods and services that drive a certain demographic out of the market — for example, a luxury car or a lavish vacation — the pressure to get a degree means families that cannot afford the cost of higher education will still find a way to pay.

Usually, the cost of products and services decreases over time as new providers enter the market. Examples include electronics, toys, apparel, and airline tickets. One of the main reasons this has not happened in higher education is large barriers for new schools. One barrier includes securing accreditation, which is a time-consuming, rigorous process.

This creates an oligopoly, or a market with limited competition, in higher education. This lack of competition discourages the leveling effect of supply and demand that should theoretically keep prices from skyrocketing. And the decreasing number of colleges due to closures and mergers will not help to alleviate this problem.

Rise in Administrative Costs

Experts also attribute rising college costs to greater administrative spending at colleges. This phenomenon is known as the "administrative bloat." While professor salaries remained fairly flat for decades, spending on services like admissions and registration increased 31% between 2003 and 2018.

According to FREOPP, professors now account for less than half of employees at most four-year schools. Colleges blame the Department of Education and the accrediting organizations, which increased rules and regulations over time. This requires additional staff to provide detailed documentation proving educational quality and compliance.

A Closer Look at Increases in Tuition

For the 2018-19 academic year in the U.S., annual prices for an undergraduate education averaged about $18,380 at public institutions and $47,420 at private nonprofit institutions — a 28% and 19% increase from 10 years prior, respectively. Most of these increases come from tuition and housing.

Looking at a smaller window of time, between the 2017-18 and the 2018-19 school years, public four-year schools in the U.S. increased tuition by an average of 2.97%. Over the same period, private four-year schools increased tuition by an average of 3.85%. These average yearly rates of increase have remained fairly constant since around 2000.

These margins may sound small. But, for example, if private four-year schools charge $30,720 on average for tuition annually and that cost increases by 3.85%, students will pay about $1,100 more over a year.

Looking at college costs by state, the most rapid increases over the same period within public four-year institutions occurred in Alaska and Iowa, at 16.27% and 13.67%, respectively. New Mexico and Iowa grew the fastest within private four-year institutions, at 26.28% and 20.83%. (These rapid increases could be because these states have fewer schools. So, if one college increased its tuition significantly during that time, it could skew the state's average.)

In less than 10 years, some schools' yearly tuition will surpass $100,000 if these increases in average rates continue.

The Effect of Rising Tuition on Students and Graduates

Student debt impacts young people more than in previous generations. Student loan debt increased 76% since the class of 2000, exceeding the inflation rate by 41%. As of 2021, student loan debt stands at about $1.7 trillion.

Graduate student debt contributes a disproportionate amount. While only one-fifth of student borrowers are grad students, they account for 40% of total student debt in the U.S. Today, about 13% of people have a master's degree, about the same fraction that held a bachelor's degree in 1960. Experts attribute this trend to the increased competition among job seekers.

This financial burden results in many worrisome consequences, not just for borrowers but for the U.S. economy.

Unsurprisingly, financially strapped college graduates spend less money. According to the National Association of Realtors, more than half of home buyers under the age of 36 said that student debt delayed them from buying a house. Today's graduates are also less likely to start businesses because their debt causes them to avoid financial risks.

These behaviors affect the growth of our economy. The Federal Reserve estimates that student debt reduces the GDP by .05% per year.