The Price of College is Soaring; That’s (Mostly) a Good Thing
Last week, I moved my oldest daughter into her college dorm. She is starting her freshman year at a top-ranked university. I could not be more proud of her and excited about her future. The other thing I did last week was pay her first tuition bill. It was more than $27,000. All told, I will pay the university about $300,000 over four years. The price of college is out of control.
If you are like me, you are inundated with terrifying statistics about the financial burden of higher education. The average cost of a four-year degree is more than $140,000. The cost of college, adjusted for inflation, has more than doubled since 1990 and tripled since 1970. There is $1.5 trillion of outstanding student debt. Scary stuff.
Then again, I omitted an important part of my story. I am among the top 1% of income earners. Though a combination of career luck and diligent saving, I set aside $300,000 for my daughter’s college education. She will graduate debt-free.
Higher eduction finance does not work the way I thought it did. Soaring costs are a tax on the wealthy and consequence of rising inequality. Let me explain why, I believe, skyrocketing college prices are generally (but not entirely) good for society.
50% Off Sale
In the retail industry, there is a pricing practice known as “hi-lo.” Stores mark-up goods and then offer steep discounts. It is a way of driving traffic to stores. We all love an incredible deal. When I worked for a hi-lo retailer, I was surprised to learn that only 9% of purchases were made at full price. Almost everything we sold was discounted. The prices on the tags had little relevance to the prices actually paid.
The same is true for college. The average discount rate for undergraduates is 49% according to the National Association of College and University Business Officers (NACUBO). That means the advertised price for tuition and fees is nearly double what the average student pays. At my daughter’s school, roughly a third of students pay full price.
The sales are even bigger at less selective intuitions. According to NACUBO, discount rates at selective institutions averaged 44.8% for first-time undergraduates compared to 58.0% for institutions overall. The price of tuition has been rising everywhere, but so have the discounts offered to students. The trend started in the late 1970s, around the same time we began to experience rising inequality. Since then, the average discount rate has risen about 10 points per decade.
When I pay full price for my daughter to attend college, the university uses about half the money to support an economically diverse student body. It is not a 50% off sale for everybody. It is only a sale for those who stand to benefit most from the discounts.
Tax the Rich
Tuition and fees increased more than 2,200% from 1970 to 2020. Meanwhile, inflation was around 600%. That means the price of college increased at a rate more than 3 times inflation. This disparity is often cited as an example of why the price of higher eduction is out of control.
You know what else is out of control? The income of the top 1%. According to work by Gabriel Zucman and Emmanuel Saez, incomes of the top 1% increased at a rate 3 times that of inflation from 1970 to 2018. That is twice the income growth rate for the bottom 50% of income earners.
The reason tuition prices appear out of control is that they are indexed to the top income bracket. My daughter’s school cannot rationalize publishing a price of $150,000 and then charging me twice that amount. It can, however, publish a price of $300,000 and offer a discount to students who cannot afford it.
To clarify, I am not asserting the top 1% of income earners subsidize higher education for everybody else. I only have two kids. That math does not work. I am simply observing that it makes sense for the advertised price of college to be indexed to the highest income bracket. That way colleges extract maximum value from people like me.
Despite what you may hear, the system is mostly working. College enrollment among the top income brackets increased from 65% to 87% between 1970 and 2020 (up 22 points). Meanwhile, enrollment for the bottom income brackets went from 31% to 63% (up 32 points). The wealth gap in society is growing, but higher education is doing more to close that gap than widen it.
Skyrocketing tuition prices are a tax on the rich. It is a way of extracting maximum wealth from top income earners while providing merit-based access to everyone. Higher education is an example of what progressive taxation looks like when done well.
Unintended Consequences
Every system has its flaws. The current discounting approach is far too complicated, especially for students who need the benefits the most. My financial planning is easy. I set aside money and plan to hand that money over to a university. For those in lower income brackets, financial planning is a nightmare.
The first issue is a chicken-and-the-egg problem. If the advertised price is high, low and middle income students may not apply. Those who do shell out time and money to submit applications to schools that may wind up being unfordable. My daughter had the luxury of attending the best school that would accept her based on merit. If you come from a lower income bracket, your options are further constrained by financial aid.
The second issue is that the discounts do not come in the form of a simple reduction in expenses. Financial aid is a hodgepodge of need- and merit-based scholarships, federal loans, private loans, and various state and federal programs. Receiving or not receiving one of these sources of aid can make a big difference in a student’s cost to attend college.
Finally, there are students who simply get screwed. The rich kid who did well in high school but relies on parents who cannot financially plan their way out of a paper bag. The middle class kid who was not accepted at the nationally ranked state school and must choose between an inferior state school or paying a fortune to go private or out of state. The low income kid who was on track for an athletic scholarship before blowing out their knee junior year of high school.
The system is far from perfect. But if we do not define the problem accurately, we risk taking actions that make the problem worse.
Cures Worse than the Disease
Following the decision to forgive student loan debt, there was an uproar that the federal government is not solving the right problem. If increasing tuition costs led to mounting student debt, will we not be back in the same position a few years from now? Lots of people have ideas. Few have thought through the implications of what their ideas would mean in practice.
Progressives want to see the government intervene and force colleges to cap tuition costs or perhaps make college entirely free. You know who that benefits? People like me. You know who it screws? People in lower income brackets who are benefiting from my willingness to pay full price.
Conservatives argue that we need to eliminate government funding and loans. They argue pouring money into the system is driving up the cost of college. Let’s play out a scenario. If you pull federal funding from my daughter’s college, what happens? Maybe the college cuts expenses on the margin. However, the more likely outcome is that the college accepts more rich kids to cover the gap. The acceptance rate this year was 5%. There are more than enough rich kids in the rejected application pile to cover any financial shortfall.
Both political parties seem to agree that colleges should bear the cost of student loan defaults. The logic is that colleges would discourage students from taking out loans if job prospects did not support the debt load. The worlds of investment banking and consulting are packed with English, Art History, and Philosophy majors. The problem is not the eduction students receive. The problem is that extending educational opportunities to lower income students increases the odds of default. Lower income students do not have wealthy families to backstop them when times are tough, and the whole idea of social mobility is becoming more of a myth than a reality.
Finally, there seems to be widespread support for vocational training. If students had less expensive educational paths, fewer would feel the need to attend a four-year university. I am not opposed to more paths, but we need to be careful that we do not create a system where rich kids go to college and lower income kids go to vocational school. We need premium products regardless of which path a student chooses. We should not expect families lacking generational wealth to settle for an inferior product.
Better? Solutions
Effective policy is the result of rigorous analysis and healthy debate. I have neither to offer. With that said, here are the three ideas that, I believe, could make a big difference without breaking the system:
- Transparent Discounts: Every student should see the discounted price of college BEFORE applying to a school. The college should be on the hook for crafting a financial aid package to deliver on the discount shown. I am not talking about a calculator. I am talking about a committed price at time of application that takes the guesswork out of financial aid.
- Open Borders: Public universities typically offer in-state tuitions that are 2–3 times lower than out-of-state tuitions. Students who do not get into their preferred public university have limited options. I understand the argument that states should take care of their own, but state funding of universities has declined in recent years. Making out-of-state tuition more affordable would benefit both universities and students.
- Lifelong Learning: As technology progresses, our entire approach to higher education needs to change. We cannot expect students to learn everything needed in life by the age of 25. We are seeing early signs of growth in lifelong learning, including massive open online courses (MOOC) and certification programs. We should invest in these models rather than attempting to fix the models of the past.
The market for higher eduction is not as broken as it appears. There is plenty to fix, but we need to focus on right problems. Me paying full price for my daughter’s degree is not the problem. We will be fine. Please focus on changes that will benefit those who need help rather than fixating on the soaring sticker price of college.
