The Rise in College Tuition and Student Loans

By Gary 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.

Gary Becker Senior Follow at Hoover Institution.

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