Higher College Costs and its Consequences

By Gary Becker

As Posner discusses, tuition and other college costs have risen greatly during the past 30 years. So too have the many benefits from college, including the greater earnings, health, and even marriage rates of college graduates compared to high school graduates. Moreover, the return on a college education has also increased, as measured by the higher benefits of college net of the increase in college costs. As a result, college is even a better deal than it was 30 years ago for most of the students who can afford the higher tuition.

Hence despite the sizable growth in college costs, more students want a college education. This increased demand for college education is obviously one factor that has pushed up college costs. The growth in college costs means, however, that college may not be a better deal now than in the past for capable high school graduates who have trouble financing higher college costs. They and other students have turned to loans to ease the financial burden of college, which, along with low interest rates, largely explains the sizable growth in student loans. Many colleges, especially private ones, have also eased the financial burden to students by increasing aid at a rapid rate.

Colleges are competing harder for better students, so that the financial burden of going to college has grown more slowly for these students than for average students. This, combined with the fact that the benefits of a college education have also grown more rapidly for abler college graduates, means that changes during past several decades in both benefits and costs of college have been much better for abler students. This increased financial cuddling of better students is another factor that has increased the cost of college for the average student.

Increased competition for better students has gone hand in hand with greater competition for better faculty. Just as returns to college have increased more for better students, it is likely (there is little quantitative evidence on this) that returns from college have also grown more from an education with better faculty and a more effective education program. In any case, the stronger competition for college faculty has been one important source of the growth in college costs since faculty is by far the dominant cost of a college education.

Although the fraction of young persons who go to college has increased in all ethnic, race, and gender groups as a result of the higher return from college, the increase has been rather modest, especially for males. Part of the explanation is that some students have been discouraged by higher tuition and other college costs, although this does not explain why young women are now far more likely to complete 4 years of college than are young men.

To ease the burden of student loans, it would be wise to introduce on a larger scale loans that tie repayments to subsequent earnings. Those who earn relatively little would effectively have lower interest rates on their loans. One obvious challenge in running such a loan program on a financially sound basis is that these loans are more attractive to students who do not expect to earn a lot, either because they have limited skills, or expect to enter occupations that do not pay well.

Students cannot go to college if they have not graduated from high school, and the fraction that drop out of high school, especially young males, has remained stubbornly high during the past 30 years (with some decline during past few years). Although the high dropout rate may be indirectly related to the costs of a college education, it is puzzling since the plight of high school dropouts has remained pretty dismal during the past several decades. They have low earnings, high unemployment rates (as made clear during the past recession), poor health, and bad marital prospects.

The best explanation for the large number of dropouts is that parents, teachers, and schools have not prepared these students for a decent high school education, let alone for college. This is being increasingly recognized as pressure grows on schools and teachers, and also on parents, to improve the education of the mainly minority students who constitute the great majority of high school dropouts.

It is imperative to find better ways to help college students cope with the large growth in tuition and other college costs. Yet, one should not at the same time conclude that a college education has been oversold, since in virtually all dimensions of life a 4-year college education generally pays off very well.

Gery Becker is Senior Fellow Hoover Institution Stanford University