The problem
Congressional Research Services reports that over the past 25 years, college fees rose almost 2 percent faster than inflation every year.
This suggests that college has become expensive relative to the cost of living.
At the same time, a college education is increasingly valuable. College graduates earn more money and have better career prospects than those who only have a high school degree.
How do colleges get money?
In the U.S., three main sources of money give revenue to colleges.
They are government appropriations, gift and endowment revenue, and payments for tuitions and fees. If one source of revenue decreases, colleges often look to raise revenue in another place.
How do colleges determine prices?
When students talk about the price of college, they are usually referring to payments for tuition and fees.
Both public and private schools engage in price discrimination, which means charging different prices to different students.
Adam Davidson, writing in the New York Times, says that the rise of college prices is a sign of market competition in elite colleges. If colleges publish a high price, they can attract top students with financial aid. The greater the reduction in the tuition, the more likely schools may be in attracting successful students to build the school's reputation.
Davidson reports that colleges often use computer programs to give a price. The price reflects a student's willingness to pay, academic record, ethnicity, and the major that they are likely to choose.
While colleges publish one price, the “sticker price,” they really have many price points. Davidson says the price offered to students is based on how attractive the student is to the school.
One problem with this, says Congressional Research Services, is that it means that college costs are not transparent. Students are not able to directly compare the cost of schools.
Michael Leachman and Michael Mitchell are researchers at the Center for Budget and Policy Priorities. They write that the high sticker price of education may discourage poor students from applying to college.
Leachman and Mitchell write that poor students, and particularly poor minority students, benefit from enrolling in selective, expensive schools.
But many poor students may be unaware of the available financial aid. They are only aware of the sticker price. Many do not apply to colleges whose sticker price seems too high.
The impact of the Great Recession
In general, states cut funding to higher education during economic recessions. The recession of 2007 through 2009 was no different. States collected less tax money, and appropriated less money for higher education.
In the U.S, states provide around 53 percent of the revenue used to support state schools.
When states appropriate less per student, schools raise fees to pay expenses.
Schools also cut other costs, such as the amount of financial aid given to students.
Michael Mitchell, an expert at the Center for Budget and Policy Priorities says:
“One way that state schools have been looking to try to make up the difference is by actually offering smaller scholarship packages or smaller grant packages to wealthier students – students that can actually pay the rest of that tuition price – and moving away from larger grant packages to low income students.”
What happens if students don't receive financial aid?
Even if a student receives a scholarship or grant, they may still need to borrow money to pay for school.
Student debt has become the largest source of household debt in the United States. The Federal Reserve Bank of New York estimates that student loans grew to almost $1.2 trillion dollars in 2014.
Many students cannot pay back the money they borrowed. They default on their loans. The U.S. Department of Education says that of the 4.7 million students who started repaying their student loans in 2011, almost 650,000, or 13.7 percent, defaulted before the end of 2013.
Should endowments pay for tuition?
Some, such as the Candidates for the Harvard Board of Overseers, suggest making endowments pay for college costs. Harvard, for example, has an endowment that is worth around $35.9 billion dollars. The University of Texas system, a public school system, has an endowment worth around $25.4 billion dollars.
Endowments are investment funds maintained for the benefit of a college. However, donors may restrict how schools spend their endowment money. Congressional Research Services says that almost 40 percent of permanent endowment money is donor restricted.
Jeff Neal, a spokesperson for Harvard, said that endowments are not like bank accounts, where money is easily deposited or withdrawn.
Mitchell, at the Center for Budget and Policy Priorities, says that many schools have small endowments, or have no endowments at all. Those schools cannot use their endowment to pay expenses in an emergency.
“Only a very small segment [of schools] that can really look at endowment as a viable safety net in that regard.”
Words in This Story
fee – n. an amount of money that must be paid
revenue – n. money that is made by or paid to a business or an organization
tuition – n. money that is paid to a school for the right to study there
degree – n. an official document and title that is given to someone who has successfully completed a series of classes at a college or university
prospects – n. an opportunity for something to happen
appropriation – n. an amount of money that is used or provided by a government for a specific purpose
appropriate – v. to get or save (money) for a specific use or purpose
endowment – n. a large amount of money that has been given to a school, hospital, etc. and that is used to pay for its creation and continuing support
price discrimination – n. the action of selling the same product at different prices to different buyers, in order to maximize sales and profits
sticker price – n. the stated price of something
selective – adj. careful to choose only the best people or things
scholarship – n. an amount of money that is given by a school, an organization, etc., to a student to help pay for the student's education