Why Is Higher Education So Expensive?

Daniel Lin,

Release Date
December 5, 2012



College tuition costs have gone up 945 percent since 1980. The increase in tuition places a heavy burden on young people and their families. What has made college tuition so expensive? Professor Daniel Lin  explains that tuition prices are rising so quickly because of supply and demand. As demand for college increases, universities can respond by increasing either enrollment or tuition costs. Since most universities are limited in the number of students they can enroll, they have largely responded to higher demand by increasing tuition.
Demand for a college education has increased partly because graduating college dramatically increases job prospects and partly because of government subsidies. Although many believe subsidies will make college more affordable, government subsidies actually contribute to rising costs. “When you subsidize something, it’s cheaper for people to consume. So people consume more of it and demand rises,” Professor Lin says. A rise in demand will mean a rise in costs.
Colleges have no trouble filling seats, even with rising costs, so they keep spending and increasing tuition. Improvements to campus facilities and the addition of more administrative staff make college tuition even more expensive without necessarily improving the quality of education students receive. We now know the root causes of rising tuition—promises of higher wages and increased subsidies. Professor Lin contends that this information should be used to seek solutions.


STUDENT 1: My student debt will, most likely, by the time I graduate, be around $80,000 at minimum.
STUDENT 2: It’s really complicated. I just don’t understand how we have to pay so much money to get an education, especially in America.
STUDENT 3: It’s overwhelming. I’m not sure what I’m going to do with my major yet, so it’s kind of crazy thinking about paying off all that debt but somehow it’ll disappear.
PROFESSOR LIN: College is getting increasingly expensive. Tuition at U.S. universities has risen faster than inflation in every year since 1981. So why is the price of college rising so quickly? It’s basic supply and demand. We’re seeing enormous increases in the demand for higher education, and universities can respond in two ways: increasing the supply by accepting more students or increasing the tuition. Since most colleges can’t keep up by increasing enrollment, tuitions must rise.
To understand what’s happening, we need to examine what’s been driving that demand. There are two main factors. First of all, the payoff from a college degree has been growing over time. In 1980 college graduates earned 50 percent more than high school graduates. In 2008 they earned over 90 percent more. In addition, a college degree increases your chances of finding a job, even in a sluggish economy. In the May 2012 employment report, the unemployment rate for high school graduates rose to 8.1 percent while the unemployment rate for college graduates fell to 3.9 percent. So it should be no surprise then that young people today are pursuing higher education in larger numbers than ever before. But there’s more to the story.
STUDENT 4: It’s kind of something that I don’t understand. You know, costs are constantly rising. I mean I guess it has to do with— Every price rises, every cost rises, but college costs rise so exponentially that I think that it just doesn’t equate.
PROFESSOR LIN: There’s a second major reason for the increase in demand, and this one is the result of public policy. To make colleges more affordable, federal and state governments have been giving subsidies to students—most notably through government-backed student loans, but also through grants and tax credits. In fact, as prices rise there’s political pressure to increase these subsidies.
What many students don’t realize is these subsidies actually lead to higher tuitions. When you subsidize something, it’s cheaper for people to consume. So people consume more of it and demand rises. So while students may want more subsidies to make college more affordable, ironically more subsidies actually make college less affordable, because they fuel the demand that’s driving tuitions upward. Instead of being helped by the subsidies, students are just taking on more debt than ever before.
And this rising demand also drives up prices in another way. Because colleges have no trouble filling seats, even with record-high tuitions, they’ve felt no pressure to cut costs. Instead, colleges have spent more. Fancy student centers, dining halls, athletic facilities, and many more administrative staff than ever before: these additions make college more expensive without increasing the value of the diploma. The rising price of college education is a heavy burden for young people and their families. Fortunately, because we know the main reasons behind rising tuitions—promises of higher wages, and increased subsidies—we can start to look for solutions.