Tuition Fees Are Too High, But Competition Can Fix It
The demand by Congressional Democrats that President Biden forgive $ 50,000 in student debt per borrower is regressive and unfair. But debt cancellation also doesn’t address why so many borrowers complain their student loans are unaffordable: University tuition fees are too expensive.
In 1996, the average four-year public college billed state students an average of $ 4,000 per year after institutional remittances. By 2016, that number had more than doubled to $ 8,800. Private colleges now charge students over $ 20,000 after the cuts.
The government’s financial assistance mitigated the blow somewhat. Congress has increased the federal Pell grant several times over the past two decades. Scholarships offered by states, employers and private philanthropists have also become more generous. The average public college student now receives over $ 5,000 per year in grants, not including institutional discounts offered by the college.
America’s financial aid system has protected low- and middle-income students from the worst of tuition hikes. But the relentless increases in the underlying tuition fees mean that students are not feeling the benefits of this bounty.
If colleges were charging students the same amount as in 1996, adjusted for inflation, increases in government financial aid would have completely eliminated tuition fees for the average public college student. But since the underlying costs are rising much faster than inflation, government assistance programs work faster just to stay in place.
In fact, federal aid itself bears a large part of the responsibility for the increase in tuition fees at the college level. An abundance of academic evidence reveals a clear link between government subsidies and rising prices. But there are additional reasons for the rising tuition fees. Colleges can get away with raising prices to capture federal aid because students have little knowledge of the actual price and quality of the college product.
Well-functioning markets give consumers the opportunity to make comparisons. When you buy a laptop, you can compare dozens of models and strike a balance between a higher price and better quality. This transparency disciplines the market and puts pressure on producers to reduce costs.
Such transparency does not exist in higher education. Colleges advertise an outrageous “sticker price” of $ 50,000 or more, but offer most of their students big discounts once acceptance letters are sent. The upshot is that most students don’t know what they’ll pay for college until they narrow down their choices. High school students generally apply to three colleges or less, and the number of those who admit them is even lower. This allows colleges to put their applicants in an impossible situation: paying our outrageous prices or not going to college at all.
Strict regulation also means that new higher education institutions face difficulties entering the market. New colleges must receive approval from a state authorizer, which can take up to a year. To access federal financial aid and compete on an equal footing with incumbents, new institutions must be accredited by an accreditor, which can involve years of work and several thousand dollars in fees. These barriers to entry limit competition and keep prices high.
Fixing the high cost of higher education will require more than restoring the sanity of the federal student loan system, although reforms to limit excessive lending would certainly be welcome. Policymakers also need to address the characteristics of the higher education market that make it so uncompetitive.
The ‘gatekeepers’ of higher education – state authorities and accreditors – should extend recognition to new higher education institutions that can produce good results, in the form of high placement rates and high incomes. the diplomas. Rather than forcing schools to tick a hundred boxes before they can operate, gatekeepers could extend interim approval while schools demonstrate results, lowering barriers to entry.
Congress may also require the disclosure of better college pricing data. Various administrative agencies already collect detailed data on what students pay for the university, but they do not have the power to organize and publish it. But if students have a reasonable estimate of what they will pay before they even apply to college, the comparison of studies will become easier.
Rising university tuition fees are a growing burden on families and are contributing to voter demand for an unaffordable $ 1 trillion jubilee for student debt. But policymakers can curb the growth of student debt if they tackle the root of the problem: the subsidies, regulations, and gatekeepers that prevent students from finding competitively priced education.
To learn more about the rising cost of college education, please read my new report: “Why college is too expensive and how competition can fix it. “