The strange, twisted logic behind the sky-high cost of college

The strange, twisted logic behind the sky-high cost of college

College is too damn expensive. Even if Joe Biden makes good on his plan to wipe out $10,000 of debt for every American with student loans, it would do nothing to bring down the staggering prices that colleges charge for admission. Indeed, the fact that debt forgiveness has become politically viable makes clear just how many people have been hurt by the crushing cost of obtaining a higher education. Today some 44 million Americans owe $1.78 trillion in undergraduate and graduate student loans — more than the GDPs of all but a dozen countries.

Small wonder that more and more families are beginning to doubt whether college is worth the price of admission. In a survey commissioned by Insider and conducted by YouGov, Americans of every generation agreed that going to college today is "not worth the financial cost." Baby boomers, who are footing the bill for their children, are the most skeptical of the price tag: Fifty-seven percent responded that college isn't worth the cost. Gen Z, by contrast, is the most positive about the price — but 46% of Gen Zers still say the cost outweighs the benefits.

If we want to end the mounting crisis of student debt, we must figure out how to make college more affordable for a majority of students. But most of the solutions currently being considered, from freezing tuition to doubling federal aid, don't address the underlying cause of the crisis. To bring down costs at both public and private schools, we must first understand why college got so expensive in the first place — and consider a more dramatic overhaul of the role that higher education plays in today's job market.

First, some good news: College isn't as expensive as you think. Yes, costs at elite schools like Harvard are staggeringly high — but very few students at four-year colleges actually pay the full list price for tuition, fees, room, and board. At most private colleges and some public schools, the list price is more fiction than reality — a fiction designed to squeeze as much money as possible out of wealthy students and their parents. Think of it as a sticker price on a car lot. What the dealer is asking for isn't what you're likely to wind up paying. You'll haggle for a lower price — and drive off thinking you got a deal.

That's basically the way it works at colleges. Schools use "merit" aid to discount the sticker price for pretty much everyone except the wealthiest students. I use quotation marks, because merit aid is granted to half the students at public colleges and 84% at private colleges. In addition to merit discounts, many students from low- and middle-income households receive state and federal grants that do not need to be paid back. About a third of all undergraduates at four-year colleges get a federal Pell Grant, with two-thirds of the recipients coming from families with incomes under $30,000.

These grants create a gap between the sticker price (what the college professes to charge) and the net price (what students actually pay). Over the past 15 years, the gap has grown. At public colleges, the average list price has grown to over $23,000, but the net price has remained fairly flat, at about $14,000. At private colleges, meanwhile, the list price has ballooned to $53,000, while the net price has actually gone down, to less than $29,000.  

If this seems like a bizarre way to put a price on college — setting an exorbitantly high tuition and then marking it down for almost everyone — that's because it is. Once upon a time, some public universities, including the entire University of California system, were tuition-free. Others charged students low tuition, thanks to large state subsidies that covered much of the cost of operating a college. So how did colleges come to depend on tuition revenue to survive? Dominique Baker, a professor of education policy at Southern Methodist University, traces the tuition model back to the 1970s, with the creation of the Pell Grant. Instead of maintaining and expanding free college for the growing numbers of baby boomers who were enrolling, she says, the United States settled on a kind of trade-off, in which "institutions can price however they want, as long as they give enough aid" to students who can't afford it. In true American fashion, the marketplace was put in charge of college costs.

This market-driven model works pretty well at a very small number of elite universities with big brand names and even bigger endowments. The Ivy League and other top-tier schools charge very high tuition, which enables them to enroll classes with large shares of students who can pay full freight. They then use the money from the rich students and their huge endowment to subsidize the education of those with fewer means. (By this logic, maybe Harvard should jack up tuition even higher than its current level of $54,000, so it can make college free for even more students.)

Unfortunately, there are two big problems with letting the market set prices. The first is that only the most elite schools can attract enough rich students to pay for the poor ones. Of the roughly 2,600 four-year colleges in the US, fewer than 100 promise to meet an applicant's full financial need. And the second problem is that most elite colleges accept almost no poor or middle-class students. They provide affordability without access.

That's the opposite of what happens at the 2,500 colleges that cannot afford to meet an applicant's full financial need. They admit most of the students who apply — but they can't draw many students who can pay anything close to the sticker price. You can't demand Porsche prices when people believe you're a Honda. Last year, 89% of all full-pay students at liberal-arts colleges attended a school ranked in the top 50 by U.S. News & World Report. As a result, the vast majority of colleges provide access without affordability. They let almost everyone in, but they can't afford to give them enough merit aid to discount the higher sticker price, so students wind up saddled with mountains of debt.

The growing problem for many colleges, both public and private, is that even though most students get a discount in the form of merit aid, revenue from tuition is still going down. That's why a favorite suggestion of progressives for making college more affordable — to transform merit aid into need-based aid — is a nonstarter for most private colleges that don't have billion-dollar endowments. These colleges don't spend money on merit aid; they make money on it. If the discounts go away, so does the revenue from students who otherwise would not attend — which would make it even harder for colleges to fund students able to pay little to nothing.

Unfortunately, the market-driven model means that even students who attend Honda colleges get stuck with Porsche prices. Today the average merit-aid discount at private colleges is $23,000 — leaving the student to cover the remaining $30,000 or $40,000. That doesn't just hurt poor students, who are sometimes forced to borrow more money than their parents earn in a year. Even a student from a family with an income of $100,000, who is unlikely to qualify for a Pell Grant, will struggle to pay the average net price of $28,400 a year for a private college, especially if the family has multiple children.

The federal government, meanwhile, has failed to keep pace with the rising price of college. When the Pell Grant was created, it covered almost 80% of the cost of public four-year colleges. Today it covers less than 30%, which forces students to take out more loans. Over the past 30 years, undergraduate enrollment grew by only a third — yet the total value of undergraduate loans increased by more than 250%.

Much of the rising debt is being accrued by students at public colleges and universities, which are increasingly pressured to live by the same twisted market logic that is driving private institutions. Today students provide 42% of the revenue at public institutions — double the burden they were forced to bear in 1980. At four-year public colleges, tuition now accounts for 52% of operational revenue, versus 48% from state funding.

As public universities increasingly look like private ones in their dependency on tuition revenue, we shouldn't be surprised to see them increasingly chasing full-pay students from out of state or abroad. The market model now reigns supreme, even at public institutions. Ben Sasse, the former senator who's now the president of the University of Florida, recently paid the consultants McKinsey & Company almost $5 million to devise a strategic plan that advised the university to raise its sticker price dramatically. The University of Florida, Sasse told faculty, is "radically underpriced" and "should definitely be charging ability-to-pay for children of the wealthiest." The school's low tuition of $6,381, he declared, is "an economic model that doesn't make sense."

Some people would call that economic model public education.

The trick, given the current crisis, is to find a way to make college more affordable and accessible. But how? Plenty of proposals have been floated in recent years, but many of them, though well-intentioned, simply wouldn't work to lower costs and broaden admissions, because they don't take into account why colleges are so expensive to run.

If you listen to critics of higher education, you could be forgiven for thinking that millionaire coaches and lazy rivers are to blame for high tuition. A recent Wall Street Journal article that blasted colleges for "spending like there's no tomorrow" featured an Italian monastery purchased by the University of Oklahoma and an esports center at the University of Kentucky. But climbing walls and granite countertops aren't what's driving up the cost of higher education. As the Journal article itself mentions in passing, the real expense is salaries, benefits, and pensions. The main reason colleges cost so much is that labor costs in higher education have risen far more quickly than they have in other industries.

Ford and Apple, unlike Fordham and Appalachian State, can use technology to make its employees more productive.

Compare colleges and universities to, say, Apple and Ford. Both companies employ a lot of people with high salaries, but their prices have risen at much slower rates, or even gone down. David Feldman, an economics professor at William & Mary, explained the crucial difference to me: Ford and Apple, unlike Fordham and Appalachian State, can use technology to make its employees more productive. By making more cars with fewer people, Ford can keep the cost to customers down and still make a profit. But in a service-oriented industry like teaching, Feldman says, "it's hard to get productivity growth without a degradation in quality." 

Technology, in fact, has made college more expensive, because keeping up with the latest advances adds another cost to the price tag. "Having a laser lab is part of a modern physics major," Feldman notes, "but it does not make the physicists more productive, in the sense that they teach more students per year." What's more, colleges today are expected to provide what Feldman calls "higher standards of service" — including career counseling, mental-health services, diversity-and-inclusion offices, and programs designed to help historically underrepresented students earn a degree.

Rising costs hurt colleges as well as students. While the Journal was wringing its hands about monasteries, it missed this summer's biggest story about the soaring cost of college. Like many schools, West Virginia University has found itself locked in a competition to attract students who can pay as close to full freight as possible, in no small part because the state has gradually invested less and less in higher education. In 1980, students provided 19% of the university's revenue; today they supply 56%. To accommodate the expected influx of students its president had promised would materialize — a bold prediction given the shrinking population of high-school students in the state — WVU borrowed millions to buy more land and construct new facilities. But the students never arrived, and the school found itself with a deficit of $45 million. Now, to curb costs, WVU is eliminating 12 undergraduate majors and 20 graduate programs. That, in turn, could reduce its revenue even more, fueling a downward spiral of enrollment.

Relying on a market-driven model to fund colleges means market competition will inevitably drive some schools out of business — especially during a period of shrinking enrollment. As middle-class families shop for better deals, they're likely to bargain some private colleges to death, forcing them into suicidal discount rates. In the long run, that may not be a bad thing for higher education — but it will do immeasurable harm to students, faculty, staff, and surrounding communities. As long as we trust the market to set prices, the colleges that are able to spend the most will make the most. That's why Sandy Baum, a senior fellow at the Urban Institute, has concluded that cost cutting will be only a "small piece" of any plan to make college more affordable. "It's just not going to make as much difference as people would hope for," she told me.

So if cutting costs won't bring down the price of college, what will? Most of the proposals to make college less expensive have either failed entirely, or failed to get off the ground. Moving classes online, where the overhead is lower, has worked well for a few graduate programs, where older, experienced students who had strong GPAs as undergraduates can be counted on to complete the courses. But in practice, online education tends to be foisted on the least-prepared undergrads at the institutions with the fewest resources. It's also consistently been shown to produce worse outcomes than in-person learning, with especially bad results for students who are less prepared.

There's also little evidence that freezing tuition would benefit most students. Unless the freezes are combined with additional funding for financial aid, they help only the richer students who are paying the list price. And even though doubling the Pell Grant to $13,000, another popular suggestion for bringing down costs, would significantly help community-college students, it would still leave undergrads at most four-year colleges with significant expenses to cover. It would also, perversely, give colleges an incentive to raise tuition, to ensure that their sticker prices captured the increase in student aid.

Free college could easily amount to starving public institutions.

That leaves only one viable proposal: making college free to everyone. There's little doubt that such a sweeping move would increase both affordability and accessibility. The question is whether policymakers could persuade the public to fund four-year colleges at a level that would make "free" worth it. Free college could easily amount to starving public institutions, Baum told me, since charging no tuition does nothing to bring down the cost of higher education.

Consider community colleges, which are generally very affordable. They're also severely underfunded: While Ivy League schools spend up to $100,000 per enrollment to educate the country's richest and best prepared students, community colleges are left with next to nothing to support those who need the most. That disparity helps explain why most of the declines in college enrollment over the past decade have come from community colleges.

In the end, shifting the cost of college back to taxpayers —as we do with K-12 education — is probably the only way to make college both accessible and affordable. But it would provoke ongoing battles over funding at both the state and federal levels. A recent survey conducted by the think tank New America found that while most Americans agree that the government should make higher education more affordable, they're sharply divided over who should foot the bill. Among Democrats, 78% say the government should bear more of the burden. Among Republicans, 64% say students should cover more of the cost.

Without any means to significantly lower the cost of higher education, it's time to consider a dramatically different approach to the problem. In reality, people with bachelor's degrees continue to earn a good return on their investment, earning 65% more than high-school graduates. But if college isn't "worth the financial cost" in the eyes of most Americans, perhaps we need to focus on rethinking higher education's "worth" rather than lowering its cost.

Most students attend college with the expectation that it will enable them to get a good job, build a rewarding and sustainable career, and secure their financial future. That, after all, was exactly what college did in the years after World War II — it helped lift millions of Americans out of poverty and fueled the creation of a secure and prosperous middle class.

But what if students didn't need to attend college to get a good job? Not every job actually requires a college degree, and lots of teenagers don't actually want to attend college. America's most popular undergraduate major is business: How many business majors are in college for intellectual stimulation? Opportunity@Work, which seeks to open the labor market to a broader range of Americans, estimates that degree requirements currently lock job seekers without a college degree out of 7.4 million jobs.

That's beginning to change. More than a dozen major companies, including Google and Apple, no longer require employees to have a college degree. And cities and states are following suit: On his first day as governor of Pennsylvania, Josh Shapiro issued an executive order opening up 92% of state jobs to applicants without a four-year college degree. What if on-the-job training became the new diploma?

"Degrees have become a blanketed barrier-to-entry in too many jobs," Gov. Spencer Cox of Utah said in announcing a similar move last December. "Instead of focusing on demonstrated competence, the focus too often has been on a piece of paper. We are changing that." We're still a long way from breaking the paper ceiling, which has enabled businesses to enjoy the benefits of credentials while passing all the expense and risk on to colleges and students. And the move to "uncredential" many jobs doesn't mean students who want to attend college shouldn't be able to. Higher education remains essential for powering research and innovation, and some careers will always need years of formal education beyond what high school can provide. To make college more accessible, we need to make greater public investments — at both the state and federal levels — in higher education. But those investments will not need to be so large if more people are able to get a good job without attending college. The fewer students who are forced to seek a degree, the less all those degrees will cost us. In the long run, the only way to make college more affordable, ironically, may be to make it less important.

James S. Murphy is a higher education policy analyst at Education Reform Now. His writing has appeared in The Atlantic, Vanity Fair, Slate, and other magazines. Follow him on Twitter at @James_S_Murphy.