The Real Problem of Rising College Costs

Someone wise once defined insanity as doing the same thing over and over but expecting different results. Members of the 110th Congress should keep this in mind when they try to address the problem of college affordability.

In the 21st century, a college education is considered by many to be a key to financial security in the new knowledge-based economy. But ever-rising tuition prices offer a financial challenge for many American families.

According to the College Board, the price of higher education rose sharply again last year following trends over recent decades. The annual costs at four-year public and private colleges increased by 6.3% and 5.9% respectively, a rate well ahead of inflation. Since 1986, tuition and fees at public and private colleges have grown at staggering rates: 122% at public and 80% at private colleges (after adjusting for inflation).

Increasing college costs since the 1980s make the price of gasoline look cheap in comparison. Since 1986, the real cost of a gallon of gasoline has grown from $1.58 to $2.50. If gas prices had risen as quickly as public college tuition, we’d be paying $3.51, a dollar more than we do today.

As with growing gas prices, increasing college tuition costs have led to frequent calls for the federal government to act. The federal government has responded by providing dramatically-increasing subsidies for higher education aid. According to the College Board, total federal aid for postsecondary education totaled $94 billion in 2005-06, a real increase of 95% during the last 10 years.

But doubling higher education aid over the past decade hasn’t been enough, according to some liberals in Congress. New subsidies for higher education are at the top of the Democrats’ agenda for the 110th Congress.

One Democratic initiative that will likely be considered is new House Education Chairman George Miller’s plan to cut interest rates on federally-subsidized student loans. Depending on the structure of the plan, the measure could cost up to $18 billion over five years, according to one published estimate.

Unfortunately, there’s little reason to believe that billions in new federal subsidies will do anything to address the root problem of rising college costs. In fact, federal spending may be exacerbating the problem.

One of the reasons colleges and universities have been able to charge more is that third-parties-like federal and state taxpayers-are footing much of the bill. Many students are less sensitive to price increases than they would be if they had a more direct financial stake. This means that higher education institutions have few reasons to keep costs low to attract students.

Ohio University economist Richard Vedder discusses this problem in his book, “Going Broke By Degree: Why College Costs Too Much.” “Students receiving grants or subsidized loans are far less sensitive to tuition increases than they would be if they were paying their own way,” Dr. Vedder argues. “Where entrepreneurs in a free, unsubsidized market seek to cut costs and lower their prices to lure new custom¬ers away from businesses that are raising theirs, there is very little of that in higher education.”

To begin to create greater competition in education and return the federal government to its original role in higher education, Congress could refocus existing tuition aid programs on those who could not otherwise afford college. This would likely reduce inflationary pressures on college tuition while addressing the policy concern of expanding higher education access.

An increasing share of federal grant and loan subsidies are being provided to students from non-economically disadvantaged families. The College Board recently reported that “changes in student aid policies have benefited those in the upper half of the income distribution more than those in the lower half.” A recent Department of Education report found that 47% of students from middle-income families accepted federal loans in 2000, compared to 31% in 1993.

These subsidies are inequitable. They are largely paid for by taxpayers who don’t have college degrees—only one in four adults have bachelor’s degrees. Workers are subsidizing students from upper- and middle-income families, who can go on to expect far higher lifetime earnings.

It may be too much to ask for fundamental reforms, at least during Speaker Nancy Pelosi’s 100-hour agenda. In the short-run, conservatives would be wise to shift the policy discussion to the relationship between federal subsidies and rising college costs. Congress should investigate whether ever increasing subsidies for higher education lead to higher college costs.

In addition, they could call on universities to be more financially accountable to students, parents, and taxpayers. Greater financial transparency would lead to greater understanding about the problem of rising college costs and encourage state-policymakers and school leaders to explore ways to make higher education institutions more efficient.

American students should be wary of congressional promises to make higher education more affordable. If history is any guide, federal spending and college prices will both keep climbing.