Every year, millions of high school graduates make the momentous decision to enroll in college. Drawn by universities’ advertised prospects of financial and career success, these students enter university with visions of possibility and opportunity—and for some, even socioeconomic mobility. Over the past few decades however, the scintillating image of possibility afforded by college education has been marred by the growing student debt crisis, where millions of students are saddled with trillions of dollars in student loan debt, sometimes to the extent of long-term financial devastation. How then did higher education become so expensive, and moreover, financially ruinous?
While being widely viewed as a cornerstone of lifelong financial success and socioeconomic mobility, higher education has come at exorbitant costs to many Americans. According to CNBC, around “44 million Americans collectively hold over $1.6 trillion in student debt” as of 2020. While student debt is influenced by a number of factors including interest rates and student loan terms, tuition itself has a major impact on debt accrual. In measuring the effects of college costs on students using the Integrated Postsecondary Education Data System and New York Fed Consumer Credit Panel data, a study at UC Berkeley found that tuition sticker price increases may account for roughly 30% of the increase in mean student debt per capita by the age of 24 from 2003 to 2011, with a $1000 rise in tuition costs corresponding to about a $475 increase in mean student debt per capita. With so much student debt tied up in tuition costs, it is no surprise that the student debt crisis has been worsening in line with skyrocketing tuition rates. Since 2008, tuition has increased by about 25% on average, and the accompanying national student debt has more than doubled in that time. As student debt continues to increase each year, the natural question to follow is what exactly is driving this surge in tuition?
Despite having the purpose of making higher education more accessible to students, federal policy initiatives intended to support the affordability of college education, such as increasing federal student loan supplies, appear to be linked to the rise in college tuition. In a study of the relationship between federal student loan amounts and tuition, researchers from the Federal Reserve Bank of New York, BYU, and Harvard utilize IPEDS data and Title IV Program Reports to measure tuition sticker price and available federal aid respectively from 2001-2002 to 2011-2012. The study estimates a tuition increase of roughly $0.64 for every dollar increase of the subsidized federal loan maximum, and around $0.20 for every dollar increase of the unsubsidized federal loan cap. Although data on institutional grants was reportedly less consistent, the study further found that an average decrease in institutional grants correlated with the rise of federal student loan maxima, thereby providing evidence for a net increase in costs to students despite internal efforts that may be taken by universities to curb the effects of higher tuition. Considering the purpose of federal student loans to improve the accessibility of college education, this correlation between loan availability and tuition sticker price appears rather paradoxical. What, then, links the rise in college tuition with federal student loan maxima?
In light of efforts by the federal government to regulate aid usage, it becomes increasingly clear that college tuition increases may very well be a product of federal regulation. The 90/10 rule is one such federal regulation that may inadvertently incentivize colleges to raise tuition in response to aid increases, thereby diminishing if not outright negating the effect of assistance provided by federal student aid. According to an article in The Chronicle of Higher Education, the 90/10 rule requires that no more than 90 percent of a college’s annual revenue come from federal student aid (in the form of loans or Pell Grants for example). If an institution fails to abide by the rule for two consecutive years, they lose all access to federal student aid funding, making compliance especially pivotal for schools seeking to matriculate recipients of federal student loans and Pell Grants. In efforts to remain compliant, universities have employed various strategies to diversify their income and reduce the proportion of revenue stemming from the government. For example, in 2011, Corinthian Colleges moved to raise their tuition by around 12 percent in order to outpace the loan maximum and continue drawing from federal aid. While legally permissible, actions such as these essentially undo the intended purpose of federal aid, leaving students most in need of support indebted by tuition increases. In this way, the 90/10 rule provides a mechanism in which an increase in federal loan maximums leads to tuition increases, and schools are compelled to raise tuition to offset corresponding rises in aid to remain below the 90% threshold.
Unsurprisingly, many have found Corinthian’s decision to raise tuition in this way to be rather unethical. Vice President of the Institute for College Access & Success, Pauline Abernathy for example, calls Corinthian Colleges’ decision to raise tuition “the height of cynicism”, placing the rise in tuition at the fault of Corinthian Colleges, while others further point to the longevity of the 90/10 rule as evidence of neglect on behalf of Corinthian. However, others argue in support of Corinthian, claiming their hands were tied by federal policy. Higher education consultant Stephen Freidheim, claims that increases in aid maxima has made complying with 90/10 increasingly difficult. Just how much autonomy, then, do universities hold over their tuition rates, and who may be held accountable for the steady growth of tuition at institutions across the United States?
The ineffectiveness of congressional efforts to improve college affordability by deterring tuition increases suggests that colleges may have less control over increases in their tuition than critiques of tuition hikes may assume. According to a study from Southern Methodist University, in an effort to promote tuition price transparency, the U.S. Department of Education has maintained six lists since 2011 identifying colleges with the highest net tuition and the “largest increases (top 5%) over the most recent 3-year period in tuition and net price” as a part of the Department’s College Affordability and Transparency Center. In examining the effects of CATC lists on college tuition, the study used IPEDS data to compare changes in tuition shifts between schools just above and below the 95 percentile cutoff. Altogether, the study found “no evidence that institutions above the cutoff on the change in tuition list differ in any of the outcomes when compared with institutions right below the cutoff.” At first glance one might consider the lack of variation across the cutoff to suggest that colleges are merely indifferent to their ranking on CATC lists. However, it’s noteworthy that prior to 2014-2015, lists were based on final IPEDS data, allowing colleges and universities to amend their statistics based on the provisional IPEDS report. Out of concern that universities were manipulating their information to remain below the cutoff, the Department of Education amended their policy to base CATC lists on provisional data. In support of the Department’s concerns, the study found that prior to the CATC’s use of provisional data, “institutions that would have been included on the CATC list based on their provisional data … decreased the amount of tuition or net price for the final data.” Thus, it appears that universities demonstrate an interest in their list rankings, and further possess an incentive to present a favorable image by remaining off the CATC entirely. If universities have a vested interest in holding more appealing CATC rankings, then subsequent tuition raises would appear to be not entirely due to the college’s choices, but rather the result of some other imposing factor.
Recalling Congress’ 90/10 rule to limit federal aid going to any one institution, combined with continually increasing federal loan amounts, tuition hikes may best be explained as the product of a sort of regulatory coercion. As federal aid increases, universities are left with the difficult decision to either endlessly diversify their income (as has been attempted by institutions such as the University of Phoenix) or, when the former option becomes infeasible, raise their tuition to ensure continued flow of aid to their students. While such tuition raises are certainly unappealing for colleges, they ultimately pale in comparison to the calamity that would transpire from having all aid pulled from their students. In this way, tuition continues to rise not entirely at the will of colleges, but in part as the product of a steady march guided by rising loan availability and accompanying funding limitations. This mechanism is corroborated by the Federal Reserve Bank of New York’s study, which notes that among for-profit institutions, which often rely extensively on federal student aid, “abnormally large tuition increases” were documented between 2007 and 2010, which coincide with the 2007-2008 and 2008-2009 federal student credit expansions. Given tuition’s dependence on federal policy then, it is clear that a policy-driven solution will be required to mitigate the rise of tuition and slow the resultant accrual of student debt.
In order to curb further tuition increases, effective federal policy should include provisions to mitigate loan increases and structure future adjustments to aid in a manner well-informed of 90/10 rule compliance. Such a policy may be based upon a measure of the amount of federal aid as a proportion of total revenue streaming into a sample of schools across the United States, only committing to aid increases when a substantial percentage of universities fall well below the 90% limit. In cases where aid-to-revenue proportions are vastly disparate across universities, a differential approach may be employed, whereby aid availability is adjusted by institution according to an institution’s existing compliance with 90/10, as opposed to cutting off all aid should the limit be surpassed. Such a policy shift would preserve the safeguards introduced by the 90/10 rule, ensuring that no institution usurps an undue amount of federal aid, while also reintroducing the market-guided effects intended by previous policy initiatives such as the CATC lists. Without the concern of having their tuition forced ever-upward by loan amounts, colleges may revert to the influence of consumer opinion (a component of which is influenced by CATC standing) and choose to minimize excessive tuition increases in a way which reflects favorably upon the institution.
Congress’ efforts to quell the financial burden imposed by higher education, while well intentioned to improve college affordability and access, have fallen short of their original purpose. Instead of encouraging cost-effective and innovative higher education business models able to produce competitive tuition rates, Congress’ overlapping policy initiatives have constrained tuition prices by overriding the influence of other market actors. This in turn, has facilitated the development of a national crisis in student debt that will require innovative and dynamic federal intervention to counteract the ramifications of decades of contradictory policies. Altogether, Congress’ mission to improve college accessibility begins with empowering colleges to take control over their tuition pricing, thereby restoring affordability to college education.
Image by Tom Woodward is licensed under CC BY-SA 2.0.
