Lana Oconnell
The rising cost of tuition has been a topic of concern for many, with some questioning whether colleges inflate tuition fees to compensate for offering financial aid to poorer students. While the issue is complex, there is evidence to suggest that colleges may be contributing to the problem. For instance, colleges are competing to offer the best amenities and programs to attract students, which drives up costs. Additionally, funding cuts from legislatures and the shift in financial aid from needy to wealthier families further exacerbate the issue. As a result, low-income students face increasing costs and struggle to repay their debts, while wealthy students gain even more substantial returns from their education, widening class divisions.
| Characteristics | Values |
|---|---|
| Reason for tuition inflation | Colleges are not exempt from inflation, and they increase tuition at a rate higher than the CPI inflation rate. |
| Colleges compete to offer the best amenities and programs to attract the "best" students. | |
| Colleges are building new facilities, committing to huge ongoing costs, and then passing these costs onto students when enrollment drops. | |
| Impact of tuition inflation | Lower-income students are becoming more reliant on student loans to pay for college, but struggle to repay their debt. |
| Low-income students are seeing their costs increase more than those for higher-income classmates. | |
| Poor students continue to enroll in lower-value institutions than their rich peers. | |
| Solutions to tuition inflation | Increase federal funding to make higher education more affordable. |
| Offer more financial aid to low-income students, for example, by making federal or state grant programs more generous. | |
| Make college free for most or all students, with colleges or states committing to limiting how much their costs rise each year. |
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What You'll Learn
Colleges compete to offer the most to the best students
Colleges are indeed competing to offer the most to the "best" students, who are willing and able to pay for these amenities and programs. This competition has driven up the cost of tuition, as colleges spend money on new facilities and amenities, such as sports centres and libraries, which they then recoup through increased tuition fees.
This competition for students has led to a shift in financial aid from needy families to wealthier ones. Wealthy students are now more likely to receive financial aid due to a federal formula that does not consider home equity and retirement savings, which disproportionately benefits higher-income families. This has resulted in a subsidy worth thousands of dollars annually for families earning above the national median income. At the same time, lower-income students are becoming more reliant on student loans and are struggling to repay their debt.
Colleges are also competing to distinguish themselves as unique institutions, offering enhanced financial aid packages, slashing tuition prices, and constructing more elaborate amenities. They are seeking to attract students by providing the best overall experience, which includes not only academics but also extracurricular activities and social opportunities.
This competition has resulted in increased costs for students, as colleges invest in new facilities and programs, which are then passed on to students in the form of higher tuition fees. It has also led to a focus on rankings and prestige, with colleges seeking to improve their position relative to their peers. This has resulted in a system where poor students fall behind, as they are steered towards less valuable degrees and are less likely to receive financial aid.
To address this issue, it has been suggested that large, well-resourced universities should expand access to low-income students, offering them the same admissions preferences given to legacy students. Additionally, universities should provide accurate wage data to help students choose majors with higher earning potential and make more informed decisions about their education.
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Financial aid is shifting from needy families to wealthier ones
In the competition for revenues and students, financial aid is shifting from needy families to wealthier ones. This is due to the intensifying competition for students from high-income families, who contribute much-needed revenue and increasingly expect to receive scholarships and discounts. Colleges and universities depend on money coming in, and sophisticated enrollment management strategies are driving them to stay afloat. As a result, financial aid is being siphoned away from students who meet the federal definition of financial need.
This shift in financial aid has resulted in a subsidy worth thousands of dollars annually for families earning above the national median income. Researchers from Wellesley College and the Federal Reserve Bank of Philadelphia have found that the federal formula used to calculate financial aid does not take into account home equity and retirement savings, which disproportionately benefits higher-income families with these assets. As a result, the formula determines that these families can afford to pay less, and they are awarded more financial aid.
At the same time, the increase in college costs is falling more heavily on lower-income families, as federal and state financial aid fails to keep up with rising prices. Lower-income students are becoming more reliant on student loans to pay for college, but they struggle to repay their debt. Students who receive federal Pell grants, which generally go to families earning $40,000 or less, are five times more likely to default on their loans within 12 years of entering college than their higher-income classmates.
To address this issue, four-year universities could expand access to low-income students by offering them the same admissions preferences given to legacy students. Universities can also better communicate the value of each major to help students choose majors with more wage potential. Additionally, policymakers should stop treating two-year colleges as an equal alternative to four-year institutions, as poor students have been steered towards less valuable degrees and institutions, further widening class divisions.
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Poor students are steered towards less valuable degrees
For decades, policymakers have claimed to expand college access. However, in reality, they have steered poor students towards less valuable degrees. This has resulted in a system that sets up poor students to fall behind, with fewer opportunities for advancement.
In the past, the returns on a college education were the same for both rich and poor students. Now, wealthy college-goers earn a premium nearly three times larger than that of low-income students, according to economists Zachary Bleemer and Sarah Quincy. For low-income students, the returns are half of what they once were. Higher education has become regressive, exacerbating class divisions.
The primary reason for this shift is a decades-long policy failure that funnelled poor students away from four-year research universities and towards two-year community colleges and for-profit institutions. Community colleges gained popularity in the 1960s and 1970s as an inexpensive way to increase access to education. However, the quality of education at these institutions has eroded over time due to cutbacks in government funding, resulting in higher dropout rates and lower graduation rates for low-income students.
Additionally, within the same university, poor students are more likely to choose majors with lower rates of return. This is partly due to gatekeeping in high-value majors, such as engineering, which often have separate applications and require higher test scores and grade point averages. STEM programs may also expect students to have completed prerequisite coursework that is more accessible to wealthy students. As a result, poor students are steered towards less valuable degrees, perpetuating a cycle of disadvantage.
To address this issue, four-year universities should expand access to low-income students and provide better information about the value of different majors. Universities can increase in-person enrollment and create inexpensive online offerings to attract students from two-year colleges. By offering accurate wage data, universities can empower students to make more informed decisions about their educational paths.
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Low-income students are more reliant on student loans
The rising cost of tuition fees has sparked a debate about federal lending policies. Students from low-income families are more reliant on student loans to pay for college, but they struggle to repay their debts. The cost of higher education has been rising sharply worldwide, and students with disadvantaged socioeconomic backgrounds are more likely to take out student loans.
The federal formula used to calculate financial aid does not take into account home equity and retirement savings, which disproportionately benefits higher-income families. This reduces the amount the formula determines they can afford to pay, resulting in a subsidy worth thousands of dollars annually for families earning above the national median income.
In the US, the value of attending community college has decreased relative to public research universities. Poor students continue to enrol in lower-value institutions than their rich peers. Policymakers have also steered poor students towards the least valuable degrees and two-year colleges, which offer lower returns in terms of future income. Wealthy college-goers now earn a premium nearly three times larger than low-income students, widening class divisions.
Students who receive federal Pell grants, generally awarded to families earning $40,000 or less, are five times more likely to default on their loans within 12 years of entering college than their higher-income classmates. Black students and first-generation college students are also more likely to default. This is partly due to lower levels of family wealth.
Students who do not complete their degrees often struggle the most with loan repayment. They are three times more likely to default than those who graduate. Graduates with debt are more likely to take higher-paying positions and are less likely to choose lower-paying public interest roles. This skews a valuable portion of the workforce away from roles that are critical to society.
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Colleges need more funding to enrol lower-income students
Furthermore, state funding cuts for higher education have contributed to significant tuition increases, making it harder for lower-income students to enrol and graduate. These cuts have worsened inequality, as rising tuition can deter low-income and minority students from pursuing higher education. The shift from need-based to merit-based financial aid also disadvantages lower-income students, who may qualify for less aid despite their financial needs.
The competition for revenue and students has led to a shift in financial aid from lower- to higher-income families. Colleges aim to attract students from high-income families who can contribute significant revenue and expect scholarships and discounts. As a result, lower-income students become more reliant on student loans, struggling with debt and higher default rates.
To address these issues, colleges should receive more funding to support the enrolment and success of lower-income students. This can include increasing state-funded financial aid, improving need-based aid, and expanding access for low-income applicants through admissions preferences and affordable online offerings. By addressing funding disparities, colleges can work towards reducing inequality and providing equal opportunities for all students, regardless of their financial backgrounds.
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Frequently asked questions
No, colleges do not inflate tuition fees to pay for poor students. In fact, it is often the case that poor students are disproportionately affected by rising tuition fees. This is due to a variety of factors, including the reduction of state funding, the increase in administrative costs, and the competition to offer the most amenities to attract students.
In the past few decades, there has been a significant decrease in state funding for public colleges and universities. For example, in Massachusetts, state-funded financial aid has been cut by 47% in the last two decades, while tuition and fees at public institutions have risen by 59%. This shift in financial aid from needy families to wealthier ones has made it more difficult for low-income students to afford college.
Colleges have been facing increasing administrative costs, including the construction of new facilities and the expansion of existing ones. These costs are often passed on to students in the form of higher tuition fees. Additionally, administrative bloat, or an increase in the number of highly paid administrators, can also drive up the cost of tuition.
Colleges are competing to offer the most amenities and programs to attract the "best" students who are willing and able to pay for them. This can lead to a cycle of colleges continuously adding new facilities and programs, which are then funded by increasing tuition fees. While wealthy students may be able to afford these increases, it is the middle-class and low-income students who often struggle the most with the rising cost of tuition.
