Why tuition fees should rise

When that funding goes down it puts pressure on schools with limited options — they can cut campus budgets, admit more students who need less aid or raise tuition, said Michael Mitchell, lead author of the report and the senior director of equity and inclusion at CBPP.

During the Great Recession, declining public funds caused tuition to skyrocket. Today, tuition accounts for about half of college revenue, while state and local governments provide the other half. But roughly three decades ago, the split was much different, with tuition providing just about a quarter of revenue and state and local governments picking up the rest.

Meanwhile, the cost of attending a four-year public college or university has grown significantly faster than income over the same time period.

Because so few families can shoulder the burden, they have increasingly turned to federal and private aid to help foot the bills. However, the deeper question is why the market has allowed these cost inefficiencies to persist. In most industries, competition brings down the cost of products over time. Akers explores four potential explanations: students overestimate the return to a degree; colleges are not transparent about their true prices; too few institutions operate in each regional market; and there are significant barriers to entry for new educational providers.

The decision to go to college is fundamentally a cost-benefit calculation. If the financial return to college is high enough, then students should theoretically be willing to pay high amounts for tuition, because they still come out ahead in the long run. But few students are sitting down with Excel spreadsheets to calculate the return to college; instead, they rely on impressions of how much a college degree will earn them in the long run. Yet only some degrees are worth paying top dollar.

Even if that is the case, a sufficiently competitive market for higher education should still bring down the price of college. Akers therefore identifies another problem: the true price of a college education is usually hidden.

This makes comparison-shopping across a wide swath of institutions impossible. Application fees and time constrain the number of colleges each student can apply to, so the number of colleges among which a student can compare prices may be as little as one.

Knowing that students will have few alternatives by the time they actually see what they will pay, colleges have every incentive to be stingy with financial aid.

Another factor constraining choice is that most students have limited options for higher education. While there are thousands of accredited colleges nationwide, the typical student has far fewer options. Most students attend a college in their home state, thanks to a combination of steep discounts for state residents, familiarity with local schools, and a desire to save money by living at home. With few competitors, colleges face less competitive pressure to provide price discounts or improve the quality of education.

High prices and few institutions should provide ample opportunity for alternative providers of education to enter the market and lower prices through competition. For public institutions, in-state tuition and required fees are used. Room and board are based on full-time students. Data through —96 are for institutions of higher education, while later data are for degree-granting institutions. The degree-granting classification is very similar to the earlier higher education classification, but it includes more 2-year colleges and excludes a few higher education institutions that did not grant degrees.

Some data have been revised from previously published figures.