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A Radical Solution For America’s Worsening College Tuition Bubble

Over the last three decades, through good economic times and bad, one of the few constants in American life has been the relentless rise in the price of higher education. The numbers are stark: According to the non-profit College Board, public four-year universities raised tuition and fees by 8.3 percent this year, more than double the rate of inflation. This was typical: Over the last decade, public university tuition grew by an average of 5.6 percent above inflation every year. And the problem is also getting worse: In the 1990s, the annual real increase was 3.2 percent. In the 1980s, it was 4.5 percent.

Even as the economy has reorganized itself to make college degrees increasingly indispensable for the pursuit of a decent career, federal financial aid programs and family income haven’t been able to keep up with incredibly buoyant tuition bills. Students and families have been left with only one recourse: borrowing. The federal government is now lending college students over $100 billion per year, a 56 percent per-student increase, after adjusting for inflation, from just ten years ago. Most undergraduates borrow today, and leave college with an average of over $25,000 in debt. And as the many signs displayed by the Occupy movement attest, some young people owe much more than that. For a growing number of students, entering the lucrative college-educated realms of the economy is like being smuggled across the border—you can get to the promised land if you try hard enough, but you arrive in a state of indentured servitude to the shady operators who overcharged you for the trip.

Politicians are taking note of the rise in public outrage. Several weeks ago, at a student financial aid conference in (appropriately enough) Las Vegas, U.S. Secretary of Education Arne Duncan exhorted the nation’s colleges and universities to work with more urgency and creativity to “contain the spiraling costs of college and reduce the burden of student debt.” The next week, President Obama held a private meeting with a small group of college presidents to discuss the issue. Vice President Biden followed a few days later, telling a group of parents that “The incredible cost of college education is for the first time crushing hundreds of parents.” (He meant hundreds of thousands, presumably.)

But while the administration has done a great deal to mitigate rising college prices by increasing funding for Pell grants and making it easier for students to pay back loans, it has done little to restrain the growth of college prices themselves. The recent communications blitz has raised the profile of the issue, but solutions that might actually bend the higher education price curve remain in short supply. And that’s because tuition addiction is a function of basic structural elements of the higher education system that will require equally foundational changes to alter.

But the severity of the problem should not be a deterrent to finding a solution. The best thing federal policymakers can do is help colleges hit rock bottom as quickly as possible, before the opportunity for recovery is lost. That will mean creating a new policy structure allowing for new higher education providers—not all of them colleges—to help students learn.

BACK-BREAKING TUITION increases are, in many ways, an inevitable consequence of the way our higher education system is currently designed. Imagine you’re in the business of selling apples that cost $1 on the open market. Then the government decides that more people should have the opportunity to buy apples and society would benefit from a net increase in apple consumption. So it decides to drop the price of apples to 60 cents. Sometimes it does this by giving you 40 cents for every apple you sell, on the condition that you start selling apples for 60 cents. Sometimes it gives people vouchers worth 40 cents that can only be used to purchase apples from approved vendors.

At first, the policy works splendidly. Apples are effectively less expensive so more people buy them and the nation is suffused with apple goodness. But then you, the apple vendor, look at the situation and say “Hey, the market price of an apple is still $1. Wouldn’t it be great if I could charge $1 for apples, but still get 40 cents from the government for every apple I sell?” Raising the price all the way from 60 cents back to $1 in a single year would be too obvious and jeopardize political support for the apple subsidy program. So you start raising prices by three, four, or five percent above inflation annually. When annoyed public officials begin asking why, you explain that apple production is an expensive, labor-intensive business, and that all of the extra money is being used to produce the very best apples money can buy. Since apple quality is substantially a matter of taste, this is a hard claim to refute.

Meanwhile, you use some of your new profits to sponsor crowd-pleasing sports events on weekends, building public goodwill. Other profits are used to hire professional lobbyists to plead for both more subsidies and more freedom to set prices. You also convince the government to allow you and other incumbent apple sellers to form a private organization with the authority to decide whether new sellers can become “approved apple vendors” for the purposes of receiving public subsidies. Unsurprisingly, few new sellers are approved. 

But eventually things start to break down. As time passes and price increases accumulate, the public starts to notice that while the taxes they pay to support apple subsidies are staying the same, the price of subsidized apples is creeping closer to the market price. This seems unreasonable. Meanwhile, when the economy turns sour, available tax receipts for apple subsidization decline. Instead of raising taxes to make up the difference, public officials drop the per-apple subsidy to 30 cents. This is bad for you, because it means you either have to spend less money on the exotic orchid greenhouse you’ve built next to the apple orchard—the reason, truth be told, you got into the apple business in the first place—or raise prices even further. Luckily, since you’ve kept new vendors out of the market and prices are still below the market rate, you can get away with raising prices, and so you do.

This is essentially the story of public higher education over the last thirty years. Diplomas are, of course, not apples. But they are more like apples than colleges like to pretend. In particular, highly-profitable lower division courses in common subjects like Economics, Calculus, and Psychology have similar curricula at most colleges and rely on many of the same nationally-marketed textbooks. They are often taught by people with no formal training in teaching. These courses are, in the education context, commodities.

It’s true that we also have many private non-profit and for-profit colleges and universities in this country. But they, too, are afflicted with the craving for increased tuition. In part, that’s because they benefit from many of the same subsidies. Non-profit colleges don’t pay taxes, even when they have billions of dollars in the bank. People can use their publicly-financed college vouchers—and, increasingly, claim lucrative tax credits—for private college tuition. Because nobody really knows which colleges provide the best education, consumers have been trained to think of colleges like a luxury good: The best are the most expensive, by definition.

Non-profit colleges also don’t have shareholders demanding that they maximize the difference between revenues and expenses. Instead, they’re run by administrators and faculty who are most interested in competing for status with other colleges, which is determined by the size, expense, and ornateness of the academic greenhouses in which basic research and scholarship are produced.

For-profit colleges, on the other hand, do have shareholders, and the for-profit sector has expanded rapidly in recent years. But most have made the very rational decision to get in on the subsidy scam. Instead of gaining customers by competing on price (a tricky thing to do when people think the best colleges are the most expensive, by definition) they’ve taken advantage of two highly scalable systems: online course delivery and the federal government’s ability to lend money. Instead of using their outsized profits to pay for expensive greenhouses, they’ve used the money to fund national marketing efforts designed to keep enrollment growth, stock prices, and executive compensation high.

In other words, everyone currently in the four-year higher education business has a host of strong incentives to raise prices and hardly any incentives to lower them. Unsurprisingly, prices often go up and almost never go down. In the long run, this will badly undermine the legitimacy of higher education and weaken the case for public subsidization. College will become a private good affordable only to the minority subset of the population that can afford it. America’s aggregate level of human capital will suffer and our competitive position relative to other nations will decline. According to the OECD, many other industrialized countries are already increasing their levels of college attainment faster than we are.

Colleges have a strong collective interest in preventing this from happening. But each college has a strong individual interest in mainlining student tuition hikes for as long as they can. After all, if only rich people can afford to attend your college, that means you have a selective-admissions college full of rich people—which is what most colleges want to be. It’s mathematically impossible for all colleges to win this game, but they all think they can be among the winners. And the people running them today are concluding, correctly, that they’ll likely be long gone before the day of reckoning comes.

All of which is to say that college tuition addiction, like any serious dependency, can’t be cured by gentle moral exhortation. College won’t kick the habit of raising prices until the things they care about—money and reputation—are seriously threatened by competitors. Therefore, federal policymakers should help create those competitors by helping establish many brand-new colleges and universities.


FOR AN INDUSTRY so central to our roiling, adaptable society, higher education is remarkably static. Students today go to almost exactly the same set of colleges their parents went to, and their parents went to. Most private colleges were founded decades or more ago. (A few pre-date the Republic.) The great mid-20th century process of building out a system of public universities and community colleges to accommodate the baby boom and transition to mass higher education was largely complete by the 1970s. Since then, most colleges have firmly settled into their foundations. They are what they are, and won’t change unless existentially threatened—and maybe not even then.

State governments can’t be relied upon to birth new competitors. Colleges exert outsized influence in statehouses where the political class is often dominated by graduates of flagship public universities. Institutions whose professional sports teams serve as a locus of civic identity can easily quash any attempt to break up their monopoly over public funds. States have also been pulling back on their funding of higher education, leaving only the federal government, which boosted funding for Pell grants by $20 billion over the last two years and now directly handles the vast majority of student loans. The financing of American higher education is being steadily nationalized and that creates new obligations and opportunities for federal policymakers to change the workings of the industry in a way that benefits students and the public interest.

That doesn’t mean the U.S. Department of Education should start running its own university system. It would do this badly. Instead, Congress and the Obama administration should create a new policy framework under which organizations can become officially recognized providers of higher education. Note, I do not say “officially recognized colleges or universities.” That’s because one of the things that makes college so expensive is that colleges (and the college experience these institutions provide) are expensive and currently people can only receive government-subsidized higher education services from colleges. Under the new system, any provider could receive payment via Pell grants, federal loans, or other current and imagined federal aid systems if they agree to a few baseline conditions.

First, they would be subject to strict price regulation. They would be free to offer courses for less than the maximum allowable amount per credit, but not more. Second, they would have to be extremely transparent about quality. They would be required to provide public information about how much their students learn, and have their access to federal aid rescinded if students are not learning enough.

These new providers would not have to be approved by independent accrediting bodies run by existing colleges and universities, as recipients of federal aid are today. In fact, they wouldn’t have to be colleges at all. InsideHigherEd recently reported that a pair of well-known Stanford professors are currently teaching an Artificial Intelligence course to about 200 Stanford students—and more than twenty thousand students around the world, online. The non-Stanford students won’t receive credits from Stanford, but they will receive official documentation from the professors as to how they scored on course tests and their overall rank. Under this new system, those professors would be free to set up their own business teaching Artificial Intelligence over the Internet, and students would be free to pay them with federal aid. Other providers might take advantage of the fast-growing body of open educational resources—free online courses, videos, lectures, and syllabi—and add value primarily through mentoring, designing course sequences, and assessing learning. 

Students, of course, won’t want to pay for these courses if they can’t receive college credit that can be translated into a degree. So as part of the new system, any existing colleges that want to continue receiving federal financial aid will be required to accept any credits granted by participants in the new system in transfer. Because these new providers will have the imprimatur of United States government approval, they will be able to compete for students who want degrees backed by sufficient reputation. And because they will be inexpensive and attached to verifiable data about how much students are learning, they will make a compelling value proposition when competing with traditional colleges that have no such data, charge more money, and are weighed down by legacy expenses and change-resistant cultures.

This will be bitter medicine for many existing colleges and universities. Some will adapt and even thrive by becoming more efficient and productive. Others will not, and die out. This will be a significant loss for some local communities and will threaten the financial structure that supports vital academic scholarship of many kinds. Much university scholarship today is indirectly paid for with revenue from student tuition and public subsidies. As the higher education market starts to break into pieces and those kind of hidden subsidies are laid bare, society will need to find new mechanisms for supporting the work of the best scholars in the field.

But a collapse of the old system is going to happen one way or another soon enough: that our addiction-wracked higher education system faces some painful future reckoning is certain. The question is whether this happens via slow wasting or if we have the foresight to build a better, more productive modern system of higher learning before it’s too late.

Kevin Carey is the policy director of Education Sector, a think tank in Washington, D.C.