America’s higher-education system passed a milestone a few years ago that university officials would probably prefer no one noticed: Annual tuition plus room and board at some private institutions overtook the median household income. Going to a selective college, for the first time, cost more than the average family earns in a year.
Of course, tuition varies widely, but—in general—the price has jumped three times faster than the rate of inflation in the past 25 years, outpacing even the spiraling cost of health care. Increases in costs have only accelerated since 2008, when the economic downturn caused huge endowment losses at private universities and state budget cuts at public ones.
This increase has not escaped the attention of most Americans. Most think higher education is not only too expensive, but 61 percent also believe it’s only a fair or poor return on their investment, according to a survey by Northeastern University. Nine out of 10 say cost is now a major barrier to obtaining a degree. In an annual survey of freshmen nationwide in 2011 by the Higher Education Research Institute at UCLA, a record 42 percent said cost was “very important” in their decision about where to enroll. Record numbers also said financial aid was so essential that not being offered such help caused them to turn down the top schools on their lists.
Students and their families are beginning to vote with their feet, and their choices are starting to affect how colleges and universities do business. A few middle- and lower-tier private institutions, as well as some state universities and colleges, are being forced to freeze or reduce their tuition, and new low-cost or even free models of delivering a higher education are threatening to end their long-held monopoly on degrees required by employers. This Topics section examines the causes and consequences of college affordability through the most recent research, articles and other resources.
How—and what—students pay
Few students pay the published, or “sticker,” price for college. Most get discounts based on financial need or academic merit through institutional or government financial aid, about two-thirds of it in the form of loans. What’s left for students to pay after that assistance is called the “net price.” Although universities would seem likely to benefit from people knowing their net prices, which are always lower than their sticker prices, the schools are generally reluctant to disclose these figures, fearing that all students will demand to pay only the lowest available tuition or that consumers will judge less-expensive colleges as being of lower quality.
Collectively, in 2011-12 U.S. universities and colleges provided around $42 billion a year in grant aid to their students, meaning scholarships and other types of financial assistance that do not need to be repaid. The federal government supplied about another $34 billion in Pell Grants, which are given based on need and also do not have to be repaid. As of the 2012-13 academic year, the maximum annual Pell Grant any student can receive is $5,550, depending on financial need, educational costs, and whether he or she attends school full- or part-time.
Veterans who served in the military on or since September 11, 2001, also are eligible for higher-education benefits under the new GI Bill. Some 773,000 veterans have so far used $20 billion worth of those benefits.
The government makes another $107 billion a year available to students in the form of loans. During the battle over health care, Congress ended the longstanding practice of giving billions in subsidies to banks to provide those loans, which are now made directly through university financial-aid offices. That reform is projected to save the government $52 billion over 10 years, money slated to be channeled back into the Pell Grant program. Those loans offer relatively low interest rates and other favorable terms.
Private lenders also still make loans to students. While some borrowers with excellent credit can get private college loans at interest rates of as little as 6 percent, these loans generally have variable interest that is usually higher and often require parents or others to co-sign.
About two-thirds of students borrow to pay for college, and the Project on Student Debt reports that, in 2012, they graduated owing an average of $26,600. In all, some 38 million borrowers are shouldering $948 billion—just short of $1 trillion—in government-backed student loans, and that figure is increasing. More than 9 percent of these borrowers default within two years and 13.4 percent within three, the U.S. Department of Education reports.
Some of this debt is driven by borrowers’ confusion about the complicated student-loan system. One of the biggest mistakes students make is borrowing from private lenders when they’re still eligible for cheaper federal direct loans. More than one dollar in five of student loans comes from private sources, even though at least half of undergraduates who take out private loans could take out federal direct loans, according to The Institute for College Access and Success.
One of the more surprising things about who pays what to go to college is that, in spite of their claims of being increasingly short of money, U.S. universities—including taxpayer-supported public ones—give about $5.3 billion a year in aid to students who do not meet the government’s definition of financial need, according to the College Board.
One reason universities give money to families regardless of their level of need is to attract applicants with high grade-point averages and SAT scores—who often come from affluent communities—to help boost the institutions’ overall reputations and standings in college rankings. Another is that universities use these inducements to get wealthier families to enroll, because they help subsidize lower-income students in the long-term. A third is to compete with well-endowed elite universities such as Harvard, Yale and Stanford that can afford to give grants to families with income as high as $200,000.
Another nearly $4 billion a year goes to families with annual incomes of from $100,000 to $180,000 in the form of tuition tax breaks of up to $2,500 under the federal American Opportunity Tax Credit. Families earning more than $100,000 a year are now getting more than a quarter of the total of those tax breaks, which ostensibly are meant to help low-income students. The share of this form of financial aid going to low-income students has fallen steadily over the past 10 years, government statistics show.
The system of subsidies that underpins university costs is more convoluted than the fares charged by airlines for different seats on the same flight. Rich students subsidize poor students, for example, because some of the tuition they pay goes to classmates who can’t cover the full cost. At least 15 states have policies that require this, the State Higher Education Executive Officers Association (SHEEO) says. In Arizona, for example, the universities channel about a quarter of tuition revenue from students who can pay into discounts, grants and other forms of financial aid for students who can’t. Critics say this practice penalizes not only full-tuition-paying, high-income parents, but also middle-class families already squeezed by escalating costs. In mid-2012, the Iowa Board of Regents ordered the practice of full-tuition-paying students subsidizing lower-income classmates to end in that state within five years.
Out-of-state students at public universities also are increasingly subsidizing in-state students, because out-of-state tuition is almost always higher than in-state. Because of this, public universities aggressively recruit out-of-state students. International students also subsidize domestic ones. Eighty-one percent of international students pay the full tuition, a much higher proportion than students generally, bringing in around $20 billion a year in tuition and living expenses, according to the U.S. Department of Commerce and the Institute for International Education.
Undergraduates in low-cost disciplines such as the humanities and social sciences also help to pay for students in subjects that cost more to teach, including fine arts, agriculture, law and engineering, the Delta Cost Project on Postsecondary Education reports, because they, too, all pay identical tuition.
To provide cushioning for student borrowers whose federal students loans consumed much of their incomes, Congress in 2007 passed a law called Income Based Repayment, which starting in 2009 allowed borrowers to pay their lenders based on a formula that took into account how much they actually earned. Since 2009, two more versions of IBR have been introduced, with one recently rolled out (Pay As You Earn) and the other slated to debut in July of 2014.
While the three versions have slight differences, they are similar in function. The programs take into account the size of the borrower’s family, federal loan balance and income. Lenders use a sliding scale to determine both eligibility and the new amount the borrower repays monthly. Undergraduate and graduate school Stafford loans, as well as Grad PLUS loans for graduate students, can be rolled into IBR. Payments are capped to either 10 or 15 (2007 version) percent of the borrower’s discretionary income—defined by the federal government as the money left over after basic living expenses are met—and any remaining balance, including the amount that accrued from interest, is pardoned after 20 or 25 (2007 version) years, depending on the type of IBR program and employment the borrower maintains. Borrowers who are employed at a non-profit or government agency can have their debt pardoned through IBR after 10 years. (An executive order from president Obama will rework the 2007 IBR program to hew more closely to the later versions; the changes will take effect in late 2015.)
But the program has been slow to enlist users. Despite the relief it can offer to borrowers with modest incomes, only 1.3 million people have signed up for the 2007 version of IBR as of January of 2014. For analysts, that number is surprising because many more borrowers are eligible.
While IBR is popular among student advocates, some reports argue that graduate universities can use a legal loophole that effectively overcharges students by encouraging them to take out loans and then sign up for IBR, with taxpayers footing the bill. Though undergraduate Stafford loans are capped at $31,000 for dependent students, there’s no limit on Grad PLUS loans—however students won’t receive more than they need for tuition, room and board, and other education expenses. But universities are generally free in determining their own prices.
There are other issues with IBR. Current law states pardoned debt is still taxable, which may push the borrower into a higher tax bracket if his remaining balance is large. Nor is IBR necessarily the most financially prudent recourse for every borrower. Even though the program reduces the monthly payment on qualified loans, interest that builds can still increase the balance of the loans. If over time a borrower’s income exceeds the level necessary to remain in IBR, he might face a larger balance because his repayment plan will kick back to the original term of the loan. Most student loans have a set repayment plan elapsing 10 years, though they can be adjusted to lower the monthly balance. And IBR’s feature of pardoning student debt creates perverse incentives, argue some scholars, that cost taxpayers money which could be spent elsewhere.
In August of 2013 a White House fact sheet noted that roughly two-thirds of borrowers who take part in repayment plans based on income earn less than $60,000 a year. Altogether, some 2 million of the 37 million borrowers who eligible for such plans are currently enrolled in them.
New developments in college costs
The vast amount of money spent by the federal government would seem to give it leverage over college costs. But there has been only slight movement in the direction of regulating tuition. The Obama administration controversially proposed, for example, that universities that increase their net prices at the fastest rates would forfeit their eligibility for some federal financial-aid money, but that idea has many caveats and little momentum. Universities have fiercely resisted tuition regulation, which they characterize as a form of price control.
Americans already appear to be increasingly making college-going decisions based on price. More than 40 percent of private colleges reported enrollment declines in the 2011-12 academic year, according to the National Association of College and University Business Officers. Experts attribute this to rising costs: More than half of private colleges had to give more discounts in 2012 than in the year before to continue to attract students, the credit-rating firm Moody’s reported.
These difficulties, combined with the decline in the number of high-school graduates after a peak in 2009, is forcing some colleges and universities to freeze or cut tuition. Politicians, too, are getting the message. The governors of Florida, Texas and Wisconsin have called on universities in their states to figure out a way to offer $10,000 degrees.
A few universities are also starting to charge different prices for different majors to better reflect their actual cost. At least 143 public universities now levy so-called differential tuition that varies by major and, in some cases, by year of enrollment, the Cornell Higher Education Research Institute found. The University of Maine, for instance, adds a $75 fee for engineering courses, and the University of Kentucky $460 per semester for nursing students.