College Tuition Is Too High, But Competition Can Fix It

Congressional Democrats’ demand that President Biden forgive $50,000 in student debt per borrower is regressive and unfair. But debt forgiveness also doesn’t address the reason so many borrowers complain that their student loans are unaffordable: college tuition is too expensive.

In 1996, the average four-year public college charged in-state students an average of $4,000 per year after institutional discounts. By 2016, that number had more than doubled to $8,800. Private colleges now charge students more than $20,000 after discounts.

Government financial aid has lessened the blow somewhat. Congress increased the federal Pell Grant several times over the last two decades. Scholarships offered by states, employers, and private philanthropists have also become more generous. The average public college student now receives over $5,000 per year in grants, not counting institutional discounts offered by the college.

America’s financial aid system has shielded low- and middle-income students from the worst of the tuition hikes. But relentless increases in underlying tuition rates mean that students aren’t feeling the benefits of that generosity.

If colleges charged students the same amount as they did in 1996, adjusted for inflation, increases in government financial aid would have completely eliminated tuition liability for the average public college student. But since underlying costs are increasing much faster than inflation, government aid programs are running faster just to stay in place.

Indeed, federal aid itself bears much responsibility for rising college tuition. A wealth of academic evidence finds a clear link between government subsidies and higher prices. But there are additional reasons for rising tuition. Colleges can get away with raising prices to capture federal aid because students have little insight into the true price and quality of the college product.

Well-functioning markets give consumers the ability to comparison-shop. When you purchase a laptop computer, you can compare dozens of models and balance a higher price tag against better quality. This transparency disciplines the market and puts pressure on producers to keep costs down.

No such transparency exists in higher education. Colleges advertise an outrageous “sticker price” of $50,000 or more, but offer most of their students significant discounts once acceptance letters go out. The result is that most students don’t know what they will pay for college until they have already limited their choices. High school seniors usually apply to three colleges or fewer, and the number that admit them is even lower. This allows colleges to put their applicants in an impossible bind: pay our outrageous prices, or don’t go to college at all.

Heavy regulation also means that new institutions of higher education face difficulties entering the market. New colleges must receive approval from a state authorizer, which can take up to a year. To access federal financial aid and compete on a level playing field with incumbents, new institutions must gain recognition from an accreditor, which can involve years of work and several thousands of dollars in fees. These barriers to entry limit competition and keep prices high.

Fixing the high cost of college will require more than restoring sanity to the federal student loan system, though reforms to limit excessive lending would certainly be welcome. Policymakers also need to tackle the features of the higher education marketplace that make it so uncompetitive.

The “gatekeepers” of higher education—state authorizers and accreditors—should extend recognition to new institutions of higher education that can produce good outcomes, in the form of strong job placement rates and graduate earnings. Rather than requiring institutions to check a hundred boxes before they can operate, gatekeepers could extend provisional approval while schools demonstrate outcomes, thereby lowering barriers to entry.

Congress can also mandate the disclosure of better data on college prices. Various administrative agencies already collect detailed data on what students pay for college, but they don’t have the authority to organize and release it. But if students have a reasonable estimate of what they will pay before they even apply to college, comparison-shopping for education will become easier.

Rising college tuition represents a growing burden for families and contributes to voter demand for an unaffordable $1 trillion student debt jubilee. But policymakers can constrain the growth of student debt if they tackle the sources of the problem: the subsidies, regulations, and gatekeepers that prevent students from finding a competitively priced education.

For more on the rising cost of college, please read my new report: “Why College Is Too Expensive—And How Competition Can Fix It.”