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How Public Universities Became So Expensive

Tuition at America’s public universities has nearly tripled since 1990. With President Biden looking to ease the burden for some students, experts explain how federal financial aid programs can actually contribute to rising costs. Photo: Storyblocks

Video Transcript

- Tuition has been growing fast at America's public universities. In-state tuition at public four-year schools increased from $3,800 in 1990 to more than $10,000. That's approaching three times the cost after adjusting for inflation. And as students logged into class from home in the pandemic, few schools offer discounts.

President Biden wants to make it more affordable to get a degree.

JOE BIDEN: Public colleges and universities should be tuition free for families earning less than $125,000.

- The president and his allies argue that the federal government should do more to help students, but research says that federal programs meant to help students pay for college have actually made higher education more expensive. The story begins on the balance sheets of public four-year schools, like the University of Oregon. In 2020, the university spent more than $975 million on operations. That includes wages for professors and administrators and upkeep on facilities.

A school can pay for some of its spending by drawing on donations that are stored in an endowment. But endowments often have spending limitations, so the more important revenue streams for public colleges tend to be state funding and student tuition. But what happens with the former greatly affects the latter. Josh Mitchell covers economics for "The Wall Street Journal."

JOSH MITCHELL: But what's happened over the years is that burden of paying for college has shifted from state taxpayers to the families themselves. And so now, we're seeing that more and more, schools are relying on tuition to get a bulk of their funding.

- During recessions, many states opt to cut funding for universities. The lost revenue is made up by raising tuition or admitting more students, especially ones from out of state or overseas. This gives public schools like the University of Oregon an incentive to expand their profile to attract not only in-state students, but also nonresidents, who have to pay higher out-of-state tuition fees. So they bolster their academic programs, and they add recreational perks, like gyms and rock-climbing walls.

JOSH MITCHELL: You know, if you can make your campus more attractive by investing in these types of things that students like to do and make it a fun environment, like a Disney World environment, more students are going to want to go there. More students are going to want to apply. And therefore, the school is going to have the power to raise tuition, and students will be willing to pay.

- These amenities are making prices rise, but there are deeper factors at play.

JOSH MITCHELL: Concerns about tuition and the high cost of college have been around since 1900, and they really started to rise in the '40s and '50s. And so Congress comes in, and they say, OK, well, we want to help people pay for college. We'll do it through student loans.

- The federal government started financing the college system when Lyndon Johnson signed the Higher Education Act of 1965.

LYNDON JOHNSON: If we reject learning, we render ourselves dead to the past and lost to the future.

- Since then, generations of leaders have approved changes to the act to influence how money flows into the college system.

JOSH MITCHELL: When Congress created this program under the Higher Education Act, it gave schools an incentive to raise their prices. Because think about it-- each student now has a voucher to pay for college. So this became a really big way for schools to make money through student loans. And so it gave kind of this perverse incentive for schools to raise their costs. Instead of competing on price, a lot of schools actually learned they could actually charge more, not less, if they could convince their students that they were prestigious.

- For example, say a student from California receives Pell grants and loans from the federal government. They're free to spend that money at the school of their choice. Some students opt for an in-state education, but others can be lured by an attractive amenity or key research program, and they can take those dollars out of state. This incentivizes schools to spend more on programs and facilities and, ultimately, charge more for tuition. But those increased costs affect every enrolled student, including those who are in-state. Dr. Grey Gordon at the Federal Reserve Bank of Richmond has studied what makes tuition prices rise so rapidly.

GREY GORDON: What we've found is that the main drivers of college tuition inflation are demand-side factors, that is, things that increase willingness of students to pay for school.

- Dr. Gordon and his colleague studied the factors that increased average college tuition between 1987 and 2010. They found that increases in federal financial aid were responsible for more than 54% of all tuition price rises observed in that period. In particular, a tweak to federal policies first seen in 1993 greatly contributed to this increase.

GREY GORDON: Before 1993, only subsidized loans existed. So those were given out to students with demonstrated need. But in 1993, the program was expanded. So now students who didn't qualify for subsidized loans now qualified for unsubsidized loans. This greatly increased the ability of students to pay for school and, ultimately, led to tuition increases.

- But the federal government isn't the only factor at play here. More parents are willing to spend on their children's education because college graduates earn 84% more than high school graduates over their careers. This earnings premium has risen over time, and it's making tuition prices rise, too.

So what can be done to rein in costs for students? Leaders in the private and public sectors have offered different paths forward-- most notably, President Biden. Experts tell "The Journal" that Biden's tuition-free proposal, as written, would have mixed effects on tuition price increases. His call to double the amount given as a grant will give students more money to spend at any college in the country. This could increase student demand for higher education, which would push prices up further.

But the plan also calls for the federal government to cover 75% of in-state tuition for qualifying students if states agree to pay the rest. This could calm some of the competition between public colleges for out-of-state students. An analysis conducted by Georgetown University Professor Anthony Carnevale did find that Biden's proposal would pay for itself.

ANTHONY CARNEVALE: We know, through a fairly elaborate set of economic analysis of the Biden plan, if we put the money down now, 10 years, the program will pay for itself.

- But Dr. Carnevale says the problem of rising tuition can't be addressed with government policy alone. The private sector has also proposed ways to train workers without a four-year degree. Google, for example, offers a six-month certificate that can stand in for a four-year degree in certain IT roles. And thousands of universities are collaborating with websites like Coursera to provide new inexpensive learning options.

Experts say that a consensus has emerged, costs for college are too high. And in a world shaken by the coronavirus and an uncertain economic recovery, parents and students are increasingly asking, is this all worth it?