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.
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
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
$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
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
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
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
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
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
argue some scholars, that cost taxpayers money which could be
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.