Accounting for the Rise in College Tuition

If tuition and fees — net of aid — had risen only as fast as skyrocketing health care costs had from 1987 through 2010, they would have increased to $8,700 from $6,600. Instead, they hit $10,300, according to the new working paper “Accounting for the Rise in College Tuition” by Grey Gordon and Aaron Hedlund.

Here’s the abstract:

We develop a quantitative model of higher education to test explanations for the steep rise in college tuition between 1987 and 2010. The framework extends the quality-maximizing college paradigm of Epple, Romano, Sarpca, and Sieg (2013) and embeds it in an incomplete markets, life-cycle environment. We measure how much changes in underlying costs, reforms to the Federal Student Loan Program (FSLP), and changes in the college earnings premium have caused tuition to increase. All these changes combined generate a 106% rise in net tuition between 1987 and 2010, which more than accounts for the 78% increase seen in the data. Changes in the FSLP alone generate a 102% tuition increase, and changes in the college premium generate a 24% increase. Our findings cast doubt on Baumol’s cost disease as a driver of higher tuition.

Read the research study submitted to the National Bureau of Economic Research.