Why does a college degree cost so much?

Students on the campus of UCLA
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Students on the campus of UCLA

In February 1970, with the school's storied quadrangle by the Charles River still in the grip of winter, Harvard University broke the bad news to students and their parents: Tuition was going up.

Their reluctant consensus raised the annual cost of attending the prestigious school in the fall of 1971 by $200—to $2,600. It was the first time since 1949 that the school, which was chartered in 1650, had boosted tuition two years in a row.

"It used to be that once in an undergraduate career tuition would increase," acting dean John T. Dunlop told The Crimson, the student newspaper. "But from now on, unless inflation is halted, there's no choice in the matter but to continue raising tuition."

More than forty years later, tuition at American colleges and universities continues to surge ahead—much faster than the inflation Dunlop cited. This fall, Harvard's annual tuition and fees (not including room and board) will set you back $45,278, more than 17 times the 1971-72 cost. If annual increases had simply tracked the inflation rate since 1971, next year's tuition would be to just $15,189.

It's not just the tuition costs at elite universities like Harvard that are outpacing the government's Consumer Price Index.

The average cost of tuition and fees at a private, non-profit, four-year university this school year was $31,231—up sharply from $1,832 in 1971-1972 (in current dollars). At public, four-year schools, tuition and fees cost about $9,139 this year. In the 1971 school year, they added up to less than $500 in current dollars, according to the College Board.

"If you look at the long-term trend, [college tuition] has been rising almost six percent above the rate of inflation," said Ray Franke, a professor of education at the University of Massachusetts, Boston. "That's brought immense pressure from the media and general public, asking whether college is still worth it."

Despite the annual sticker shock, millions of American students and their families still believe it is—and many experts concur, pointing out that college graduates, on average, do still make considerably more than those with just a high school diploma. Since 1971, annual college enrollment has more than doubled in the U.S. to 19.5 million, as of 2013, the latest Census data available. In that year, there were 5.3 million in two-year colleges, 10.5 million in four-year colleges and 3.7 million in graduate school.

But after decades of expanding enrollments, applications have begun tapering off. College enrollment peaked in 2011. With millions of recent debt-burdened college graduates still underemployed by one of the worst recessions on record, many students and their families are wondering why tuition keeps rising, and how much higher it will go.

Meanwhile, the ongoing rise in costs have stretched families' capacity to pay for college to nearly the breaking point.

In 1971, for example, Harvard's $2,600 tuition amounted to about 13 weeks' worth of the median household's annual income of $10,285. Today, the median household needs to work for almost a year to pay the full sticker price.

To make up the gap, millions of students and families every year are forced deeper into debt to make up the difference—around $100 billion a year is borrowed through a cottage industry of private and publicly-funded loan programs.

With the total level of student debt outstanding at more than $1.2 trillion, parents, students and researchers are now asking: how is this sustainable? And why does college cost so much?

Climbing Walls, Lazy Rivers

Researchers who study the question of the rapidly rising financial burden of American higher education say it's important to understand that very different forces are driving the cost of delivering that education and the price students and their families have to pay.

On the cost side, schools continue to compete for students by working to attract top faculty, build and maintain the latest facilities and offer the next generation of students amenities that can be touted on campus tours for prospective applicants.

Among the most selective schools, amenities have become an important part of the race for the best and brightest, and well-off, applicants, according to Robert Kelchen, a professor at Seton Hall University's Department of Education. "Schools are all going after a fairly small pool of students who are high achieving and high income and able to pay much of their own way to college," he said. "They're trying to build more amenities—so you hear about the rock climbing walls and the lazy rivers."

Over the decade from 2001-2011, the share of expenses devoted to "student services" rose from 17 percent of the average school's budget to 20 percent, according to a comprehensive review of college-spending patterns by the Delta Cost Project at American Institutes for Research. The research covered decades of data from thousands of American public and private colleges and universities.

The rising cost of college sports including generous coaching salaries—has also raised concerns, especially when tuition subsidizes money-losing programs and increases the financial burden on students who don't take part in athletics. (The costs of intercollegiate sports are included in the "Student Services" category in the chart below, except for those operated as self-supporting auxiliary enterprises.)

"At many colleges, it's a significant cost," said Kelchen. "The biggest subsidies are at these small Division I programs that are trying to make their way up the ladder and get into the big time."

Still, though pricey amenities and big-budget sports programs get a lot of attention, they're the exception, not the rule among universities, say higher education experts.

Higher education payrolls have also been rapidly adding non-teaching jobs in recent years. Public and private colleges and universities expanded their payrolls by 28 percent between 2000 and 2012, more than 50 percent faster than the previous decade, according to an analysis of higher education staffing by the Delta Cost Project. That build-up largely tracked the rise in enrollments.

"Many of these new positions appear to be providing student services, but whether they represent justifiable expenses or unnecessary 'bloat' is up for debate," wrote Donna Desrochers, the report's principal researcher.

But while that payroll expansion added higher benefit costs for full-time faculty and staff, many schools offset those spending increases by relying more heavily on part-time instructors. That kept the overspending impact relatively contained, with the exception of some well-funded private research universities, the report concluded.

Meanwhile, teaching salaries, one of the biggest single line items, have remained relatively flat—much like those across most of the U.S. labor market. Despite heavy spending by a handful of top universities for the most talented, grant-winning researchers, most schools aren't seeing big wage pressures, largely because teaching jobs are in high demand.

"Overall, the aggregate level that institutions are spending on teaching and student-related services has been pretty much stable for the past 15 to 20 years, adjusted for inflation" said Franke, of the University of Massachusetts in Boston.

So if the cost of providing an education has remained fairly stable, why does the price students pay keep rising?

The reason, say researchers, is that deep budget cuts in state funding for public higher education and shrinking subsidies at private schools have pushed a greater share of the cost onto students and their families.

The Recession's Aftermath

In 2007, when the global economy collapsed under the weight of a massive credit bubble, states from Maine to Hawaii were hit by the fiscal storm of a lifetime. Surging unemployment cut deeply into income and sales taxes. Collapsing property values undermined a once-reliable tax base.

When the dust settled, state officials were left with multi-billion-dollar budget gaps that had to be filled. Since the recession, states have closed some $425 billion in budget shortfalls, according to the Center on Budget and Policy Priorities,a research institute. And they're not done cutting yet.

The budget squeeze brought big cuts in funding for higher education. By 2013, states had cut higher education spending to $2,353 per student—about 28 percent less than in 2008, according to the Center. Eleven states cut funding by more than one-third, and two states—Arizona and New Hampshire—cut spending per student in half. (States have restored some funding yet.)

But now, even as the economy has recovered and tax revenues are growing again, state budgets remain under intense pressure from the growth of mandatory spending programs, including pensions and health care for retirees and Medicaid for lower-income households.

"Mandatory spending programs, specifically Medicaid, are requiring more and more state funds, which in the zero-sum world of state spending, has left fewer and fewer dollars for other programs," according to a recent report by Moody's, which monitors the finances of states, colleges and universities to issue them credit ratings.

Medicaid spending alone has risen from less than 10 percent of state spending 30 years ago to nearly 16 percent today, according to Moody's. Higher education funding has borne the brunt of much of the "crowding out" of funds, said Moody's, falling from around 14 percent of state spending in the late 1980s to just over 12 percent today.

Despite the Great Recession's painful global impact, funding for higher education took a much bigger hit in the U.S. than across most of the developed world, according to data from the Paris-based Organization for Economic Cooperation and Development. Among the 34 countries monitored, public spending on education rose an average of 7 percent between 2008 and 2011. Other than the United States, only Denmark, Estonia, Hungary, Iceland, Italy and the Russian Federation cut education spending during that period.

Today, despite public funding cuts, higher education spending per student has largely recovered in most U.S. states. Overall, average state spending for higher education was up 1 percent in 2013 and an estimated 3.7 percent in 2014, according to a report from the National Association of State Budget Officers.

"But when you look at where the money's coming from, it's shifted dramatically," said Franke, of the University of Massachusetts in Boston. "For students, their share [in the form of tuition] more than doubled as the states have cut back [funding] by about 30 percent."

As public subsidies have hit a 10-year low, college students—for the first time—are now paying half or more of their education costs, according to Delta Price Project researchers. (The interactive chart below shows how tuition levels and state spending per student have shifted on a state-by-state basis over the past seven years.)

That's forced many students and families to go even deeper into hock.

"Once you factor in other expenses like room and board, the net cost of attendance increased even for those who are receiving the largest amounts of financial aid," said Michael Mitchell, a policy analyst at the Center on Budget and Policy Priorities. "As costs have gone up, students are taking on higher levels of debt."

As of the 2013 school year, the latest data available, some 59 percent of students graduating from a public four-year institution had student loans, up from 55 percent in 2008. The average loan amount rose by 16 percent, or about $3,600, Mitchell said.

And while state spending cuts have forced public school tuition higher, all but the wealthiest private colleges and universities have also been passing a greater share of the cost of a degree onto students.

The Other Wealth Gap

It was the biggest single gift in the history of the richest American university. So far.

Earlier this month, Harvard University reported that an alumnus, 59-year old hedge fund investor John Paulson, made a $400 million donation—his way, he said, of thanking the Ivy League school for the superior education that helped him build his $19 billion firm, Paulson & Co.

Two years in, Paulson's gift has helped Harvard raise $5 billion of a planned five-year $6.5 billion campaign to add to the $36.4 billion endowment that makes it the world's richest university.

Like the fortunes of many of the well-heeled donors writing large checks, the wealth gap is widening among America's colleges and universities.

While an improved economy and rising stock market have helped private institutions repair much of the Great Recession's damage to their endowments, the biggest investment gains and largest gifts are flowing to the wealthiest schools, according to a recent analysis by Moody's.

Paulson's $400 million largesse is just the latest example, according to Kelchen.

"As a comparison, at Seton Hall we have about 10,000 students and our whole endowment is about $250 million," he said. "Most private colleges don't have large research enterprises, so its basically 70 to 80 percent of funds coming from tuition."

Like wealthy individuals, the wealthiest school have a wide range of income sources, said a recent report by Moody's, including investment income, gifts, research grants and, for public universities, state support.

Schools with the biggest endowments are able to attract the best investment advisers and tap alternative investments that may be riskier but generate higher returns. That makes it unlikely that schools further down the wealth ladder will able to close the gap, Moody's said.

"This growing gap will pose increasing competitive challenges for institutions that do not have the resources to invest in facilities, financial aid and other strategic initiatives at the same level as their wealthier counterparts," wrote Moody's analyst Pranav Sharma.

Wealthy schools also capture the bulk of charitable gifts flowing to higher education. The top 40 richest schools alone received nearly 60 percent of all gift revenue last year, according to Moody's.

As a result, the vast majority of schools have far less money to help subsidize the cost of higher education. Of the 850 schools surveyed last year by the National Association of College and University Budget Officers, the top 50 wealthiest had a median endowment of $3.5 billion. For the entire list, the median was just $113 million. (Tweet this.)

That's why, for students attending all but the richest schools, tuition and other fees pays the bulk of the cost of their education. For all private colleges, the median share paid by students is 75 percent. With their outsize wealth, the richest schools rely far less on tuition and student fees to pay the bills; at the top 20 private schools, the median contribution from student charges was just 15 percent.

That leaves schools with smaller endowments at a disadvantage competing for the best and brightest applicants.

Drowning in Debt

How much longer can this continue?

Faced with rising costs—and widespread debate about the economic returns of a college degree—the pace of education borrowing peaked in 2010 and has been falling since. Part of the reason is a tapering off of enrollments in many parts of the country.

But the widening gap between the cost of higher education and the growth of household income is also putting a damper on the college aspirations of millions of American families. Between 2000 and 2013, the average level of tuition and fees at a four-year public college rose by 87 percent (in 2014 dollars); during that same period, the median income for the middle fifth of American households advanced just 24 percent.

That's a trend that education researchers warn just isn't sustainable.

"It's hard to see it continuing that much longer because you're getting to a point where it's getting too difficult for families to afford college," said Kelchen. "Students can access loans. But for how long are they willing to take on more and more debt?"

Falling Behind

That question has a wider impact beyond current and future students and their families. The dramatic revenue shift from public and private sources to tuition and fees has pushed the U.S. further behind other countries in rates of college completion, according to the OECD.

In 1995, the United States was first among OECD member countries, with a 33 percent graduation rate. Since then, as graduation rates have risen around the developed world, the U.S. has fallen far behind, ranking 19th out of 29 countries studied by the OECD.

In 2012, some 39 percent of young Americans were expected to graduate from college, compared with 60 percent in Iceland, 57 percent in New Zealand and 53 percent in Poland. The U.S. still leads Canada, Germany, Switzerland, Spain, Turkey, Italy, Chile, Hungary and Mexico.

As U.S. graduation rates have stagnated, a smaller share of the next generation is achieving the upward mobility that a college education has traditionally brought. About half of young people in OECD countries have attained their parents' level of education. But in the United States, only 20 percent of U.S. men and 27 percent of U.S. women have more education than their parents.

As a smaller share of Americans reach their parents' level of education, they can look forward to lower incomes than previous generations. And that means they'll have less money to pay tuition for their children.

This is the second article in our weeklong series "Debt by Degree," which examines the growing student loan debt burden. You can read the first story here.

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