Higher Education Costs Are Exacerbated By Declining State Aid, But The Increase Is Real

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In response to my post on the screwy incentive structure facing college administrators a couple of correspondents wrote in to say that the real issue here is state and local disinvestment from their public university systems. That’s certainly an issue, particularly over the past ten years, but it’s not the issue.


The private school line illustrates that the basic cost structure is rising at a rapid rate. The even more rapid increase on the public side reflects disinvestment, driven initially by the increased burden of Medicaid on state budgets and then by the recession.

Another way of seeing this is to look at Pell Grants:

In this case, Nancy Pelosi’s tenure as Speaker of the House was associated with a huge increase in the federal government’s willingness to engage in tuition assistance. That, however, had only a modest impact on the actual purchasing power of a Pell Grant since, again, the underlying cost structure is exploding too much.

Other correspondents noted to me that focusing on headline tuition can be misleading because many students get discounts of various kinds. That’s quite true. And at the super-fancy elite schools, the discounts (“financial aid”) tend to be allocated in terms of need. But the important point to understand about this is that current incentives point toward the median college using target discounting to improve the quality of its incoming freshman class (see Matt Quirk’s excellent article on this) as a way of increasing prestige. That’s very nice for the top-ranked seniors finishing high school, but it doesn’t do anything to help the average student or the average family. And that’s the point. The current incentive structure points toward always reinvesting excess money into moving up the prestige hierarchy rather than toward lowering prices to broaden the customer base.