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Misconceptions About The Cost of American Higher Education

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It is a well-known and highly publicized fact that the cost of higher education has been rising over the past few decades at a pace that exceeds the rate of general inflation in the United States. This is a serious matter and cause for concern and analysis. Alarmist critics of higher education, whose favorite game is to project the cost of tuition at the highest priced universities over the next 20 years, hinder refined analysis of the problem. They produce frightening annual cost estimates: two decades from now, an Ivy League education will put families out $170,000 a year and a staggering $625,000 for a four-year education1. Such numbers can only make parents of small children sick to their stomachs and persuade them that unless something drastic is done to these universities, no one but the super-rich will be able to afford such an education.

While it is true that college and university tuition and other costs have risen rapidly, and as I'll suggest in my next posting, much can and should be done to limit them, the arguments perpetuated by doomsday critics of our higher education system, lacks subtlety and reinforce myths about the cost and benefits of attending our nation's best colleges and universities. This is a complex subject, but let's attend here only to a few facts about the rising cost of tuition and "term bills"2 of both the best of the private and public universities in our country.

The target of most criticism on cost, as is often the case, are the elite private institutions, the Ivy League eight and universities such as MIT, the University of Chicago, Northwestern, Johns Hopkins, and Cal Tech. It is true that the sticker price for tuition and term bill is very high by any standard. For example, the total cost of a Princeton undergraduate education in 2010-11 tuition is $48,580; the tuition is $36,640, up 3.7% from a year earlier - in a year with virtually no national inflation. Columbia's tuition and term bill was marginally higher than Princeton's, exceeding $50,000 for the year. In fact, all of these private universities and colleges have similar tuition and term bills. How can anyone afford it?

The answer lies in the important distinction between the "sticker price" and the "discounted price." The Ivy League schools and most of the other elite private universities follow a practice called, "need blind admissions," and "full need financial aid." These universities and colleges admit students without consideration of their financial need. The only criteria that are used are those related to the quality and potential of an applicant, and his and her ability to contribute to the college and to the society later in life. The decision is not contingent upon ability to pay. Once students are admitted, then the colleges construct financial aid packages that permit these students, under most circumstances, to attend the university or college. The financial aid package is based to a large extent on a student's family's ability to afford the cost of tuition. Therefore, youngsters who come from very wealthy backgrounds may receive no financial aid. But at most of the Ivy League schools, if your parents' family income is less than $200,000, you will receive scholarship aid and some minimal loan support. For those who come from low-income backgrounds, they may well receive a "free ride" throughout college - it costing them almost no tuition and other costs.

The ability of these colleges and universities to vary the sticker and discount price is linked to the level of their endowments, much of which at the undergraduate level is used to support financial aid packages. These colleges and universities are fortunate to have these endowments that can be used to provide social opportunities for gifted young people without the means to attend these elite schools. It follows, of course, that recent suggestions from members of the United States Congress, to tax these endowments, would only reduce the number of needy students who could go to these colleges and universities. Recent data on the accumulated loans burden of students graduating from college are instructive: the lowest loan burden was actually at Harvard, whose average graduate carried a loan burden of roughly $7,500 upon graduation - not a huge number considering the value of his or her Harvard education. Less wealthy Ivy League institutions reported somewhat higher indebtedness of their graduates: Columbia, for example, found that Columbia College graduates had outstanding loans of roughly $10,000 for their four years of education. These sums are a far cry from what you might expect if you examine the projections for tuition like those that Mark C. Taylor offer us above - when he reports cost data without accounting for the influence of financial aid on the ability to afford attending these great colleges and universities. Indeed, a recent study by two Princeton economists showed, ironically, that the best predictor of future earnings of college graduates was the tuition level at the colleges and universities that they attended as undergraduates.

Let's turn now to the great public universities and the cost burdens that they place on students and their families. Here it might be argued that the "bang for the buck" is even greater than at private universities. This year the undergraduate fees at the University of California, Berkeley, always ranked among the greatest universities in the world, was $8,325 for in-state students; about $6,900 at the Arizona State University; roughly $6,500 at the State University of New York at Stony Brook, and slightly under $5,000 per year at the City University of New York four year colleges. Although these fees have been increasing in recent years,3 they remain one of the great bargains in higher education, especially if you consider the financial aid that is available to many of these students. Consider only the available federally funded Pell Grants that are based upon a student's need. The maximum amount in 2010 was $5,500. If you were a student from a poor socioeconomic background and eligible for the maximum Pell Grant, you would find that your tuition at exceptionally good public universities amounted to almost no tuition or fee costs. At Berkeley, students and their families (without any other form of financial aid) are receiving annual educations at top colleges and universities for roughly $3,000 a year; at CUNY they are essential going for free. If we consider the lifetime value of a college degree in terms of earning capacity, recent data suggest that a typical college graduate with a bachelor's degree will earn about 66 percent more than a high-school graduate during a 40-year working life. And those who go beyond their post-baccalaureate degrees earn substantially more. This investment in education pays off - for the individual and the larger society, which needs the skills of highly educated students for the new knowledge based industries of the 21st century.

Why are the costs so much higher at the privates v. the public universities? The most important factor is that the privates offer what can only be described as "boutique" undergraduate education. There are far fewer students. The average class size at these institutions is often fewer than 20 students per class, although in certain very popular introductory courses, such as Introductory Economics or basic chemistry for pre-medical students, the numbers will run into the hundreds. Hundreds of students per class are often the norm, rather than the exception at excellent public universities.4 The ratio of faculty to students is much higher at the privates. They also offer a plethora of student services that are not always available at the larger public institutions - at least in the form of personalized service.

So why do complaints about these educational costs persist? First, at the private colleges and universities there is a donut hole for the middle-class family with more than one student in college at the same time. They earn too much money to qualify for full financial aid; their family assets suggest that they can contribute to their child's education at a certain level that rarely adequate takes into account the cost of having several children in college simultaneously. The formulation of need packages also tends to examine assets along with income and sometimes distorts that level of liquid assets available to families for contributions to their children's education. The very wealthy and the very poor benefit from the financial aid arrangements at these privates more than the family whose gross income may reach $100,000, but who also have two children in private colleges. Second, most excellent private colleges and universities simply do not have the financial assets to adopt the Ivy League's admission and financial aid policies. They are not able to provide the discount rates that the wealthier schools can afford. Consequently, the cost burdens for families and students who attend these superb schools that have less wealth will, in fact, be greater.

The publics have a different kind of problem. They are strangled by an egalitarian ethos. There is a deep-seated belief that the wealthy should not subsidize the education of the less fortunate. All families are charged the same price for their child's education, regardless of ability to pay. Out of state students pay perhaps three times what in-state students pay; and a wealthy Hollywood actor or producer whose kid goes to Berkeley pays the same amount as the child of a first generation child of migrant workers. This is unjust. What the states should seriously consider and model is moving to the Ivy League model of need-blind, full-need financial aid. If these universities were to start perhaps with the out-of-state sticker price of $30,000 for tuition, and then create full need financial aid packages for the in-state students, those who can easily afford the tuition would pay it in full; those who could not afford it at all, would attend schools without any tuition or fee payments. This shift in thinking about admissions and financial aid at our great state universities would be an important change. It should be explored and modeled with the idea of producing little incremental costs for a much "fairer" system of supporting the college educations of students with disparate economic needs.

In my next posting, I'll discuss ways in which colleges and universities could reduce expenditures that would help to lower the rate of increase in the cost of higher education.


1Such figures, assuming an annual rate of growth of 6%, can be found in Mark C. Taylor's, Crisis on Campus (Alfred Knopf, 2010, p. 103)
2The term bill includes tuition, fees, room, and board.
3The press reports of the rates of increased for these state universities offer a distorted picture because the increases are calculated off of a very low base tuition level.
4Some of our finest private and public universities have created "honors colleges" that have specialized programs, relatively small classes, and an organized community that is offered to a subset of their most academically talented and curious students. Participating in these environments often provide truly exceptional educational experiences at low cost.