Bruce A. Kimball and Sarah M. Iler
Why then did student debt rise to about $1.6 trillion? Different reasons apply to the various kinds of borrowers and we estimate that about two-thirds of the debt is owed by graduate students (including those in medical, law or business school) and by students who attended often-predatory, for-profit colleges and universities. Our focus is on undergraduates at non-profit colleges. A major reason for the burdensome debt of undergraduates at both public and private nonprofit colleges is neither the rising list price nor the steady net price. Rather, their ancillary expenses — food, housing, travel, technology, books, clothing, recreation and so forth — have risen with the cost of living and, since 1980, grown faster than the wages and salaries of their families. This growing shortfall over the past four decades, combined with the declining proportion of production cost paid by government subsidies, forced undergraduates at non-profit colleges to borrow more, we maintain.
While undergraduates’ net price of tuition plateaued even as their debt ballooned in recent decades, the proportion of revenue that colleges actually received from tuition increases (their net tuition revenue) declined. Through the 1960s, we explain, almost all the grant aid awarded to students comprised scholarships and fellowships funded by colleges’ revenue from gifts, grants, or endowments. Colleges’ tuition revenue virtually equaled their listed tuition through the 1960s.
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Then, during the stagflation of the 1970s, a few colleges began to discount tuition — cut their list price — in order to attract specific students. Subsequently, tuition discounting accelerated, particularly at private colleges and universities, as they competed to attract the best students, diversify the student body or simply fill their seats. Net tuition revenue therefore diverged from listed tuition.
Colleges are generally reluctant to divulge how much they discount, and less than a quarter of the private non-profits report the amount, while discounting at public institutions is murky and little studied. Non-reporters obscure their discounts by folding them into “institutional grant aid,” which is reported in many datasets. By 2009, this grant aid (including scholarships and discounts) covered about 55 percent of the average list price at private, four-year colleges, which do most of the discounting and compose more than half of all four-year colleges and universities. The great majority of private colleges, lacking huge endowments and current gifts, realized diminishing returns from raising tuition because they had to increase their discounts at the same time. Therefore, the proportion of net tuition revenue available to pay their production cost decreased.
Analyzing production cost across higher education begins by distinguishing between aggregate cost and per-student cost. Growth in aggregate cost is usually salutary for the nation. Educating more citizens at a higher level fosters social mobility and improves decision-making in a democratic society, as well as generating more wealth for society by increasing people’s intellectual capital and making them more productive. However, if aggregate cost grows faster than the economy, then higher education is consuming an increasing fraction of the national income. This trend, called “cost escalation,” can become a serious problem, as with health care today.