Why Does Tuition Keep Increasing?

60 Pages Posted: 21 Sep 2015

Date Written: September 20, 2015

Abstract

Tuition at American colleges has increased significantly over the years. Three common explanations for these increases are 1) declines in state funding, 2) increases in faculty salaries (Baumol’s cost disease), and 3) increases in college funded financial aid. Analysis of recent data shows these explanations for rising tuition to be inadequate. Even imposing the assumption of a $1 for $1 effect on tuition, an average of 18-33% of the change in tuition at four-year colleges is left unexplained by these three factors. More importantly, regression analysis provides overwhelming evidence that these three factors do not have a $1 for $1 effect on tuition. Using their estimated impacts implies that 66-91% of the increase in tuition at four-year colleges is left unexplained after accounting for changes in state funding, faculty compensation, and college-funded financial aid. The most likely explanation for the statistical inadequacy of these three factors as well as the most plausible explanation for the larger question of why tuition increases is that colleges are engaged in an academic arms race (Bowen’s Laws). Simply put, tuition keeps increasing because colleges are rewarded for spending more and raising tuition allows them to spend more.

Keywords: Higher education, tuition, state appropriations, Baumol's cost disease, financial aid

JEL Classification: H72, I22, I28

Suggested Citation

Gillen, Andrew, Why Does Tuition Keep Increasing? (September 20, 2015). Available at SSRN: https://ssrn.com/abstract=2663073 or http://dx.doi.org/10.2139/ssrn.2663073

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