Accounting for the Rise in College Tuition

62 Pages Posted: 8 Feb 2016

See all articles by Grey Gordon

Grey Gordon

Federal Reserve Banks - Federal Reserve Bank of Richmond

Aaron Hedlund

University of Missouri

Multiple version iconThere are 2 versions of this paper

Date Written: February 2016

Abstract

We develop a quantitative model of higher education to test explanations for the steep rise in college tuition between 1987 and 2010. The framework extends the quality-maximizing college paradigm of Epple, Romano, Sarpca, and Sieg (2013) and embeds it in an incomplete markets, life-cycle environment. We measure how much changes in underlying costs, reforms to the Federal Student Loan Program (FSLP), and changes in the college earnings premium have caused tuition to increase. All these changes combined generate a 106% rise in net tuition between 1987 and 2010, which more than accounts for the 78% increase seen in the data. Changes in the FSLP alone generate a 102% tuition increase, and changes in the college premium generate a 24% increase. Our findings cast doubt on Baumol’s cost disease as a driver of higher tuition.

Suggested Citation

Gordon, Grey and Hedlund, Aaron, Accounting for the Rise in College Tuition (February 2016). NBER Working Paper No. w21967, Available at SSRN: https://ssrn.com/abstract=2729067

Grey Gordon (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Richmond ( email )

P.O. Box 27622
Richmond, VA 23261
United States

Aaron Hedlund

University of Missouri ( email )

118 Professional Building
Columbia, MO 65211
United States

HOME PAGE: http://www.aaronhedlund.com

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