Why do American universities cost so much?

Question

Being from Russia, the idea of paying 5-6 digit sums for a university education sounds ludicrous. I understand that prices in the US are different but surely there have to be cheaper options. Besides, if your education operates like a free market, one would expect that at least some universities would choose to offer their educational services at a lower price. Do any? If so, why aren't they popular? Are there options for Americans to get your university education for free?

Answer 1

Examining cost drivers in an industry is a complex economic task and making comparisons between countries is also quite complex, since there are many surrounding differences in other aspects of the economy. There have been a number of studies examining the higher education sector with general equilibrium modelling (see e.g., Chatterjey and Ionescu 2012, Jones and Yang 2016, Abbott et al 2019 and Athreya and Eberly 2021). There have also been several reports summarising cost drivers in higher eduction in the US (and elsewhere), with particular attention to the rising (real) costs of university since the 1980s. Reports on this topic include Archibald and Feldman (2011), Archibald and Feldman (2016), Archibald and Feldman (2018) and Gordon and Hedlund (2021).

The US higher education sector is a mixed economy composed of public and private universities. There are extensive public subsidies throughout the sector, including an extensive system of subsidised loans. The sector operates in parallel with a number of large technological and industrial sectors in the US that have seen rapid growth in the last few decades. I am not sufficiently familiar with international differences between the US and Russian higher education sectors to offer a point-by-point comparison, but here are a few of the main cost drivers for US higher education that are identified in the literature:

• Cost disease: One of the drivers of increasing cost is cost disease (also known as the Baumol effect). Due to labour competition between different sectors of the economy, the labour cost for higher education workers has tended to increase faster than increases in labour productivity in the sector. For example, the rise of competing technology fields in STEM (e.g., "big tech") can drive competition for highly educated technical workers, which would drive cost disease within the higher education sector. Since labour costs for higher education workers are high, ceteris paribus the resulting supply curve is pushed towards higher prices.

• Less direct government funding (than other countries): In the US system there is direct funding of public universities by state governments, with a mixture of public and private universities. However, governments fund a smaller proportion of the sector than in many other countries. In some countries the cost of higher education is borne primarily or solely through taxation and so the service is "free" to the consumer. Since direct government subsidies defray the "sticker price" of a service to consumers, ceteris paribus having less direct funding from government means a higher cost for the consumer.

• Subsidised/govt-backed loans for education: Most students attend university using student loans. These include loans from the Federal Government and private loans. The US Government provide a range of direct loans up to a limit and then beyond this student can seek private loans. As is the typically the case in economics, when the government subsidises or provides loans for a costly activity, ceteris paribus the demand for that activity increases and so does the price. The "Bennett Hypothesis" (named after Secretary of Education William Bennett) is that increases in financial aid and government funded/subsidised loans caused the universities to raise their tuition and simultaneously increase capital spending on amenities to attract students, knowing that the loans would increase demand in the sector and defray costs onto the government.

• Amenity competition and high capital spending: Because student loans are provided by the government this substantially increases demand for higher education and induces high levels of competition for students. US universities are known to have responded to these changes by engaging in high capital spending to provide luxurious amenities (e.g., stadiums, sports facilities, pools, climbing walls, student lounges, cafes, etc.) to students to augment their education. This has generally been considered to be a simple way to compete for students when faced with high inelasticity of education quality. A number of critiques of the high cost of the higher education sector have noted the "gold plating" of US univerity campuses due to amenity competition. This is largely a secondary effect of having a market with a high level of government loan-subsidisation to attract students.

• Increase in administrative roles and associated labour costs: Higher eduction in the US has experienced a large increase in non-academic administrative staff since the 1980s. Some commentators regard this as a development reflecting an increasing "standard of care" in universities while others see it as "administrative bloat" that does not increase the standard of care or even a broader aspect of an ideological capture of the universities that decreases the standard of care. Regardless of how it is characterised, there has been a huge increase in labour costs in US universities due to proportionate increases in non-academic administrative workers who work in support roles in the university.

Answer 2

There are many factors.

First, we should address the difference between price and cost. Price is what the student pays. Cost is what the university spends. In most of Europe, the cost is much higher than the price. In the US, the price is generally closer to (but still below) the cost. This is because, in Europe, the government foots a much larger percentage (and - in some countries - all) of the cost.

There is still a difference in cost - the US spends between 1.5 to 2 times as much per student as Germany. Why the difference?

One difference is that salaries in particular for knowledge workers are higher in the US. Google is now paying its US software engineers with a few years of experience close to $200K. As I understand it, Google does not pay its software engineers in Germany nearly that much. The university salary is not going to be as high as Google's, but professors who could become software engineers (and most of them could learn to be, even if they aren't computer science professors) are, on average, only going to accept so much of a difference in salary to be a professor.

(For that matter, graduate students at the University of California (all campuses) are currently on strike, demanding to be paid at least $45K a year, because rent in California is expensive and it costs that much to live there! This is going to basically ruin that university system, because there is no way this doesn't completely break the budget, but they're also not going to be able to attract graduate students with what they're paying now since, with the recent inflation, that will require being homeless.)

A second difference is that the average US student is more expensive to educate. In Germany, roughly only the top 50% of students go to university, and only 50% of those who go graduate. In contrast, in the US, students with all levels of high school achievement go on to a tertiary education system that attempts to teach them university-level material, and the system aims to graduate all of its students (though it doesn't come close). Part of the difference comes from a difference in standards - a US university graduate is not expected to know as much or be as capable as a German university graduate. On the other hand, the average US high school graduate knows much less and is less capable than the average German high school graduate, and the difference is even bigger when you consider the university-going cohort. This means US universities are teaching more, to students who need are slower learners, than German universities. It's not surprising US universities spend more.

Finally, the US has a fair number of elite universities that spend a lot of money on research and on various luxuries for the students (and staff). (When I visited a Canadian university, I was shocked by how crowded the library was compared to even relatively frugal non-elite US universities. More square feet in the library cost money! Or go to a French university and realize that roofs that don't leak are a luxury.) They are a small percentage of universities, but they do spend so much that they do drive up the average by a noticeable amount.

Answer 3

As for the title of the question, why it costs so much: A fundamental difference between the US and other countries (or the US several decades ago) is that the rest of the world believes that education is a communal responsibility that should be paid for in large part by tax money. As a consequence, many countries have no tuition costs to students at all -- for example, during my college years in Germany, I never spent a single Deutschmark on paying for college: it was all tax-payer funded.

In contrast, contemporary American society has come to accept that taxes are bad and that many things are an individual responsibility. States no longer pay a substantial share of universities' operating costs, and so the majority of what it costs to provide students with an education needs to necessarily come from students themselves. That adds up to thousands of dollars per year per student. (A back-of-the-envelope calculation will show that that is not much more than it is in countries like Germany, for example; the difference is only who pays for it.)

Given this, it makes sense that you may be able to find opportunities to get a college education for more or less money, but you will not find much if you're looking for "essentially free" education. It simply costs $s to educate students, and someone has to pay for it whether that's at Harvard of Podunk Community College. The only approach you can take is to be good enough to get a scholarship: It that case, your education of course still costs money, but it's not you but some scholarship fund that will pay for it.

Answer 4

Many good answers here, so I'll just address one aspect that they haven't:

For the top-tier Ivy Leagues, being expensive is the point. They are, practically speaking, giant hedge-funds with a university attached to them.

Harvard's endowment is $50 Billion. Princeton's is $40 Billion That's more than the GDP of many small/poor countries. They don't need to charge fees:

After a stellar year in 2021, Princeton University has an endowment of $37.7 billion. Over the past 20 years, the average annual return for the endowment has been 11.2 percent. Let us give Princeton the benefit of the doubt and assume that at least some of that was luck and maybe unsustainable, and that a more reasonable prediction going forward would be that Princeton can average a return on its investments of an even 10 percent a year. That puts Princeton’s endowment return next year at roughly $3.77 billion.

Now—what is Princeton’s annual operating budget? $1.86 billion. The arithmetic here is not hard. $3.77 billion in investment income minus $1.86 billion in operating expenses leaves you with $1.91 billion.

Princeton could let in every student for free.

The fact that Princeton charges $80K/y for undergrad, is not because they need the money, but because it signals prestige and exclusivity and there are more than enough takers. In fact, its peanuts, since wealthy people make multi-million dollar "donations" to ensure their children get in. This applies to all the Ivys.

(P.S. that rate of return is really high, but Ivy League Endowment rates of return have always been significantly higher than normal. There's no hard proof, but it's widely suspected that in addition to the donations, big-shots in the business community pay with knowledge that is used for insider trading by endowments.)

Answer 5

There are several factors, but in my opinion the biggest one is federally subsidized student loans which break the "expected"/"free market" behavior.

When my parents went to college in the US, it was seen as a privilege, for the highly intelligent, and not something everyone did (perhaps closer to how PhDs are viewed today). Many people could simply graduate from high school and make a fine living. College was also much more affordable, many people were able to pay for a large portion of their tuition by saving wages from working over the summers in high school.

As demand for more skilled labor grew, however, a college degree became increasingly required for many jobs and more people began to attend college. Eventually, college became seen as something "everyone" should attend. In response to this sentiment, the Federal government created a liberal student loan program to help enable anyone attend college who wanted to. Note that unlike most loans, student loans are not based strongly on credit-worthiness or the likelihood that you will be able to pay them back, nor can you default on them.

While a potentially laudable goal, some argue that this loan system had the opposite effect. Instead of universities keeping prices relatively constant, they quickly realized that since almost anyone can get a loan they could charge exorbitant prices and people would simply take out the "guaranteed" loan to pay for it. I don't know of a good data source off-hand, but I suspect there is a high correlation between the rapid increase in the cost of undergraduate education and the amount of federal funds put toward student loans (with federal funding leading rather than lagging the cost increase).

At least from the perspective of my parents, you are essentially now damed if you do (save carefully, don't qualify for student loans, then drain your savings to pay) and damed if you don't (don't save, qualify for student loans, then be stuck with crippling debt).

It's also worth mentioning that many of the top universities in the world reside in the US and there has been an increasing amount of foreign competition for admittance to US colleges. Not only does this exert upward pressure on the price, but many colleges charge a large additional fee to foreign students which acts as a further incentive to raise domestic prices.

Answer 6

Unlike Russia, there is a more clear perception of a more prestigious university = higher station in life. This does not always work out as expected (see the current outrage about student loans). The education model is fundamentally different because of reasons having little to do with academia and a lot with economy.

In Russia, taking a bank loan (mortgages and unforeseen urgencies aside) is typically a pretty bad idea. In the US, the credit score is important, and borrowing money one way or another is viewed as one of the pillars of capitalism: $100 now is better than $100 a few years later. The idea of taking a loan from the government to invest in yourself to pay it back many years later makes more sense in that financial system. Actively managing their finances is just not something most Russians do (surely not to an extent Americans seem to do that). And yes, there are scholarships, but they are pretty rare (on the flip side, purely academic careers able to sustain a small family are also exceedingly rare in Russia).

Both have their pros and cons. One of the notable deficiencies of the current Russian system is the perverse incentive to get a coveted diploma no matter the actual education provided, sometimes viewed as 5-6 years of largely wasted time. Soviet-era tekhnikums are now proudly calling themselves "institutes" or even "universities" because that is what moves the most tax money through them. Again, reasons for that are economical - the alignment between the education system and the industry is poor, unlike some European countries. The same is true about the US, but in a different way, and you have people complaining about massive debt they are never able to pay off.

And yes, there are cheaper options, but you graduate from Harvard and are easily on your road for six figures annual; you graduate from Podunk and are barely making the ends meet. So "free market" dictates how much one could fleece each social class and market to them accordingly. There is little incentive to facilitate social mobility for universities - this is something a government should be handling, and it is rather hands-off in the case of the US.

Answer 7

I'm rather surprised I didn't see any other answers addressing the premise that

education operates like a free market

because education is not a free market.

In a free market, by definition, there are low barriers to entry. This is not the case in the education market. There are a large number of very high hurdles a new educational institutional must pass in the United States to even gain access to the market, including:

• Obtaining quality faculty
• Putting together a curriculum
• Physical buildings, not just for teaching, but also for dorms and extracurriculars. These are not strictly necessary, lack of physical presence has a large impact on perception of quality.
• Permission from the state's department of education (This alone will take 2+ years)
• Obtaining accreditation (Regionally or nationally, by a private nongovernmental organization like ABET)
• Certification from USCIS (to take foreign students)
• Specific program accreditation for things like law or medicine

Snuck into these hurdles is a rather nasty catch-22 where accreditation is usually denied to institutions that don't already have students. However, students are obviously wary of institutions lacking accreditation.

Answer 8

There are many reasons. The basic one is that higher education isn't fully funded by the government through taxes. Some universities get substantial funding from individual states (funded by income taxes), but not enough to cover all costs. In those universities, tuition isn't completely covered, but it is lower for residents of that state (taxpayers) than for others.

Many (actually most) universities are private and receive only limited governmental funding so much of the tuition is borne by the students. Many universities (private and state) give out some scholarship aid to a minority of students. This can reduce the cost considerably, even to zero. Some states give (or gave, in the past) scholarships to residents even for study at private universities.

Free higher education comes for only a few. Some athletes and some financially disadvantaged students primarily.

Most universities have many revenue streams, but a lot of that is to support research, not teaching, specifically. But even with the high cost of tuition, the student pays only a fraction of the total cost in all but a few "for profit" colleges and universities that tend to have special missions and, possibly, lower standards.

Funding in the US for education generally is very poor and it comes from some crazy sources. Property taxes, in particular, ensure that if you are poor and live in a poor area then your primary and secondary education will be poorly funded since most of it is local funding. We don't seem to be able to break that habit. That isn't quite the same as for higher education, but, some states fund higher education poorly.

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For completeness, I'll note that all universities cost a lot - everywhere. The difference, really, is who bears the cost. In the US, students bear a lot of it. If faculty are poorly paid and exploited somewhere then they do. A sensible (IMO) system recognizes that an educated citizenry is a benefit now and for the future and finds a way to spread that cost accordingly and appropriately.

Answer 9

Among many other reasons:

In the US, employers pay for employee health care. In many other countries, this is not the case. In the US, the health care system is exceptionally inefficient and prices are rising fast. Universities are hit particularly hard by health care costs because they employ many older staff. Those costs are passed on to students.

Health care costs are particularly significant to students because, while universities can cut staff pay and defer capital expenses, it is quite hard to cut health care costs.

Answer 10

Some people answering the question before me have the incorrect impression that U.S. students have no choice but to pay high tuition for private universities.

Let us start with some U.S. government statistics.

In fall 2020, nearly all undergraduate students (95 percent) attending degree-granting institutions enrolled in either public 4-year (48 percent), public 2-year (30 percent), or private nonprofit 4-year (17 percent) institutions... The remaining 5 percent of undergraduate students were distributed across private for-profit 2- and 4-year institutions and private nonprofit 2-year institutions in fall 2020.

"Public" in the U.S. means educational institutions run by a government - not what it means in the U.K. and some other English-speaking countries.

Some random examples of public 4-year institutions are

• Hunter College of the City University of New York

• University of California, Berkeley

• The Ohio State University

• Rutgers, The State University of New Jersey

• The Pennsylvania State University

Some examples of public two-year institutions (almost synonymous with community colleges) are:

• 12 2-year colleges in Connecticut State system

• 116 California Community Colleges

• Borough of Manhattan Community College of the City University of New York

(For non-U.S. readers - many undergraduates attend a community college with the intention to transfer later to a 4-year school and get a 4-year degree. Not all succeed, but at a typical U.S. community college, young people intending to transfer often form the majority of the students.)

Some diverse examples of private universities are:

• Columbia University in the City of New York

• New York University

• Georgetown University

• Liberty University

Indeed, the sticker prices of the tuition at most private schools seem like a lot. But, according to the government statistics above, nearly 4 out of 5 U.S. undergraduates choose to attend a public 4-year or a 2-year program, rather than a private one. Public institutions tend to be free or very low cost for the students, with the taxpayers covering most of the cost. For example, in the City University of New York or State University of New York systems, tution is free for students who reside in New York State and earn less than $125,000 a year (details). Tuition is not free, but is still very cheap for students who each more than $125,000 a year, or come in another state or country.

We should note that in addition to paying (or not) for tuition, a student needs to eat something, and sleep somewhere, which in the U.S. can cost about $1-2,000 / month for 4 years. Many public and private institutions offer their students subsidized housing and meal plans - typically, not free, but cheaper than market price. Also many undergraduates are able to live on the cheap at home with their families while getting their bachelor's degree.

Nor, in general, are these free and low-cost public institutions difficult to get into, which is how free universities in other countries usually operate. For exmple, CUNY and SUNY have practically open admisisons. The statistics on the percentage of students who apply and are not accepted are not useful for these schools because (almost) any student who graduated high school in New York with a grade of B or better has to be admitted, and can usually get free tuition.

Most U.S. students are well aware that it is not necessary to pay for a private school in order to earn a bachelors degree. Only a little over 1 in 5 do choose to attend a private school, rather than a public one.

EDIT: I will adress some points raised in the question and in the comments.

Let us compare the above facts (widely availability of free and low-cost public institutions) with the picture painted by the Russian government's Internet Research Agency:

https://almavest.ru/ru/node/1379

English translation:

The United States, in the field of education, lacks many concepts familiar to us in the post-Soviet space...

There are no federal "state universities" in the United States, because historically it turned out that education is not mentioned in the US Constitution - in 1787, the Founding Fathers of the United States, apparently, were not interested...

All universities in the USA are paid, there is no free post-secondary education in the USA at all.

https://legalizuem.ru/blog/vysshee-obrazovanie-v-ssha

English translation:

It is also worth considering that American education is considered one of the most expensive in the world; unfortunately, there is no free education in America...

The minimum cost of studying at an American university is from $ 5,000 per year. On average, this is about 30,000 dollars a year.

Besides, if your education operates like a free market, one would expect that at least some universities would choose to offer their educational services at a lower price. Do any? If so, why aren't they popular?

There are some for-profit universities. As you can see from the statistics I cited, the vast majority of U.S. undergraduates attend public of private non-profit institutions. Here are a couple of examples of for-profit universities:

• De Vry

• University of Phoenix

For-profit universities can't compete with public universities by offering lower tuition, because public universities are heavily subsidized by taxpayers. Generalizing very broadly, most Americans don't view for-profit universities as a good option for earning a bachelor's degree. Some people view for-profit universities as sometimes a good option for taking some non-degree courses, e.g. learning a foreign language or a particular skill. Some for-profit universities are outright scams.

Are there options for Americans to get your university education for free?

Yes, many. For example, as I explained above, most New York State residents can get into SUNY or CUNY (the admissions are almost open), and the tuition is free for most residents, and very low for others. Almost 4 out of 5 U.S. students choose this option.

At universities that do charge high tuition, many students receive some kind of grants or scholarships. I'd venture to say that it's more common nowI'! than paying the full sticker price tuition. For example, the beatnik author Jean-Louis Lebris "Jac" de Kérouac attended Columbia University on a football scholarship (go Lions!!)

A recent New York Times article says that some private universities are lowering their tuition sticker price to better reflect what students actually pay.

One common way to earn free tuition at expensive private universities is to volunteer to serve in the U.S. military. Then (with some restrictions), U.S. taxpayers will pay college tuition for you, your spouse, and dependends.

Some (not all) states have programs where the state pays some or all university tuition for people receiving public assistance (welfare, dole). Sometimes they pay for a very expensive private university.

why is there a student debt crisis?

The truth is more complex than what your government's propaganda paints. For example, I know one young woman who borrowed over $100,000 as student loans, and spent it mostly on things like travel and clothes. She states that her plan was to marry a rich man who would pay off her student loans. As far as I know, her marriage plans have not materialized yet, but rather I and other U.S. taxpayers will end up paying for her student loans.

According to CUNY's Hunter College,

The median federal loan graduate indebtedness for Hunter students was just $12,500. (Hunter is proud that 75% of its students graduate debt-free.)

Is there a reason why more people don't go there?

I'm sure that the over 1 out of 5 students who attend private universities believe that there are valid reasons for their choices. For many students, the tuition cost is not a big consideration because someone else pays. Some students believe that the campus environment is more pleasant in a private university, than in a public one (example), or that they would get better education in some way, or that they would be more likely to find a good job or be admitted to a competitive graduate school after graduation.

But the claim that Americans wanting a bachelors degree have no choice other than to borrow hundreds of thousands of dollars to pay for private university tuiton is demonstrably false.

Do these universities offer all majors?

That's definitely a consideration for some students. For example, some religious students attend a religious university (many Roman Catholic universities; Liberty - evangelicals, etc) because they want to study theology, and they don't want to do it at a public university.

For certain majors, such as cinema studies or forensic studies, some undergraduate programs are very well regarded, while most others are not.

Answer 11

Put simply.. the US government provides government guaranteed loans..

Since a potential student can get a $60,000 loan for education purposes only the colleges can feel free to charge them pretty much as much as they can afford to borrow.

If the potential student could not borrow $60,000 for a college loan the university would have no choice to lower the admission price (as few people could afford to pay $60,000)

Think about it. Without the current loan system.. could the universities charge this much money for college? How would students come up with the money to afford these high prices?