December 10, 2019
College tuition has nearly tripled over the past three decades, student debt exceeds $1.5 trillion, and there are more than seven million borrowers in default. Why does tuition continue to rise and how should public policy respond to ensure higher education remains within reach for the next generation of Americans? This policy paper examines ongoing changes in the cost of attending college, the returns on investing in education, and debt financing of college over the past few decades. Finally, it assesses the implications for potential policy reforms.
Author Aaron Hedlund reviews the academic literature on higher education in the U.S., including possible sources of tuition inflation, the history of the college premium, and the consequences of student debt. He finds that:
- Financial aid, state funding, differences in productivity, and the structure of higher education itself all play a role in tuition inflation.
- College remains a worthwhile investment, but there is wide variation in outcomes across institutions, fields of study, and the degree of preparation of incoming students.
- Student loan default is concentrated among those who drop out of college with small loan balances and poor labor market prospects.
- Student debt can limit graduates’ ability to start a business or purchase a home and even influence marriage and career choices.
After reviewing these trends, the author evaluates several proposed policy reforms for higher education. He finds:
- While student loan repayment should feature some form of safety net mechanism, total loan forgiveness would be expensive, untargeted, and distortionary.
- Decreasing student loan availability would reduce enrollment of low-income students.
- Increasing subsidies would be expensive, and may not direct assistance toward low-income students.
- Policies that allow for flexible tuition pricing would help low-income students without straining college budgets.
This suggests that policymakers seeking to address the rising costs of higher education should avoid one-size-fits-all solutions such as blanket student loan forgiveness. Instead, they should embrace policy changes that allow for innovation and greater flexibility. As the structure of higher education continues to change, flexible policy solutions will better allow the next generation of students to pursue educational investments that set them up for success.