Jan 21, 2019 in Analysis

The rising cost of attending university or college is a concern resonating with American families at all levels of income and with individuals whose viewpoints span the political spectrum. The discussions about the rising cost of college education frequently begin from the premise that higher learning institutions, as well as the systems of higher education are dysfunctional. Viewing higher education industry through such lenses might reveal several inadequacies that Americans have tolerated for a very long time. Nevertheless, devoid of appropriate context such information can be quite misleading. Without doubt, there is significance in placing college or university education within the industrial configuration of the US economy and the economic history of the previous century. Once the higher education industry has been positioned within the broader economy, it will be possible to see how technological changes affect the cost structure of the universities and colleges. Creating an effective public policy to address the higher education bubble demands a clear comprehension of the rudimentary forces that increase education costs. Against this backdrop, this paper offers a good foundation comprehending how these forces have helped in increasing the costs of education in higher learning. In addition, the paper also gives an insight concerning how higher learning institutions spend their tuition fees and discusses some of the policies governing financial aid and college tuition prices. 

The Unusualness of Higher Education Industry

College and university tuition seems to increase more rapidly than the rate of inflation (Archibald and Feldman 1). This can be taken as prime evidence that the higher education sector is in deep crisis. An individual’s first reaction, as of concerned American, is questioning whether the higher education system is operating normally. The rate of inflation is a weighted average of the price changes of products making up the price index. According to Archibald and Feldman, the prices of several items would increase faster than the average in any given year (1). Some items might also experience a decline in prices. Nevertheless, government data has consistently showed that the cost of securing higher education has been increasing faster than inflation (Archibald and Feldman 2). Are there any other industries showing the same trend in prices? 

The way in which one views the usualness or unusualness of increases in the college tuition fees varies significantly basing on one’s perception of inflation. Suppose the world provided a 50/50 likelihood in any given year that prices of goods or services will increase more rapidly than the overall inflation. In the modern times, the prices of most items would increase faster than the average approximated half of the time as the years go by (Archibald and Feldman 3). Alternatively, the world might also present a situation where prices of certain items often increase more than the average (Archibald and Feldman 4). In addition, in order to balance things out, the prices of some items might rise slower than the average. The price trend of college tuition would be unusual if the world offered a 50/50 chance that the prices would increase more rapidly than the overall inflation (Conner and Rabovsky 4). On the other hand, the cost behavior of college tuition would be usual if the prices of certain goods or services frequently increased more than the average inflation. This proof appears to be clear. One cannot elucidate the structure of higher education tuition by dichotomizing the budgets of higher education in order to assess the changes in the economy affecting both higher education and other services. 

Factors Contributing to High Tuition Costs

Universities and colleges spend a certain amount of money to offer educational services per student. Conner and Rabovsky (12) argue that the changes in this per-student cost are at the core of increased tuition. Nevertheless, there are also other forces affecting the cost of obtaining higher education. Higher learning is one of the heavily subsidized activities. Three factors contribute to the high cost of tuition: technology, government policies, and shared government (Archibald and Feldman 4).


Taking an extensive evaluation of the data, Archibald and Feldman identified three distinct periods in which the cost of higher education changed (5). The first period took place during the mid-1960s in which the tuition fees rapidly increased. The second period was between late 1960s and 1980s in which the real cost of higher education remained constant before slightly declining. The third period is between the late 1980s and now, in which tuition fees increased and continues to increase faster than the overall inflation. Ehrenberg (11) argues that any helpful explanation of the rising tuition costs should consider these three periods. A comprehensive explanation should note that the upward behavior of tuition fees is extremely similar to the changes in real prices of other services. Consequently, Ehrenberg (12) suggests that the increasing cost of tuition is a part of the technological changes that has revolutionized the US economy over the last century. The technology effect on the increasing cost of higher education can be viewed from three different perspectives discussed below: cost disease, standard of care, and the cost of hiring highly educated service providers (Archibald and Feldman 6).

Cost Disease. Technology results in cost disease especially in service industry. Economists argue that technological advancement decreases the amount of labor needed to produce a good. According to Greysen, Chen, and Mullan (23), this technological advancement has played a crucial role in agriculture and manufacturing sectors, but it seems to be failing in reducing input and cost in other sectors, such as education. Rather than reducing costs, technological advancement is increasing the costs. Hemelt and Marcotte (25) argue that any homogenous commodity or one that is manufactured in an industrial setting is very vulnerable to the cost-reducing advantage of technology. On the contrary, productivity is extremely harder to attain for many service sectors with the use of technology. For instance, offering a service such as education in modern times still requires almost the same amount of labor as it did twenty years ago (Hemelt and Marcotte 24). This is what economists regard as a cost disease. Technology does not equally decrease costs for all industries. Education is among the industries that benefit from the cost-cutting advantages of technology the least. In the labor intensive higher education sector, the time of provider of service is a service, and attempts to cut back that time decreases the quality of the service. Besides not benefiting from the cost-cutting effects of technology, the higher education sector hires from the same labor market, and uses electricity from similar utilities as other industries. Schneider (3) pointed out that any industry witnessing lower levels of productivity than the nationwide average is likely to experience increases in costs than the overall rate of inflation.

The Cost of Employing Highly Educated Service Providers. This is the second perspective through which technology increases the cost of higher education. The US higher education, similar to other service sectors, depends significantly on well-educated employees (Schneider 56). Approximately 70% of the university employees have at least a degree (Archibald and Feldman 11). The percentage for the employees holding a degree in the manufacturing sector is far below the 70%.  In the event that the gap in salaries and wages widens between individuals holding a degree and those who do not, it is possibly that higher education will incur huge costs. Hemelt and Marcotte (21) make a case that the form of technological advancement that changed the US economy has increased the demand for individuals with ever more formal schooling years. The increase in the supply of that form of labor slowed in the late 1970s (Archibald and Feldman 8). In the contention between the supply and demand for educated labor, demand has won the argument. The ultimate outcome is an increase in the gap, favoring the college educated. 

Industries depending on well-educated service providers, including the higher education, have all experienced a reasonably higher cost of labor since the 1980s. Ehrenberg (5) argues that if the cavity between the well-educated and less-educated widens, the cost of producing a service that employs well-educated personnel must also increase. Consequently, universities and colleges are compelled to charge higher college fees in order to meet the increased costs resulting from the wide gap between the well-educated and less-educated. Higher education institutions also utilize highly educated personnel outside classrooms, and such personnel have several alternatives in the private sector (Ehrenberg 6). 

Technological Care Standard. Technological shifts do not have a direct impact on college or university tuition fees. Rather than decreasing the number of labor hours taken to produce a class, technological innovations interfere with what is taught and how it is taught. For instance, students in higher learning institutions attending science and technology fields have to familiarize themselves with modern tools which might be more expensive than ordinary teaching tools (blackboard and chalk) (Greysen, Chen, and Mullan 6). Similar to the current medicine, higher education institutions have to meet the standard of care. For higher learning institutions, the care standards are established by the labor markets employing the graduates. Consequently, these institutions cannot select the technology to employ in the same manner other industries do (Greysen, Chen, and Mullan 6). Other industries, unlike the higher education, have the advantage of adopting new forms of technology if it guarantees the quality improvement of the firm’s product, or if it cuts down the costs of producing a product. Higher learning institutions are compelled to implement new forms of technology even if the technology causes increase in cost (Ehrenberg 11). The additional cost of implementing these technologies is always transferred to students, who eventually have to pay high tuition fees. 

Federal Government Policies

Some of the federal government policies have increased the cost of acquiring higher education. Ehrenberg (5) argues that the federal government contributes to an increase in cost on selective private higher education institutions in three major ways. Firstly, the breakup of the shared agreement of different elite learning institutions by the Department of Justice to target their financial assistance to students with needs has resulted in the increased utilization of merit aid and very expensive financial assistance packages. Secondly, Ehrenberg (5) points out that the maximum Basic Education Opportunity Grant (BEOG) seems not to be keeping up with the speed of the country’s inflation rates. In 1975, the maximum BEOG amount was about $ 4000 (Ehrenberg 5). In 1997, the maximum BEOG was nearly $ 2700 (Ehrenberg 5). Consequently, higher learning institutions, especially private universities and colleges, have been compelled to seek other financial ways of making up for the difference. One such way is the increment of tuition fees. Thirdly, increasing cost of doing researching is also taking a toll on the cost of running higher learning institutions. The few recent years have witnessed a rise in the cost of doing research because the government puts pressure on higher learning institutions to decrease their rates of indirect costs, and at one fell swoop, raised anticipations for matching finances in the application of grants. 

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Shared Governance

The costs of higher learning are increasing because of the shared governance between administrators, trustees, and faculties. Ehrenberg (5) argues that this form of governance virtually guarantees that certain private education institutions will be very slow to respond to the increasing costs. According to Ehrenberg (5), trustees are always successful business people with adequate knowledge of cutting down operational costs and meeting budgeting constraints. However, if the university president orders the spending of money in order to uphold the strength of the college or university in a specific field, they are likely to agree. In public higher learning institutions, trustees usually do not regulate the levels of tuition and state appropriations because the political process frequently makes such decisions. The administrators of public higher learning institutions frequently make hard decisions in order to balance budgets since they can blame the government. On the other hand, administrators in private universities frequently find it hard to evade blame. Instead of risking the goodwill of the institution, administrators are likely to increase tuition fees. 

Why do students get less financial aid if they make more money in the previous year?

Private and public higher learning institutions have implemented various formulas and procedures for the determination of how much the student’s family can afford towards the tuition fees (Hamilton). Public colleges use the Federal Methodology, a formula provided by the United States Department of Education. The formula calculates the anticipated family income as relates to the student’s financial aid. 

For an individual to apply for federal assistance, they are required to fill the Free Application for Federal Student Aid (FAFSA) form (Hamilton). It is possible for an individual to get less financial assistance if they have made more money previous years. On the contrary, it is also possible for a student to get more financial aid, if they have made less money in their previous years. The Federal Methodology can allocate financial aid to individuals that need it the most. People who made more money before do not need the same amount of money as compared with those who earned less. The FAFSA forms require the applicants to provide information about their income and assets. However, it does not consider the assets like retirement accounts and equity which the applicant has built over time. This information enables the providers of financial aids to determine the financial position of the applicant (Hamilton). The formula is expected to reflect the actual financial need of the applicant in order to ensure the appropriate persons are receiving financial aids. 

Certain private higher learning institutions might request for information regarding retirement accounts and home equity when using their own institutional methodology. These institutional methodologies are stricter than Federal Methodology, and they will definitely lead to calculations showing less need of finances. Irrespective of the methodologies used, the aim of financial assistance calculation is to provide a single number reflecting financial need (Hamilton). This number is referred to as Expected Family Contribution (EFC). According to the US Department of Education, the EFC represents the amount of aid that the family is anticipated to contribute for a single year (Hamilton). The financial need of a student computed by the formulas can range from $ 0 to infinity. 

The Spending of Tuition Fees by Universities

As revealed above, higher education tuition fees are increasing more rapidly than inflation rates. One way of regulating the costs of higher education is making citizens better consumers by providing them with better prices and outcome information (Schneider 25). However, the exact cost of higher education is extremely hard to compute due to the sophisticated and opaque pricing structures (Schneider 24).  Presently, higher learning institutions are spending more amounts of dollars on administrators than on students or faculty (Schneider 23). Schneider (21) points out that regardless of the high costs of higher learning, tuition paid by consumers does not cover the full amount required by the institutions to run smoothly. A study conducted by Greysen, Chen, and Mullan (9) about Yale University’s latest financial status showed that the university’s income from students, comprising of accommodation and tuition fees, accounts for about 8.6% of the institution’s total operating revenue. Regardless of contributing little to the smooth operation of the higher learning institution, there is a need for consumers of higher learning services to comprehend how their money is spent. Some of the critical areas to which higher learning institutions channel tuition fees include staff salaries and benefits, campus facilities, research, teaching, and scholarships (Hemelt and Marcotte 2).

Staff Salaries and Benefits

Universities and colleges have employees who provide various services that enable them to run smoothly. Several higher learning institutions broadcast their income from tuition fees and expenditure in yearly report. The largest chunk of university’s tuition spending is dedicated to paying staff salaries and benefits, such as health insurance, childcare, and pensions. A study conducted by Hemelt and Marcotte (2) indicates that costs related to the payment of salaries at Yale University accounted for about 63% of the total operating expenditure in the 2010/11 academic year. Hemelt and Marcotte (3) argue that the high spending on staff salaries indicates that universities are investing in the maintenance of good student to staff ratio. This implies that students benefit from smaller classes. In addition, the huge spending on staff also signifies a more contact time between students and the staff resulting in the delivery of quality services to the consumers. Whereas the teaching staff is one the most conspicuous employee category, they only represent a single group of workforce. Universities require the services of non-teaching staff, such as administrators, ICT staff, and librarians. The non-teaching staff also causes the budget to bulge significantly (Hemelt and Marcotte 2).  

Investment in Campus Life

A considerable portion of the tuition fee is dedicated to the improvement of campus life. Majority of universities focus on investing where it matters most, and campus life is one of such areas. A university has to improve the support for teaching and learning. Students rely on a wide range of professional and support services in order to get the most out of campus. Higher learning institutions use tuition fees to build new physical structures, repair old structures, and overhaul facilities, such as sports centers and libraries. The University of Yale reported that it spent about 15% of its expenditures on running the physical facilities on the university in academic year 2010/11 (Hemelt and Marcotte 2). In certain higher learning institution, investment in university estate has been an evident outcome of the higher tuition fees. About 80% of higher learning institutions claimed that they improved or maintained the quality of campus life. Some of the services that improve campus life include welfare and pastoral support, social and leisure facilities, comparatively priced accommodation and catering services. Universities are increasingly modifying the support they provide in order to cater for a wide range of students, such as those who undertake part-time studies. 

Research, Teaching, and Scholarships

The third major chunk of tuition spending is research, teaching, and scholarships. Frequently, costs related to research by academics and graduates are categorized together with teaching costs. For instance, the University of Yale reported that it dedicated about $279 million on studies and instructions in the academic year 2010/11 (Hemelt and Marcotte 3). The relationship between research and teaching is obvious: funding of research is frequently necessary for universities’ capability to deliver their courses. Studies have also shown that top universities engaged in constant research tend to attract top academic performers, and have high quality learning facilities. 

Federal Policies Governing Financial Aid and Fees

The US federal government has set several rules to strengthen financial aid programs at nonprofit, for-profit, and public higher learning institutions (Kaplin and Lee 5). The rules protect consumers from aggressive or misleading recruiting practices, provide students with adequate information concerning the effectiveness of education programs, and ensure eligibility in the process of awarding financial aid. For the purposes of this study, out of these assurances by higher education policy, this segment will focus on the eligibility during the process of awarding financial aid. 

Financial Aid Policy

This policy aims at ensuring that only needy persons and eligible programs get access to financial aid. It requires higher education institutions to clarify the courses that qualify for federal aid and the amount of aid that is appropriate (Ehrenberg 6). The policy addresses five critical areas: credit hour, written arrangement, retaking coursework, student withdrawal, disbursement of federal student aid funds, and gainful employment. 

Credit hours refer to the metrics employed by the Department of Education to assess the suitability of federal aid (Greysen, Chen, and Mullan 5). Originally, there was no standard for a credit hour, and consequently higher learning institutions awarded students more aid than they deserved. This regulation addressed this issue by defining a credit hour and establishing required steps for the accreditation of agencies in order to determine whether the credit hour assigned by the institution is acceptable. 

In relation to the written arrangement, the financial aid policy permits higher education institutions to deliver a portion of another institution’s education program via written arrangement. However, the policy limits the amount of education programs which can be offered by an institution in an arrangement, forbids arrangements with ineligible institutions, and expands information than an institution should avail to student enrolled in a program affected by the arrangement. 

With regard to disbursement of federal student aid, the policy makes sure than the neediest student get the financial assistance. The law recognizes such student as Pell grant recipients. Initially, several students were not receiving financial aids in time. 

Tuition Fee Policy

Different states have necessary policies that support their public organizations with appropriations. The direct appropriations stated in most of tuition policies enable higher education institutions to charge fewer prices than the cost of offering the education. For some public institutions and private higher learning institutions, the private giving and endowment income perform the same role as the direct appropriations. 

The tuition fee policy states that no higher learning institution may collect fee from student or charge any form, except those allowed by the law. This policy safeguards consumers from being exploited by higher learning institutions by setting a uniform standard that all institution must adhere to. Consequently, no institution can establish its fee structure and amount. However, the amount fee can be adjusted by respective states. However, the law allows high learning institution to decrease tuition fees.

The policy also requires higher education institution to collect fees and provide an annual account of the fees collected. This provision of the law aims at ensuring that university and college administrator do not embezzle tuition money which can result in the insolvency. 


This paper has discussed the factors contributing to high cost of higher education, as well as given an insight concerning how higher learning institutions spend their tuition fees. The three factors contributing to the high cost of tuition include technology, government policies, and shared government. The technology effect on the increasing cost of higher education can be viewed from three different perspectives which are cost disease, standard of care, and the cost of hiring highly educated service providers. Through the Basic Education Opportunity Grant (BEOG), the government has contributed to high cost of tuition by not adjusting the maximum amount of grant to match up with inflation. The Federal Methodology can allocate financial aid to individuals that need it the most. As a result, people who made more money in the previous year do not need the same amount of money as those who earned less. Some of the critical areas to which higher learning institutions channel tuition fees include staff salaries and benefits, campus facilities, research, teaching, and scholarships. 


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