Meet the real student-loan victims: Ivy League schools, the 1 percent and the real cause of tuition creep

Costs are skyrocketing. But some schools and families are in a better position than others

By Jonathan R. Cole

Published February 14, 2016 5:00PM (EST)

Bernie Sanders speaks at Great Bay Community College, Feb. 7, 2016, in Portsmouth, N.H.   (AP/John Minchillo)
Bernie Sanders speaks at Great Bay Community College, Feb. 7, 2016, in Portsmouth, N.H. (AP/John Minchillo)


The Cost of Higher Education over Time

How much has tuition, which is the focus of much public criticism, climbed over time? On the surface, there appears to be a real problem. The distinguished historian of education Roger L. Geiger uses data from thirty-three private and sixty-six public universities to show that “the costs of higher education borne by students nearly doubled in real terms from 1978 to 1996. In the same years, gross domestic product (GDP) and disposable personal income each grew slightly more than 50 percent. The cost of going to college, then, grew nearly twice as fast as the economy.”

William G. Bowen, who has probably done more influential empirical work on various aspects of American higher education than any other contemporary scholar or academic leader, also concludes that the cost of higher education has historically risen at a more rapid rate than inflation. Looking backwards from 1964 to 1904–1905 at the direct costs per student (of which tuition is only one component) compared with an index of overall economic trends, Bowen notes: “Excepting war periods and the Great Depression . . . cost per student rose appreciably faster than an economy-wide index of costs in general. The consistency of this pattern suggested to me then [this study was done originally in the 1960s and was labeled by Clark Kerr as Bowen’s Law], as it does today, that we are observing the effects of relationships that are deeply embedded in the economic order.”

And, in 2012, Sandy Baum, Charles Kurose, and Michael S. McPherson used data from the American Institutes for Research’s Delta Cost Project to conclude that “education and related expenditures per FTE (full-time equivalent) student increased at an average annual rate of about 1 percent beyond inflation at all types of public universities from 2002 to 2008.” For many years, the cost of private university education was rising more rapidly than was the cost of education at its public counterparts. The reverse has been true over the past decade, and change in relative costs has accelerated after the Great Recession of 2007–2008. Prior to this reversal, Charles T. Clotfelter, professor of public policy and economics at Duke University, studied cost escalation at several elite universities up until 1998 and found confirming evidence of rising costs: “Beginning around 1980, these costs [in higher education], measured in real, inflation-adjusted dollars, began to rise rapidly. Growth was especially rapid at private institutions. . . . Throughout most of the past three decades, the average tuition and fees charged by colleges and universities in the United States tended to increase faster than the overall rate of inflation.”

In Why Does College Cost So Much?, published in 2011, Robert B. Archibald and David H. Feldman concluded that: “Tuition and fees at colleges and universities consistently go up faster than the inflation rate. We don’t like this, so it is a problem. The first cause one might consider is that colleges and universities are doing something wrong. Colleges and universities have indeed served up some pretty fat targets in recent years, so this approach might appear to be quite fruitful.” But as these two economists suggest, the story is a complex one.

Over the past thirty years, the average in-state tuition and fees rose 257 percent for students taking four years to complete their studies, an increase from roughly $2,400 to $8,700. If there is any hopeful news on the cost of a college education, it has come from recent reports that the rate of tuition increases has slowed since 2012. In-state tuition and fees rose by 2.9 percent for students at four-year public colleges, the lowest rise since 1975–1976. At private colleges and universities, the rate of increase was 3.8 percent, somewhat lower than in recent years, according to Sandy Baum, who tracks these data for the College Board. The average tuition sticker price at four-year public institutions was up about $250 over the previous year to $8,893 in 2013–2014; at private nonprofit four-year colleges, it grew from $28,989 to $30,094 in 2012–2013. After adjusting for financial aid, the cost of college (including tuition, room, and board) for those attending all four-year institutions reached an average of $12,620 in 2013, up $220 over the previous year. It rose to a total of $23,290, an increase of $700, at private four-year colleges and universities. Finally, at two-year public colleges, the average tuition and fees grew about $100 over the prior year to $3,264.

The aggregate data on student debt, however, are more troublesome. Student debt has now topped $1 trillion, and the rate of default on these loans has continued to increase to the point where one in ten students now defaults within two years of starting to repay them, according to the Department of Education. To help pay for their college costs, in 2012, 36 percent of undergraduate students received an average of $3,650 in federal Pell Grants, which are the primary source of support for needy students. The students may also have taken out low-interest loans from the federal government, such as Stafford and Perkins loans, and may have received support from individual state programs. The federal government also provides help through education tax credits and tuition deductions, which amount to about 60 percent of the total Pell Grant allocations.

This is the view from 30,000 feet. A closer inspection of pricing and actual cost is more instructive. Let’s first examine two of the nation’s largest public university systems— the City University of New York (CUNY) and the University of California system. Over many decades, the colleges in CUNY have assimilated hundreds of thousands of children of immigrants and have permitted access to deserving students from lower socioeconomic backgrounds. It has been one of the exemplar institutions that has fostered upward social mobility in the United States. With a current enrollment of roughly 270,000 students among its community colleges and four-year colleges, it continues to do that today.

The cost of going to college is not limited, of course, to tuition and fees. Students also have to pay for their books and supplies, for room and board, and often for travel to and from school, among other things. So, tuition and fees give us only a partial picture of the overall cost of a college education. In the case of CUNY, the tuition for full-time students at four-year colleges was $5,730 in 2013; if a student came from outside of New York State, the tuition was either $15,330 per year or $510 per credit. CUNY also has a technology fee, a student activities fee, and a Consolidated Service Fee. These fees, for fulltime students, total around $200 a year, on average. But CUNY also recommends that students living at home or with relatives bud get an additional $7,110 to cover the costs of the items mentioned above plus personal expenses. For students who do not live at home, CUNY recommends a bud get of $19,858 for expenses in addition to tuition and fees, most of which (more than $10,000) goes toward the cost of housing. Thus, New York State residents living away from home and attending a CUNY college full-time would be wise to bud get their total expenses at around $25,000 per year. The estimated costs for the substantial percentage of CUNY undergraduates who commute to college would be around $14,000 a year.

As mentioned, eligible students can reduce the sticker price of tuition and fees through federal Pell Grants and tax credits, as well as through New York State’s Tuition Assistance Program (TAP), which offers grants based on a complex set of calculations of a family’s financial circumstances. Consider the full-time CUNY student from a low-income family: He or she might receive the maximum Pell Grant for a year of study, which in 2012–2013 totaled roughly $5,645. If he or she also applied for TAP, he or she might receive another grant up to about $5,000 per year. Since Pell and TAP programs are not loans, the money does not have to be repaid. The total amount received from these two financial aid programs, which were specifically designed to increase access to college education for youngsters from poorer socioeconomic backgrounds, could cover the total cost of tuition and fees at CUNY. In fact, in 2013 about 60 percent of full-time students attending CUNY colleges paid no tuition and fees at all. Yet many of these students graduate with some level of debt because they’ve needed to take out loans to meet the additional expenses of school, such as those mentioned above. A look at the actual indebtedness of CUNY students is revealing: Fewer than 20 percent of students graduated with debt in 2013; the default rate on their loans is roughly 6 percent on an average total debt of about $13,000.

Now consider the situation in California, which has had the greatest system of public higher learning in the United States. Unlike CUNY, in which all components of the system report to a single chancellor, California has a tripartite system of community colleges, a California State University system (CSU), and the research universities that are part of the University of California (UC). As of 2011, roughly 235,000 students attended one of UC’s ten campuses, including Berkeley and UCLA. These institutions had almost 20,000 faculty members and close to 200,000 staff members. The California State University system had another 437,000 students at twenty-three campuses and more than 44,000 faculty members and staff. Finally, the community college system enrolled about 2.4 million students at 112 colleges. In the aggregate, these three components of California state higher education comprise the largest and most complex system in the nation, although New York might contest that by bringing together both the State University of New York (SUNY) and CUNY systems.

A California student from an impoverished or low-income background also has access to Pell Grants and to state student aid. The amount of tuition, fees, and other expenses associated with attending each of the three tiers differs, of course. The estimated cost for community college students in the 2013–2014 academic year came to about $14,000, of which roughly $1,100 was the cost of tuition and fees for a twelve-credit program. Tuition and fees at the CSU system were about $6,600, but with additional costs, the total came to about $25,000. Finally, for UC students, tuition and fees were $13,200, with estimated total costs coming to $32,400. These are not small sums for parents with little savings and low-wage jobs, but even the full sticker price for a Californian who attends one of the world’s top universities is not wildly expensive. As with CUNY, if a student comes from an economically disadvantaged background yet has the credentials to be admitted to one of the UC institutions, the discounted price for a year of college could come to around $3,000 if he or she received full amounts from both Pell Grants and the California entitlement award, which is similar to the New York TAP program. If the student also qualified for need-based aid because of “high potential,” he or she might receive another $1,500, bringing the total charges for tuition and fees to about $1,500 per year. Again, this student might be forced to take out loans to cover the cost of books and living expenses. And depending upon the need for housing or to commute to school, he or she might incur debt of perhaps $10,000 to $15,000 a year. That is no small chunk of change for a youngster who has never had much money to begin with. Over a four-year period (assuming the student graduates within four years, which is not true for many), the amount of debt grows to a significant sum. The student who commutes to community college, which is where many enter the education system before moving up to either the CSU or UC system schools, can attend school without paying any tuition and fees.

One further obstacle for prospective college students and their families who come from poorer economic backgrounds is the highly skewed levels of knowledge about how a student might receive financial aid in order to reduce the sticker price of a college education. In 2015, the College Decision Survey of these prospective students showed that “students were least likely to be familiar with Pell Grants (44 percent), tax credits/deductions (35 percent) and the Supplemental Educational Opportunity Grant program (27 percent).” Some “88 percent of prospective students and recently enrolled students said the cost of college and availability of financial aid were important or very important factors in deciding to attend a specific college,” yet a minority of those in this study were familiar with basic ways of lowering the cost of education. Rachel Fishman, who directed the study, notes: “Only 44 percent of students with a house hold income of less than $50,000 expected to or had received a Pell Grant, even though U.S. Department of Education data show that 92 percent of students who applied for federal student aid from that income level received Pell.” We must find mechanisms to change this and also to simplify access to information about federal financial aid programs and how families can use the tax credits available to them to lower the cost of higher education.

The loan repayment and default problem hits students at community colleges hardest because they have the highest probability of dropping out of school. Nationally, only about 25 percent of community college students graduate, and a high proportion need student loans to be able to attend college in the first place. When they don’t graduate, they don’t reap the economic rewards of a college education; and, saddled with debt, they all too often default on their loans. This is not nearly as large a problem at either four- year universities or the prestigious private universities, where the graduation rates exceed 90 percent and the default rate on government loans is very low. Far more focus on the debt situation of community college students is needed, and policymakers ought to devise ways to keep these students in school and to reduce their debt burden.

If a high-achieving high school student of modest means wins the lottery of getting into one of the most selective universities, then he or she is in for more good luck. Despite what the media would have us believe, these are the very small number of institutions where the difference between the nominal cost of attending the university— $50,000 tuition and fees— and the actual cost for students from low-income backgrounds is the greatest.

Let’s look at Princeton University, which had a $21 billion endowment as of June 2014. On a per-student basis, Princeton is probably the wealthiest major research university in the nation, although Harvard’s endowment is significantly larger ($36.4 billion in the same year). Princeton’s tuition and fees total slightly more than $50,000 a year, and 75 percent of their students graduate debt-free. The average debt at graduation for those who do take out loans is between $5,000 and $6,000. As mentioned, all of the Ivy League undergraduate colleges have a need-blind admissions policy that is coupled with a full-need financial aid policy. What this means is that applicants are reviewed regardless of their need and are admitted, ostensibly, only on their merit. We know, of course, that legacy children and athletes have significant advantages in the admissions process, as do youngsters of color and to a lesser extent those who come from economically disadvantaged families. But like a number of the Ivy League universities and a few others, about a de cade ago Prince ton adopted a no-loan financial aid policy. Consequently, the amount of borrowing by even economically disadvantaged students is very low. Princeton’s average student debt upon graduation is the lowest in the country, but it is not alone in the category of those truly distinguished colleges at research universities whose students graduate with little or no debt. All of this is possible because these schools have substantial endowments that cover part of the cost of attending them, and they have a deep commitment to supporting students who do not come from privileged economic backgrounds.

At Yale, which has a sticker price of about $54,000 a year, graduates have an average debt of $9,254 after four years, and only 28 percent have to borrow for their education. Again, this is because the school commits a large part of its endowment to financial aid (in fact, much of the endowment for financial aid is restricted by the terms of the gift for financial aid use); its annual financial aid bud get for undergraduates is close to $120 million per year.

Finally, Harvard’s undergraduate tuition, room, board, and fees for 2014–2015 were nearly the same as Yale’s— almost $59,000— but only 34 percent of its undergraduates have to borrow to get through school. The average debt is a bit more than $10,000 for four years at Harvard. For 2014–2015, the school awarded $166 million in financial aid— a 77 percent increase over the amount designated for aid in 2007. Harvard initiated the major move to have students graduate without any debt. Its website tells the story clearly:

Your financial circumstances have never kept you from great achievement, and they will not keep you from Harvard. . . . 20 percent of our parents have total incomes less than $65,000 and are not expected to contribute. Families with incomes between $65,000 and $150,000 will be asked to pay proportionately more than 10 percent, based on their individual circumstances. . . . Home equity and retirement assets are not considered in our assessment of financial aid. . . . Foreign students have the same access to financial aid funding as U.S. citizens [which is not true at most other highly selective colleges]. Harvard lets prospective students know that approximately 70 percent of our students receive some form of aid, and about 60 percent receive need-based scholarship and pay an average of $12,000 per year. Twenty percent of parents pay nothing. No loans required.

Beyond the most selective colleges and universities, the actual cost of higher education is apt to be greater; and the loans that result from lower or non-existent endowments create a larger debt burden for less-well-off students. Excellent universities, such as Brown University, or colleges, like Bowdoin, do not have the endowments to allow for this low level of indebtedness. But as should be plain, the real costs of going to college in the United States differ enormously for varying types of schools.

A report from the Institute for College Access & Success, an independent Non-profit organization that works to make higher education both more affordable and more attainable for individuals from varying backgrounds, underscores the extreme variability in the debt of undergraduate students who received their diplomas in 2012. Although the average debt climbed to $29,400 in 2011–2012, details varied by state and type of college. The report presents aggregate data on so-called high-debt states and low-debt states, but these numbers can be misleading until one looks at specific institutions and the actual proportion of graduating students who leave college with a debt burden, as we have done. Among the 71 percent of recent graduates from four-year colleges who held loans, the amount varied by state from $18,000 to $33,650, and the number of students holding debt ranged from 41 to 78 percent. But more importantly, the report shows even greater variability in debt among colleges— even in the same state— ranging from an average of $4,450 to $49,450 in the aggregate for four years.

Among the highly educated and wealthiest 1 percent or even .1 percent of those in the United States and abroad, price is not a determining factor in their decisions to have their children apply to the top schools or attend if admitted. Perceived advantages in such areas as admission to professional schools, future income, prestige, networking, and “assortative mating” (i.e., marrying others who come from a similar background), whether rational or not, drive the decisions of this limited group. Consequently, under their need-blind admissions and full-need financial aid programs, these schools charge substantially more to students of the very wealthy than to those who come from needy backgrounds. This is a social policy adopted by these universities— one that involves the belief that those with wealth should contribute to the welfare of the less economically fortunate. If greater financial support doesn’t come from either the state or federal government, then the schools have taken it upon themselves to create a progressive policy that will enable the less affluent but remarkably able youngsters to attend these elite schools. This is a form of social engineering. But not all private colleges and universities, as wealthy as they may seem to outsiders, are in a position to compete financially with Harvard, Yale, and Princeton (HYP).

The affordability crunch falls on neither the 1 percent nor the .1 percent, nor on those at the bottom of the income hierarchy, but on those in the middle class whose annual family income ranges from, say, $50,000 to $150,000 and who may have more than one child attending college simultaneously. How should one handle this group in the middle? The wealthiest of the top universities adopted a no-loan policy for either everyone (in the case of Harvard) or for students whose families earn less than around $200,000 a year. This is an admirable practice, but many institutions that are competing with HYP cannot afford such generosity. Yet they have, in the name of competition, adopted such policies ostensibly to compete with those better-endowed universities. Take Columbia, as an example. The University’s prestige and place in the public mind has been significantly elevated over the past generation, but its endowment is simply not in the same league as HYP and Stanford. Yet its “discount” rate has risen from around 25 percent to well over 40 percent of tuition in a generation. That is a great deal of money that might otherwise be spent on faculty salaries, greater financial aid for graduate students, better laboratory facilities, and upgraded classrooms and library facilities. The money might be better spent on, for example, attractive undergraduate programs that might lure students to the university than on a no-loan policy. In short, there are large “opportunity costs,” as economists would say, to adopting a no-loan financial aid policy. Whether it is even appropriate that a student attend a great university at no cost is another issue.

Public institutions of higher learning have historically adopted a regressive form of taxation on those families whose children attend them— and most people see this as fair or just. If Steve Jobs’s third daughter, Eve, who was born in 1998, decided to attend Berkeley rather than Stanford or some other highly selective private university, is there any reason why her family should not pay more for her education than should the immigrant parents of an equally talented first-generation child who struggle to make ends meet? The only form of progressive “tax” comes in the form of financial aid eligibility that would distinguish the child of the poorer first-generation family from Jobs’s child. But to go to one of the greatest universities in the world for about $14,000 in tuition a year is a bargain for a child of such wealthy parents. Total costs for students living away from home are almost double the cost of tuition.

Although the media tend to focus on the sticker prices of a handful of top universities, these institutions represent a tiny percentage of the schools that educate most of the nation’s college students. The state universities and colleges, as well as the community colleges, teach most of our college students, and their escalating tuition and fees should be the primary focus of our concern and of media attention. At the end of the day, however, the United States in 2013 had the highest proportion of its appropriate-age cohort graduating from college than it ever has had in the past.

Finally, most Americans who consider the cost of our higher educational system think that the level of student debt in other countries is far less than that in the United States. This is not true. In Sweden, where college is free, students still typically graduate with $19,000 in loan debt. In the United Kingdom, where students do pay fees and tuition for college, the average debt at graduation is roughly the equivalent of $40,000— more than in the United States. In Chile, which has both public and private universities, roughly 50 percent of the population between the ages of eighteen and twenty-four go to college. This figure can be misleading if we ignore the fact that more than 90 percent of youngsters from the wealthiest 10 percent of the population go on to higher education, compared with fewer than 20 percent among those who come from the poorest 10 percent of the nation. Of course, the wealthiest Chileans tend to send their children to the top universities; those from disadvantaged backgrounds tend to wind up in lesser institutions. The dropout rate also reflects the great economic disparity in the country: About 50 percent of Chilean students drop out, and the overwhelming majority of them come from the most economically disadvantaged groups. They take on debt and often struggle to repay it, just like Americans. Clearly, the phenomenon of debt incurred to cover the cost of higher learning is not a peculiarly American problem.

Adapted from "TOWARD A MORE PERFECT UNIVERSITY" by Jonathan R. Cole. Reprinted with permission from PublicAffairs. Copyright 2016 by Jonathan R. Cole. All rights reserved.

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