The rising price of a year in college looms large on the American political landscape. Calls to make college free, or at least debt free, will figure prominently in policy and political debates goi...

The US higher education system is on the verge of a revolution, so some observers claim. Archibald and Feldman, leading analysts, provide an incisive overview of the challenges facing and possibilities for America's universities and colleges in their training future generations. And they demonstrate that our higher education system is resilient and adaptable enough to weather the internal, external, and technological threats without changing campuses beyond recognition. The Road Ahead examines the threats posed to the current health of higher education by rising tuition and falling government support, as well as from new digital technologies rippling through the entire economy. Some predict disaster, pointing to high costs, exploding debt, and a digital tsunami that supposedly will combine to disrupt and sweep away many of the nation's higher education institutions, or change them beyond recognition. Archibald and Feldman provide a more nuanced view. They argue that the bundle of services that four-year colleges and universities provide will retain its value for the traditional age range of college students. Less certain, Archibald and Feldman argue, is whether the system will continue to be a force for social and economic opportunity. The threats are most dire at schools that disproportionately serve America's most underprivileged students. At the same time, growing income inequality reduces the ability of many students and their families to pay for higher education. Archibald and Feldman suggest a range of policy options at the state and federal level that will help America's higher education system continue to fulfill its promise.

Does an increase in the generosity of federal financial aid make college more affordable, or does it simply encourage colleges to raise tuition? In a Feb. 19, 1987 New York Times op-ed titled “Our Greedy Colleges,” former federal secretary of education William Bennett made a strong case for the latter when he stated, “If anything, increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that federal loan subsidies would cushion the increase.” This seemingly simple claim has spawned a long, often heated, and highly politicized debate. The “Bennett hypothesis” often is justified as simple economics. Federal aid is a subsidy. Increases in subsidies raise demand, and rising demand pushes up price. Yet the textbook model of a perfectly competitive market is a poor fit for the higher education industry as a whole, and it’s quite inappropriate for understanding how tuition is determined at the nonprofit institutions that still dominate the higher education landscape. Colleges and universities are price setters, not price takers. Yale, Valparaiso, and Southeast missouri State all “sell” education, but the services they offer are quite differentiated. And unlike most firms, nonprofit colleges and universities often turn away business. They care about who purchases their services. We will present a simple enrollment management model of how nonprofit colleges jointly decide how to fill their classes and

We use the National Longitudinal Study of the High School Class of 1972 and the Education Longitudinal Study of 2002 data sets to evaluate changes in the college matching process. Rising attendance rates at 4-year institutions have not decreased average preparedness of college goers or of college graduates, and further attendance gains are possible before diminishing returns set in. We use multinomial logit models to demonstrate that measures of likely success (grade point average) became more predictive of college attendance over time, while other student characteristics such as race and parents’ education became less predictive. Our evidence suggests that schools have become better at sorting while students have efficiently responded to changes in the return to higher education.

Higher education prices have evolved over time in a manner quite similar to other service industries that rely heavily on highly educated workers, and quite differently from the time paths of prices in other service industries. As Claudia Goldin and Lawrence Katz explain, the returns to education are the result of a race between technological progress that increases the demand for highly educated workers and educational attainment that increases the supply. Beginning in the late 1970s, a slowdown in the growth of educational attainment helped fuel a dramatic increase in the wages of highly skilled workers. Any explanation of the rising cost of college attendance must incorporate as part of the story this shift in the income distribution in favor of the well educated.

The current orthodox view of rapidly rising higher education costs is based on stories of dysfunctional behavior in higher education. This chapter summarizes the narrative of rising cost that is based on prestige games and other arms races among schools, administrative bloat, and university faculties that are increasingly and inefficiently detached from the core mission of their universities. The second half of the chapter presents evidence that is inconsistent with these explanations. If the dysfunction narrative were true, the similarities between higher education prices and prices in other industries uncovered in Chapter 2 are coincidences. Explanations based on coincidences are not appealing. The chapter also presents a series of facts about higher education costs and prices that are difficult to reconcile with the dysfunction narrative

This chapter starts the part of the book focused on tuition setting. The first part lays out the relationships among costs, institutional subsidies, student-specific subsidies, list-price tuition, and the part of total tuition that students have to finance. The second part of the chapter focuses on institutional subsidies. These are the subsidies public institutions receive from state appropriations and the subsidies that public and private institutions receive from endowment earnings and gifts. These institutional subsidies allow institutions to charge an average tuition that is less than the average cost of providing the education. The chapter ends by exploring how the relative importance of these subsidies has evolved recently. Public institutions have become more dependent on tuition, while private institutions have become less dependent on tuition.

This chapter introduces the subject matter and the mode of analysis in the book. This chapter explains why costs and prices are quite different at colleges and universities. The way one thinks about changes in college costs and college prices depends on where one sits. In particular, a close-up view focused exclusively on colleges and universities will lead to quite different conclusions than an aerial view that places colleges and universities in a broader economy-wide perspective. This chapter explains why the book adopts the aerial view rather than a close-up view. The chapter ends with a preview of the results in the remainder of the book, emphasizing the critical role of technological progress. The pace of technological progress and the type of technological progress have significant influences on college costs and prices.

There is a widespread concern in the United States that college is becoming less affordable for the average citizen. Affordability typically is measured using the percentage of a family's income required to pay the cost of attendance. Increases in this percentage are taken as decreases in affordability. This is a problematic measure of affordability since a family with rising income can have more left over after paying tuition at the same time that college takes a larger percentage of the family budget. Using the “income left over” definition of affordability, the chapter presents data showing that the affordability problem in the United States is limited to those at the very bottom of the income distribution. This is consistent with the evidence that cost disease is the major long-run driver of rising college cost. Affordability problems result more from changes in the income distribution than from rising college cost.