College 101: Government Subsidies and College Price Inflation (Part 3 of 5)

Over the last 35 years, the price of attending college and the revenues collected by colleges have risen sharply. For example, college revenues have grown at 7% annually over the last three decades, a growth rate that has far out-paced wage growth in the US.  In 2013, college revenues were $600 billion (3% of U.S. GDP). 

This staggering growth in college revenues is fueled by large public aid programs for higher education. College is one of the most subsidized goods in our society. Federal and state subsidies to colleges total approximately $200 billion annually. These large subsidies include public aid directly to colleges, as well as public aid to students (in the form of student grants, notably the Pell Grant, and in the form of government-backed college loans). 

The main beneficiary of this public money is the college establishment (the existing universe of 3,200 institutions) since it has the sole right (given accreditation rules and related regulations) to collect tuition payments that rely on Pell grants, government subsidized college loans, and other forms of public financial aid.

From their sole position as eventual recipients of public aid for higher education, accredited colleges have raised their prices consistently and substantially for decades. Caught in this inflationary cycle (i.e. a cycle where the government increases aid and the college establishment raises price) are students and families who increasingly deplete household income and take out large loans to meet the ever-rising price of college. Another vulnerable party in this cycle is our government, which constantly issues college-related debt marked by hard-to-predict long-term default rates.

A. Rising College Revenues

Revenues of U.S. colleges have increased approximately tenfold since 1980 and now exceed $600 billion annually. Since 1980, college revenues have grown at a rate of 7% per year. College revenues currently constitute over 3% of U.S. GDP.


National Center for Education Statistics, Digest of Education Statistics


Because the number of public colleges and private non-profit colleges has remained largely fixed over the past few decades (see earlier Part 2 of this blog series), revenues per college have soared in the same time period.


National Center for Education Statistics, Digest of Education Statistics


Note: In 2013, the U.S. had 1,623 public colleges that educated 72% of U.S. college students, and 1,652 private non-profit colleges that educated 20% of U.S. college students. The remaining 8% of U.S. college students attended 1,451 private, for-profit colleges. With the exception of the creation of for-profit colleges – colleges which are now declining in number thanks to increased regulation and which account for just 8% of all college enrollment – the total number of colleges has remained essentially fixed since for the last 25 years.

Remarkably, college revenues have grown four times faster than enrollment at public colleges and five times faster than enrollment at private non-profit colleges.


National Center for Education Statistics, Digest of Education Statistics


B. Government Contributions to College Revenues

College is one of the most subsidized institutions in our society. Public aid for colleges takes four main forms.

  1. Government Grants to Colleges – These grants come in the form of state appropriations, local appropriations, and federal research grants to colleges. In 2013, these grants totaled $96 billion. Direct government aid is particularly pronounced in the case of public colleges, where 37% of college revenues come from direct government aid.

  2. Government Grants to Students – Federal and state governments provide grants to students to help them pay for college. The largest of these grants is the federal Pell grant, which provides low-income students with grants of up to $6,000 per year. In 2014-2015, 8.3 million students – 40% of all students enrolled in college – received Pell grants, and Pell grant recipients received an average of $3,683. Pell grants and other publicly funded grants to college students now total over $40 billion per year. 

    Note: A typical US college, according to the Pew Charitable Trusts, receives $10,000 per student per year in public aid across the two categories of public subsidies just described (government grants to colleges and government grants to students.)

  3. Publicly Subsidized Student Loans – Various federal student loan programs provide college students with loans at discounted interest rates and, in many cases, appealing repayment timelines. Although students and their families can obtain loans from non-governmental institutions (banks, private foundations, and colleges themselves), 90% of all college loans are obtained through federal student loan programs.

    The public cost of these loans is the sum of the cost of foregone interest associated with the loans (the government can lend at higher interest rates than those it charges on college loans) and the eventual cost of principal defaults and forgiveness. The Congressional Budget Office estimates that the annual cost of federally subsidized college loans to the federal government is $15 billion. This estimate is highly sensitive to expectations about eventual loan defaults. If default rates on college loans increase, the cost to public treasures will rise in direct proportion. The U.S. federal government currently has approximately $1.2 trillion in outstanding college loan principals, and it has issued college loans to approximately 40 million students. The liability is enormous, by any definition.

  4. Tax Credits – The federal government offers a variety of personal income tax credits and deductions to encourage college attendance. The largest of these is the American Opportunity Tax Credit, which provides a tax credit of up to $2,500 per year to taxpayers paying for tuition, fees, and course materials. In 2013, the federal government provided $31 billion in tax credits.

Pew Charitable Trusts, Federal and State Funding of Higher Education

Pew Charitable Trusts, Federal and State Funding of Higher Education


C. Runaway Inflation in College Prices from Public Subsidies

Large public subsidies for higher education have created irresistible incentives for established colleges to raise their prices.

Over the past half century, colleges have increased their published college prices (the “sticker price”) 6% annually – a rate almost identical to the growth in overall college revenues and double that of inflation. The sticker price of 2-year colleges has grown 5% per year and the sticker price of 4-year colleges has grown 6% per year.


National Center for Education Statistics, Digest of Education Statistics


Increases in the “net price” of college – i.e. the price paid by a student after college-issued scholarships and discounts – are only slightly less alarming and still far ahead of inflation. Net college prices from 1990-2015 grew annually at 2.9% to 4.9%, depending on the college type in question. Annual inflation for the period was 2.4%.


College Board, Trends in Higher Education


D. Household Bankruptcy and Public Finance Risk

Caught in this inflationary cycle – in the go-round in which the government subsidizes college and the accredited colleges raise prices -- are, of course, students who increasingly deplete family discretionary income, take out debt, and teeter on the edge of insolvency to meet the cost of college.

Students from upper income families pay more for college, in absolute dollars, than students from lower income families. This is because higher-income students qualify for less college-issued financial aid and because, on balance, they attend more expensive (often private) colleges.