Collaborative Research: Accounting for the Rise in College Tuition

Indiana University, Bloomington IN

Investigators

Abstract

Abstract: Collaborative Research: Accounting for the Rise in College Tuition Persistent rising college tuition and student debt in the U.S. are growing public policy concerns, yet factors driving their growth remain unresolved. With its combination of extensive public subsidies, complicated financial aid rules, segmented market structure, and widespread use of differential tuition pricing, the higher education market functions quite differently from many other markets. In addition, most traditional colleges are non-profit institutions that pursue objectives that differ from those of profit-maximizing firms. In addition, the incentives colleges face are less well understood. This research project develops a new approach to quantify the determinants of U.S. college tuition and how they contribute to tuition inflation, as well as assess the impact of programs aimed at expanding college access and easing the burden of student debt. Focusing on explaining the aggregate trends in college tuition increases, it will shed light on differences across college types and investigates ways to promote educational opportunity across the socioeconomic spectrum. The methods used in this research can also serve as a template for future students and researchers interested in studying the complex higher education market. The results of this research can help policy makers develop better policies to increase higher education attainment for the American workforce, hence improving U.S. competitiveness. The proposed research develops an equilibrium structural model that includes life-cycle decision-making by households, imperfect competition and price discrimination in the higher education sector, student loan borrowing, and uninsurable post-graduation earnings risk. Relative to the existing literature, the presence of forward-looking behavior and higher expected post-graduation earnings endogenously motivates college attendance and facilitates taking the model to the data. The model is then used to test and quantify various hypotheses for the rise in college tuition---an approach which permits counterfactual analysis and decomposition of tuition drivers. Lastly, the project will use the model to study the efficacy of recent and proposed reforms whose goals are to restrain the growth of tuition and student debt. The results of this research project will help guide policies aimed at improving college education, thereby increasing the U.S.?s human capital and competitiveness.