Since the 1980s, College tuition has more than doubled in the U.S., and unlike other goods and services, a college education doesn’t seem to comply with the rules that typically bring down the cost over time – competition. The more prestigious colleges like the IVY league schools are no better than public schools in this regard. Some of the most expensive colleges in the U.S. belong to the IVY group, and Harvard is one of those colleges.

Currently, it costs $50,000 to attend a single year at the IVY league school. Add to this room boarding and other costs, and the figure quickly rises to around $75,000/year. This is an exorbitant sum by anyone’s standard but especially the middle and lower-middle-class.

The question still remains, why is it that Harvard and other schools of equal status cost so much? What is driving up these costs every year? In this article, I will try to shed light on the reasons behind the preposterous expenses associated with attending the ivy league school.

Cost Disease

No, this is not a biological ailment but an economic phenomenon coined by William J. Baumol and  William G. Bowen in the 1960s. Industries that do not see an increase in their productivity gains over time have to compete with the wages of industries that do. To understand this, take as an example the automotive industry.

The automotive industry has benefited from a steep rise in productivity over the decades due to advancements in science, cheaper and better materials, more efficient manufacturing processes and so on. Owing to these productivity benefits, the automotive industry has seen a constant rise in profits, which enables it to pay competitive wages to its employees.

However, something like the services industry doesn’t abide by the same principles because a hotel is not selling you a product. They cannot innovate or put money into R&D to seek out more efficient and cheaper ways to cater to their customers. Due to this, they don’t bring in the same revenue as a company that is selling a product such as a car manufacturer.

However, due to job competition, a hotel has to increase its employees’ wages to keep up with the broader market so that their labour force won’t leave them for other industries. This, in turn, drives their services’ cost over time to make up for the increased wage demand.

But what does a hotel have to do with a college? Well, they both have one thing in common – they provide a service and not a product. The analogy I used is meant to oversimplify an otherwise intricate phenomenon, but the core concept remains the same across all service-based industries.

Harvard has to pay its professors and other faculty members competitive wages in order to keep them there. This is one of the reasons why the cost of education has gone up so much in the past couple of decades.

Low Regional Competition

Currently, there are approximately 5,300 colleges in the U.S., a number that is only second to India on the global scale. But why is it then that with so many colleges scattered around the country, the price doesn’t decrease as it should due to competition?

Again, a college education is not something you can order off of Amazon. Sure, there are thousands of colleges across the U.S., but students cannot magically attend them from any corner of the country.

The U.S. is a large country, coming in at third place globally, right after Russia and Canada. Moreover, the 5,300 colleges that the country has aren’t sprinkled uniformly across its geography. Instead, there are regions that enjoy a monopoly when it comes to high-quality post-secondary education, and then there are regions that don’t have the prestigious schools that are lauded the world over.

People from the southern and mid-western states have to travel to the east coast if they want to attend any of the eight IVY league schools, including Harvard. This is also true for the country’s many non-IVY schools that are held in high regard, such as Stanford, MIT and Caltech. Hence, students have fewer choices than is typically believed.

Another factor that is closely related to the diminishing competition amongst schools is the gatekeeping at the hands of the accreditation system for new schools. You would think that high demand and a lower supply would encourage the establishment of newer schools, but the reality is different.

In the U.S., a college can only receive federal financial aid if the respective governmental authorities accredit it. However, accreditors typically judge a school by factors such as faculty and curriculum instead of how well the student outcome is compared to the lower tuition price.

This sort of system inevitably discourages the establishment of newer but cheaper schools that are potentially more effective at education.

There is no Shortage of Demand For Higher Education

As one of the core principles of modern economics, a high demand always drives up supply. However, due to the reasons stipulated above, the supply of high-quality education has remained stagnant for decades in the U.S. When demand continues increasing and supply doesn’t budge, the end result is inevitably going to be a higher cost.

According to the department of education, American colleges expected a total of 20.4 million students in fall 2017, about 5.1 million more than in fall 2000. In other words, more and more people are trying to get a college education, and there is no shortage of applicants.

In such a scenario, colleges can do as they please, and no one will bat an eye. Harvard can announce tomorrow that they are doubling their tuition fees, and thousands of people will still line up to get in. The worrying bit is that while it seems like a snarky jab at the school’s greedy practices, they can hypothetically do so because American colleges aren’t regulated by any governmental entity.

Moreover, highly competitive colleges like Harvard only accept about 5% of the total applicants each year. That is roughly 500 undergrad students out of 20,000 total applicants. Why would it then lower or at least maintain the cost of tuition when instead they have all the incentive to drive up the costs?

Financial Aid Hurts Tuition Costs

The provision of financial assistance by the federal government is a somewhat recent phenomenon. Up until the 1970s, financial aid programs were nonexistent. However, in 1978, Congress passed a bill called the Middle Income Student Assistance Act, which allowed undergraduates, regardless of income class, to attain subsidized loans.

While this has encouraged and helped thousands of students over the decades to pursue high-quality education, it has also driven up tuition costs.

Colleges know that students will get these loans and financial aid programs, which incentivizes them to increase their tuition costs to get in on the action. This would not be the case if colleges were answerable to governmental scrutiny. However, since they have a free pass, they can do as they wish without any ramifications.

Conclusion 

1. Unlike a physical product that goes through phases of improvements and productivity gains, a college education is a service that doesn’t abide by the same rules. Hence, the only way they can keep their faculty happy is to increase tuition costs not to lose them.
2. Moreover, while there are thousands of colleges across the U.S., distinguished colleges such as Harvard are not ubiquitous. This means that the competition isn’t really there even though, on paper, a student might be able to get a college education in any region of the country.
3. Also, more and more people in the U.S. are trying to enrol in colleges, and Harvard is no different. Roughly 20,000 applicants apply to the IVY league school each year, and only 500 are lucky enough to get in. With so much demand and little supply, colleges are incentivized to increase costs. The lack of governmental regulation doesn’t help either.
4. Lastly, financial aid and student loans also encourage high ‘sticker price’. Colleges know that the vast majority of students will get financial assistance, and so they increase their costs to rack in as much of that aid as they can.