Working Paper: NBER ID: w21967
Authors: Grey Gordon; Aaron Hedlund
Abstract: We develop a quantitative model of higher education to test explanations for the steep rise in college tuition between 1987 and 2010. The framework extends the quality-maximizing college paradigm of Epple, Romano, Sarpca, and Sieg (2013) and embeds it in an incomplete markets, life-cycle environment. We measure how much changes in underlying costs, reforms to the Federal Student Loan Program (FSLP), and changes in the college earnings premium have caused tuition to increase. All these changes combined generate a 106% rise in net tuition between 1987 and 2010, which more than accounts for the 78% increase seen in the data. Changes in the FSLP alone generate a 102% tuition increase, and changes in the college premium generate a 24% increase. Our findings cast doubt on Baumol’s cost disease as a driver of higher tuition.
Keywords: Higher Education; College Costs; Tuition; Student Loans
JEL Codes: E21; G11; D40; D58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| changes in underlying costs, reforms to the federal student loan program, changes in the college earnings premium (I21) | increase in equilibrium tuition (D59) |
| reforms to the federal student loan program (I28) | increase in tuition (I23) |
| changes in the college earnings premium (D29) | increase in tuition (I23) |
| demand-side shocks (related to financial aid expansions) (F35) | increase in tuition (I23) |
| supply-side shocks (E65) | decrease in tuition (I22) |