The Fear of Falling Behind

It's Tuesday, April seventh, and welcome to HigherIQ. In 1980, the average cost of tuition, fees, room, and board at a public four-year university was about two thousand three hundred dollars a year. Adjusted for inflation, that's roughly eight thousand in current dollars. The actual cost today is closer to twenty five thousand. College tuition has risen more than two hundred and fifty percent in real terms since 1980, far outpacing inflation, wages, housing, and nearly every other cost in the economy. The question isn't whether college got more expensive. It's why the price of educating a student rose so much faster than the price of almost everything else. The first force is what economists call Baumol's cost disease. In 1965, economist William Baumol observed that industries relying on skilled labor, like education, healthcare, and the performing arts, can't improve productivity the way manufacturing can. A factory can replace workers with machines and produce more goods per hour. A university can't. Teaching a seminar still requires a professor in a room with students. Advising still requires a human being. You can't automate a lecture the way you can automate an assembly line. But as wages rise in sectors that do get more productive, like technology and finance, universities have to raise salaries to compete for talent. Professors who could earn two hundred thousand in consulting need to be paid competitively to stay in academia. The work hasn't gotten faster, but the labor market around it has gotten more expensive. The cost of delivering the same education goes up every year, not because the education improved, but because everything around it did. The second force is administrative bloat. Universities have expanded their non-teaching workforce at a rate that dwarfs faculty hiring. From 1975 to 2005, the number of administrators at American universities grew eighty five percent. Support staff grew two hundred and forty percent. Meanwhile, the share of university budgets going to actual instruction fell from forty one percent in 1980 to twenty nine percent. There are now three times as many administrators and staffers as there are teaching faculty at leading schools. Universities operate like small cities, with compliance offices, diversity programs, career centers, mental health services, recreational facilities, and marketing departments that didn't exist at this scale a generation ago. Some of this growth is genuinely necessary. Federal compliance requirements have expanded enormously. Students expect and deserve mental health support. But the cumulative cost of building a bureaucracy around the core mission of teaching has been staggering. Spending on student services has grown four times faster than spending on instruction. The third force is the most controversial: the relationship between federal student loans and tuition. In 1987, Secretary of Education William Bennett wrote a New York Times op-ed titled "Our Greedy Colleges," arguing that increases in federal financial aid had enabled universities to raise tuition, confident that loan subsidies would cushion the blow. The idea, now called the Bennett Hypothesis, works like this: if a student has ten thousand dollars to spend on education, the school charges ten thousand. If the government gives that student five thousand in loans, the school raises tuition to fifteen thousand. The institution captures the aid. The basic logic isn't complicated. When it's easy to finance an asset, the price of that asset goes up. We saw it in housing before 2008: easy mortgages inflated home prices until the bubble burst. Student loans work the same way, except the bubble never bursts because the loans can't go away. Unlike a mortgage, a car loan, or credit card debt, student loans are nearly impossible to discharge in bankruptcy. Congress made that choice deliberately, first for federal loans in 1976 and then for private loans in 2005. The lender faces almost no risk. The borrower carries the debt for life if they can't pay. And the university already has the money. The evidence on whether this actually drives tuition is genuinely contested, and HigherIQ should be honest about that. A 2015 study by the Federal Reserve Bank of New York found that increases in subsidized loan limits led to tuition hikes of about sixty cents on the dollar. A separate study from the National Bureau of Economic Research found that for-profit colleges eligible for federal aid charged tuition seventy eight percent higher than comparable schools that weren't eligible. A model by economists Grey Gordon and Aaron Hedlund concluded that changes in the federal student loan program alone generated a hundred and two percent increase in tuition over a twenty three year period, more than doubling the cost. But other research, including studies conducted under three successive presidential administrations, found no causal link between federal aid and tuition increases at nonprofit institutions. Bennett himself acknowledged that federal aid doesn't cause inflation but "helps make it possible." The most nuanced reading is probably the Richmond Fed's conclusion: the pass-through rate from loans to tuition varies drastically over time depending on whether students are borrowing constrained. Sometimes Bennett was right. Sometimes he wasn't. There is no single fixed answer. What is clear is the outcome. Total outstanding student loan debt in the United States exceeds 1.75 trillion dollars. The average graduate leaves school roughly thirty thousand dollars in the hole. And three years after leaving college, only forty one percent of borrowers have avoided default and paid at least one dollar toward their principal balance. The system produces degrees, debt, and, for a meaningful number of graduates, no clear path to repayment. There's another structural problem hiding inside the pricing. A degree in engineering and a degree in social work cost roughly the same at most universities. But the median starting salary for an engineer is north of seventy thousand dollars. For a social worker, it's closer to thirty eight thousand. The student loan balance is identical. The ability to repay it is not. Almost no other market works this way. A bank won't give you the same mortgage for a studio apartment and a four-bedroom house. But universities charge the same tuition for a degree that leads to a hundred and fifty thousand dollar salary and one that leads to forty thousand, and the federal loan system finances both at the same terms. The result is that the students who can least afford to borrow are often the ones whose degrees generate the least return, and they carry the same debt as peers whose degrees pay for themselves in a few years. Underneath all of this is a deeper shift that rarely gets named. For most of human history, education was a luxury. Having the time to sit and read, to study philosophy or literature, to spend years learning before earning, that was a privilege reserved for people who didn't need to work. The word "school" comes from the Greek "schole," which literally meant leisure. Education was what you did when survival was already handled. Somewhere in the twentieth century, that flipped. College became the baseline expectation for a middle-class career, the minimum credential for jobs that previously required none. What was once a privilege became a requirement, and the economics followed. When something is optional, the market disciplines its price. When something feels mandatory, the seller has leverage. Universities don't have to compete on price the way other industries do because the perceived cost of not going is even higher than the cost of going. The fear of falling behind is the most effective pricing power in the economy. The most uncomfortable part of this story is that none of the forces behind it has a clean villain. Baumol's cost disease is structural, a consequence of how labor-intensive services work in a rising economy. Administrative bloat is partly a response to legitimate demands for student support and federal compliance. Federal loans expanded access to college for millions of people who would otherwise have been shut out entirely. Uniform pricing subsidizes lower-earning fields that society genuinely needs. Each force, in isolation, is defensible. Together, they created a system where the price of a degree has disconnected from both the cost of delivering it and the economic value it returns to most graduates. So if this comes up in conversation, here's how to think about it. College tuition has risen more than two hundred and fifty percent in real terms since 1980. Universities can't get more productive the way factories can, but still have to pay competitive salaries. The share of spending on actual teaching fell from forty one percent to twenty nine percent. Federal loans made college accessible but may have given schools the confidence to raise prices knowing the money would follow. And the word "school" comes from the Greek word for leisure, because education used to be what you did when survival was already handled. Now it's the price of entry to a middle-class career. The result is 1.75 trillion dollars in debt carried by people who were told a degree was the safest investment they could make. For many of them, it was. For too many others, the math doesn't work anymore. Stay informed, stay curious, and we'll see you tomorrow.