College tuition has become increasingly expensive over the years, and has reached the point where scholars today have had their education compromised or even cut short by impending tuition costs. Based on tuition rates provided by the College Board, in the past 30 years (from the 1975-76 class to the 2015-16 class), the change in tuition for a private, non-profit institution, increased by approximately 221%. Three factors contribute to heightened tuition costs—Baumol’s cost disease, rise in inequality, and cost discrimination.

Baumol’s cost disease, in terms of college, refers to the idea that college itself does not increase in productivity over time. General economic productivity on the other hand continuously increases, and with such increases higher standards of living follow, causing tuition to rise to accommodate for the wage increase for instructors.

Rise in inequality refers to colleges’ increased hiring of professionals. This act increases the benefits of going to college, but also makes it more expensive, because education provided by highly skilled professionals in their field, makes it more valuable.

Finally, colleges participate in price discrimination by way of increased financial aid. Colleges raise tuition and increase financial aid, which creates a special price that individual families pay, based on their ability to pay. Thus, people who qualify for financial aid actually do not experience the rise in prices, because the difference between the years is offset by the fact that they qualify for aid. On the other hand, families who do not qualify for aid are hit with the difference in tuition, because regardless of what the university costs, they cannot receive aid and must pay the full cost.

Despite such surges in tuition, however, students still view college as a valuable necessity worth the heightened cost and, as a result, they continue to attend. Yet, with increased expenses, students have to borrow more money in order to be able to fund their education. Within the ten-year period of 2004-2014, student debt, on average, rose 56% even though the percentage of borrowers who graduated with debt only rose by 4% (from 65% in 2004 to 69% in 2014). Recent statistics show that increased borrowing has led to a total U.S. student loan debt of $1.26 trillion, with 43.3 million Americans having accumulated such debt.

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In 2015, the Federal Reserve’s response to the rising student loan debt included the following statement:

The large and sustained increase in student loan balances over the past decade or so has raised concerns that student loan borrowers are incurring debt burdens that will be difficult to repay and will hinder their ability to achieve life goals such as purchasing homes, starting families, investing in small businesses, or retiring from the workforce.

In each case, a significant amount of disposable income is needed for a comfortable financial situation during the repayment period. Disposable income is income that is available after taxes, which can be used to buy goods and services. The issue with increased loans and debts on those loans is that they infringe upon the available disposable income that people have. People have to pay off their debts before they can spend money on anything else. Thus, they cannot afford to start families, because they cannot afford to support the household they create. People are also less able to purchase homes because they need available income to pay the mortgages on those homes. Similarly, in order to retire from the workforce, people must have saved copious amounts, especially now. However, with high loan debts, less is available to be saved.

Aside from negatively impacting the lives of students, loan debt can also negatively affect overall economic growth in the years and decades to come. This issue is tied to the fact that economic growth and productivity is based on spending. Consumers make up approximately 70% of the gross domestic product (GDP) of the United States. This is significant because it means that 70% of economic growth is based off of how much the population spends. This spending is in turn based upon consumers’ disposable incomes. With disposable income lowered, economic growth falls because peoples’ power to spend is hindered.

Disregarding the general economic impact of student loans, it can be speculated that eventually the cost of tuition and the debt that student loans place debtors under will surpass society’s and specifically students’ valuation of the benefits of a college degree. While the thought of such a future is harrowing, especially since the generations to come will become the leaders of tomorrow, this future is born out of the societal misgivings of today. In order for students to realistically be able to combat larger student loans in the future, the system of loan forgiveness and debt payoffs must begin to change right now.

 

-Louisa Saakian

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