Why Is College So Expensive?

An Econ 101 professor might say “supply and demand”

Three college-age students focus on exam in classroom
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Life is much more expensive today than it was 20, 30, or 40 years ago. Thanks to inflation, we have to spend much more now on our homes, cars, food, and clothing than our parents or grandparents did at our age.

But one thing that hasn’t kept pace with inflation: the cost of college. It’s actually been rising faster—a lot faster.

Key Takeaways

  • The cost of college has been increasing much faster than most other things we buy.
  • Some reasons for the rapidly rising cost of college include loss of funding, higher enrollment, and more student loans available.
  • Students who want to mitigate these costs should start planning for them with their families early.

How Much Does College Cost?

Attending college is a much pricier prospect today than it was in decades past.

However, the amount you have to spend on college varies widely depending on what type of institution you attend. For instance, two-year community colleges offer much lower tuition and fees per year than a four-year university. Out-of-state students will pay even more, while private universities tend to charge the highest rates overall.

For the 2020-21 school year, the average cost of a U.S. college by school type is as follows:

  • Public two-year (in-district): $3,770
  • Public four-year (in-state): $10,560
  • Public four-year (out-of-state): $27,020
  • Private nonprofit four-year: $37,650

Why Is College So Expensive?

As you can see, the cost of earning a degree can rival buying a home. But it wasn’t always this way. Here’s a closer look at why college is so expensive.

Less State Funding

One of the major reasons college costs have increased so much is because government funding has not kept pace with the underlying cost of college, shifting the burden of paying for college from the government to the families, said Mark Kantrowitz, publisher and vice president of research at Saving For College and author of “How to Appeal for More College Financial Aid.” 

That’s especially true following the 2008 financial crisis, as state-level funding never rebounded following the recession. Between 2008 and 2018, 41 states spent less per student. On average, states spent 13% less (about $1,220) per student. Meanwhile, the average tuition in all 50 states increased by an average of 37%.

On the other hand, family income has been mostly flat since the late 1970s. “This forces families to either borrow more or shift enrollment from higher-cost colleges to lower-cost colleges, such as from private to public colleges and from four-year to two-year colleges,” Kantrowitz said.

Inflated Retail Prices

The retail cost of college is largely a reflection of supply and demand, according to John Pearson, a certified college financial consultant with Barnum Financial Group's Center For College Planning. “Over the last three decades, the demographics of college-age children reflect the echo of the baby boomers, a generation for whom the college experience was often life changing,” he said. “A large percentage of that group want their children to have a similar, if not better, experience.”

Colleges understand how to market to this parent group and that boomers often equate price with quality, Pearson added. It’s common for colleges to create the illusion of selectivity by building a pipeline of applicants well beyond what they can accept. “That, coupled with use of tuition discounting, allows them to set an artificially high retail price and then offer scholarships—really just discounts—that bring the net price down.” 

While the “sticker price” of a degree might seem exceptionally high, most students don’t end up paying that amount—even if they attend one of the most expensive colleges in the U.S. It’s a strategy to make the school seem more exclusive and high quality.

Higher Enrollment

While the cost of tuition on paper is much higher than what most college students actually pay, that doesn’t mean families don’t overextend themselves financially, even with scholarships and other aid. Plus, the net cost of college has actually grown 63% over the past 20 or so years at public four-year institutions.

Another reason why college tuition has skyrocketed is that college attendance has steadily increased since the 1940s and 50s, when the federal government made it more affordable for military veterans and average citizens to enroll, explained Andrew Pentis, a certified student loan counselor and expert for Student Loan Hero. As enrollment increased, there was less money available per student. So not only is less aid available to schools, but the dollars don’t go as far as they used to. As a result, colleges have had to jack up their prices to support the number of students attending.

More Financial Aid

When many people think of financial aid, they imagine scholarships, grants, and other free aid that doesn’t need to be paid back. However, financial aid also includes low-cost student loans through the federal government. And the increased availability of these loans has also pushed college costs higher.

In the 1990s, for example, unsubsidized federal loans were made widely available to students and their families, so schools haven’t been incentivized to keep their tuition prices down. Their students have simply borrowed more and more to defray the costs, according to Pentis. “And the wheel just keeps on spinning because these students and their parents continue to believe—rightly, by the way—that a college degree will increase their lifetime earnings considerably over that of peers who didn’t advance past the twelfth grade,” he said.

A worker with a bachelor’s degree earns about twice as much over their career than someone who has only a high school diploma or GED certificate.

More College Services

Because colleges receive less funding, they have to operate more like businesses to stay afloat. That means competing against other schools for the most affluent, qualified students. One of the ways colleges do this is by providing top-tier amenities and services, such as state-of-the-art athletic equipment, palatial dorms, restaurant-quality food options, and more. Some experts say that to afford these upgrades, colleges have had to increase their revenue by raising prices.

Coping With High College Costs

There is a huge emotional side to paying for college. “My experience in counseling hundreds of parents is that they don't want to disappoint their kids,” Pearson said. “No parent wants to be in the role of diminishing their child's dreams and expectations.” 

Even so, it’s important to be realistic about what your family can afford to pay for college. Taking on too much debt can set students back financially for decades, whether they’re shouldering their own student loans or supporting parents later in life who sacrificed their retirement for higher education costs.

So how can families avoid overpaying for college?

Start Planning Early

“Typically, parents don’t start paying attention to these financial issues until after a list of possible schools has already been developed by the student,” Pearson said. To ensure college isn’t a financial burden, it’s important for both parents and students to take an active role in planning early on. Set realistic goals on college choices based on what you can reasonably afford, and start socking away savings as soon as possible.

Use Tax-Advantaged Accounts

Due to the rapid pace that college tuition increases over time, money in a traditional savings account won’t grow fast enough by the time a child reaches college age. Instead, consider putting college savings into a state-sponsored 529 plan. These accounts allow you to invest funds to use later for qualified higher education expenses, free of income tax. “Every dollar you save is a dollar less you'll have to borrow,” Kantrowitz said. “529 plans also provide families with the flexibility to send their children to a more expensive college than they otherwise could afford.”

Attend Community College First

The biggest and best way to save on college costs might also be the most obvious: attending a lower-priced school. “If you attend a community college in your backyard and even live at home for those two years, for example, you could potentially halve your overall college costs,” Pentis said. Once you have your general education out of the way and a firmer grasp on what you want to study, you can transfer to the four-year school you’ve been eyeing for your junior-year campaign.

Limit Debt

After you’ve chosen a school that fits your budget, be sure to exhaust every financing option available before you resort to borrowing student loans or signing income share agreements. “Those options include tapping existing savings accounts, taking on a part-time job to increase income, applying for private scholarships and public grants, and more,” Pentis said.

Treat Scholarship Hunting Like a Full-Time Job

Kantrowitz suggested that students search for scholarships on free scholarship matching websites such as Fastweb.com and the College Board's BigFuture. Also, be sure to apply for financial aid using the Free Application for Federal Student Aid (FAFSA).

The deadline to submit the FAFSA for the 2021-22 school year is June 30, 2022.

Frequently Asked Questions (FAQs)

Are expensive colleges worthwhile?

When evaluating the cost of various colleges, it’s important to look beyond the published price. Depending on what types of financial aid you qualify for, the cost could be significantly less than advertised. Be sure to compare schools’ net cost, which is the institution’s price minus any scholarships and grants you get.

Why are private colleges so expensive?

Private colleges tend to have a higher sticker price than public universities, but they actually provide more aid, on average. According to data collected by U.S. News and World Report, the average tuition discount for freshmen during the 2017-18 school year was more than 50%.

Why is college in the U.S. so expensive compared to other countries?

One of the biggest reasons why American students tend to spend more on college is because they’re responsible for picking up more of the tab. In other countries, it’s common for the government to subsidize the cost of education. In Norway, for example, most students attend college for free.