It’s funny how a question might take five words to ask, and require chapters to answer. Here’s one such question: “what causes tuition to rise?” Certainly, there are several factors that drive tuition prices, including:

1. inflation – year after year, our currency is devalued as the monetary base is expanded, thereby reducing the purchasing power of our currency. This is reflected in the cost of all goods, although tuition appears to increase at a certain multiple of the rate of inflation.
2. prestige – colleges seek to increase their prestige, as this is a critical factor that differentiates colleges from one another, and colleges may justifiably expend more money on prestige-related expenses (faculty hires, luxury construction, etc).
3. student achievement – the quality of students is related to who submits applications, whose applications are accepted, and which students decide to attend. In attracting the highest quality students, colleges might offer tuition breaks to certain students, which they would offset by charging all students a generally higher tuition.
4. resource provisioning – related to all of the previous factors, it is critical for colleges to provide resources to students to increase prestige and student achievement, but the amount expended on resources will be subject to inflation.
5. available student credit – the capacity of students to “afford higher tuition” is related to the amount of credit that is available for students to borrow. This credit is subject to legislative pressures, and less influenced by traditional financing metrics (e.g. collateral, credit history).
6. education legislation – the ability of lenders to take risks on financially unproven debtors (i.e. 17- and 18-year old students) is related to incentive programs that must be artificially inexpensive for lenders, which is not possible through free-market forces and must be driven by extra-market intervention through legislation.

Likely, there are other factors to include in this model, but this is a start.

The core question involves “what causes what.” Do colleges charge more because they must do so to grow their prestige, or can they grow prestige because students are able to pay more? Does it cost more to pay for school because schools provide more resources, because those resources cost more, or is this fundamentally unrelated? The number of different models that can be formed using the factors listed above only grows as more factors are identified. For now, Student Loan Bubble will look at existing work to see what others have identified, but this is a theme that Student Loan Bubble will revisit from time to time.

In the following New York Times piece, Glater describes certain consequences of the year-over-year increase in tuition, and some of the forces that drive it. It’s not a “grand unified theory of tuition” but many of the previously listed factors are reflected in this article. I was particularly interested to learn that lending at public schools is inversely related to state funding of those schools, such that students have historically made up the funding deficit through loans. State citizens will be exposed to the cost of public school funding through the taxes they pay, and reducing this form of exposure increases the costs that are shouldered by individuals. I also thought it was interesting that certain forms of low-income grants have decreased in recent years, and I am curious to know more about that causes for that.

Read on, and if you can think of other factors that influence tuition prices, please post a reply to this article.

Excerpt from: http://www.nytimes.com/2007/10/23/education/23tuit…

“The average price of college is continuing to rise more rapidly than the consumer price index, more rapidly than prices in the economy,” Sandy Baum, a co-author of the report who is a senior policy analyst for the College Board and a professor at Skidmore College, told reporters at a news conference yesterday.

Ms. Baum added that the prices “are probably higher than most of us want.”

Those price increases reflect increases in the sticker price that colleges advertise, though, Ms. Baum said, the average student does not pay that full amount. At public universities, the average student gets about $3,600 in grants and tax benefits, lowering the actual cost to around $2,600. At private institutions, aid totals about $9,300, bringing the cost to $14,400.

But even the net price, after taking into account grants and other forms of aid, is rising more quickly than prices of other goods and than family incomes. In recent years, consumer prices have risen less than 3 percent a year, while net tuition at public colleges has risen by 8.8 percent and at private ones, 6.7 percent.

The changes in tuition at public institutions closely track changes in financing they receive from state governments and other public sources, the report found. When state and local support for public colleges declined over the last seven years, tuition and fees rose more quickly, and as state support has grown of late, the pace of increases fell, it said.

“We hope that state governments – which really set tuition prices at most public colleges and universities – will do their part to reinvest in higher education,” David Ward, president of the American Council on Education, said in a statement released by the College Board.

Private loans, those not guaranteed by the federal government, continued to be the fastest-growing form of borrowing, totaling more than $17 billion in the 2006-7 academic year. In the same period, students and their families borrowed $59.6 billion in federally guaranteed loans.