NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Accounting for the Rise in College Tuition

Grey Gordon, Aaron Hedlund

NBER Working Paper No. 21967
Issued in February 2016
NBER Program(s):Economics of Education, Economic Fluctuations and Growth

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.

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Document Object Identifier (DOI): 10.3386/w21967

Forthcoming: Accounting for the Rise in College Tuition, Grey Gordon, Aaron Hedlund. in Education, Skills, and Technical Change: Implications for Future U.S. GDP Growth, Hulten and Ramey. 2017

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