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Accounting for the Rise in College Tuition

Author

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  • Grey Gordon

    () (Indiana University)

  • Aaron Hedlund

    () (University of Missouri)

Abstract

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.

Suggested Citation

  • Grey Gordon & Aaron Hedlund, 2015. "Accounting for the Rise in College Tuition," CAEPR Working Papers 2015-015, Center for Applied Economics and Policy Research, Department of Economics, Indiana University Bloomington.
  • Handle: RePEc:inu:caeprp:2015015
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    References listed on IDEAS

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    Cited by:

    1. Cai, Zhifeng & Heathcote, Jonathan, 2018. "College Tuition and Income Inequality," Staff Report 569, Federal Reserve Bank of Minneapolis.
    2. Hendricks, Lutz & Herrington, Christopher & Schoellman, Todd, 2018. "College Access and Attendance Patterns: A Long-Run View," Working Papers 10, Federal Reserve Bank of Minneapolis, Opportunity and Inclusive Growth Institute.
    3. Aaron Hedlund & Grey Gordon, 2017. "Accounting for Tuition Increases at U.S. Colleges," 2017 Meeting Papers 1550, Society for Economic Dynamics.
    4. Holger Sieg & Yu Wang, 2017. "The Impact of Student Debt on Education, Career, and Marriage Choices of Female Lawyers," NBER Working Papers 23453, National Bureau of Economic Research, Inc.
    5. Rodrigo Azuero & David Zarruk Valencia, 2016. "The Effects of Student Loans on the Provision and Demand for Higher Education," PIER Working Paper Archive 17-020, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 22 Oct 2017.

    More about this item

    Keywords

    Higher Education; College Costs; Tuition; Student Loans;

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models

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