NCPA - National Center for Policy Analysis

D.C. Drove Your Student Loan Debt

October 17, 2011

For decades federal politicians have been fueling high profits -- and prices -- at both for-profit and nonprofit schools, say Neal McCluskey and Vance Fried of the Cato Institute.

While for-profit colleges are making good money and Washington is aware of it, if profit is defined simply as revenue derived from providing a service exceeding costs, putatively nonprofit colleges actually have much higher margins than for-profit schools.  There are just a few ways to get at schools' real costs: One is the buildup method, in which you calculate all the inputs required to educate undergrads, from market-rate professors' salaries to photocopying costs.  The second is to get the best internal accounting of actual college expenditures you can, which a few states furnish, and estimate costs from that.

  • Using both methods reveals that it costs roughly $8,000 to educate an undergraduate at an average, residential college.
  • The average tuition including room and board comes to almost $37,000 at a private four-year university, and $16,000 at a public equivalent.
  • The average profit made per student at a private college is about $5,500, a margin of 41 percent.
  • Profits are similar at public institutions -- only what schools don't get from tuition they make in state subsidies.

Colleges have been able to achieve these stunningly high profit margins by radically increasing the prices they charge students.  

  • Inflation-adjusted tuition and fees have tripled in the last 30 years.
  • Politicians have enabled schools to charge these skyrocketing rates in the name, ironically, of helping students.
  • Indeed, inflation-adjusted federal aid to students has quadrupled since 1980, going from $35.4 billion to approximately $146.5 billion.
  • Meanwhile, total student debt has leapt ahead of total credit card debt, blowing past the $800 billion mark.

An essential move would be to phase out the big subsidies to students that enable schools to raise prices with impunity.  That means reducing everything from Pell Grants, to cheap student loans, to tuition tax deductions.  This should force schools to keep their prices in line with the real cost of providing education, and saving both students and taxpayers big bucks.

Source: Neal McCluskey and Vance Fried, "D.C. Drove Up Your Student Loan Debt," Cato Institute, October 10, 2011.

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