Why Is College So Expensive? 5 Forces Behind Rising Tuition Costs

A single year of undergraduate study (tuition, fees, room and board) used to cost just $1,286 during the 1963-64 academic year, according to the National Center for Education Statistics (NCES).

By 2022-23, that figure had reached $30,884. Even after adjusting for inflation, the cost of attending a four-year institution has roughly tripled since the early 1960s, far outpacing growth in median household income, consumer prices, and wages.

Why has higher education gotten so expensive, and why hasn’t anything corrected it?

The answer is complex - multiple factors have all come together to create this issue. Some come from inside the colleges themselves, some outside it. Collectively, they have created an environment where costs rise regardless of economic conditions.

Here is what the data actually shows and why costs are not likely to fall.

The Administrative Expansion

One of the most frequently cited internal cost driver is the growth of university administration or administrative bloat. 

A Goldwater Institute study of 198 leading research universities found that between 1993 and 2007, the number of full-time administrators per 100 students grew by 39.3%, while full-time teaching, research, and service employees grew by just 17.6%. Inflation-adjusted spending on administration per student rose 61.2% over that same period, compared to 39.3% for instruction.

More recent data from the American Council of Trustees and Alumni (ACTA) shows the trend continued through the 2010s. From 2010 to 2018, ACTA found that non-instructional spending, including student services (up 29%) and administration (up 19%), grew faster than instructional spending (up 17%) across 1,529 four-year public and private institutions. 

Between 2016 and 2021, administrative spending per full-time-equivalent student increased 6.3%, from $3,549 to $3,771, while instructional spending per FTE fell 4.7%, from $14,352 to $13,685.

However, it's important to put some context to this and realize that some of this data is skewed, and a lot of the growth tracks with both student growth, and government requirements. At some medical schools, hospital staff are lumped into the data as non-teaching staff.

At the end of the day, the data suggests the growth of staffing has exceeded inflation and enrollment trends, even taking into account what new administrative mandates would require.

State Funding Cutbacks

At public institutions, tuition is heavily dependent on state funding: when state appropriations go up, there is less pressure to raise tuition, but when they go down, students pay more.

This relationship is documented annually by the State Higher Education Executive Officers Association (SHEEO) in its State Higher Education Finance (SHEF) report.

The SHEF FY2024 report shows that state and local government funding for higher education totaled $139.1 billion in fiscal year 2024, with education appropriations per FTE at $11,683, almost 18% 2019 levels. That sounds good, but the state-by-state picture is uneven.

Twenty-two states fund higher education at a lower level than 2008 levels, with Arizona (40.3% below), Iowa (29.9% below), and Delaware (29.8% below) being the lowest. Per-FTE appropriations range from $4,629 in New Hampshire to $25,529 in Illinois - a 5x gap across the country.

The biggest cuts came after the 2001 and 2008 recessions. State legislatures slashed higher education budgets and then only partially restored them during recoveries. Students absorbed the difference through higher tuition.

Critically, even when state funding rebounds, tuition does not fall in step. SHEEO data shows that between 2012 and 2022, state funding increased, yet colleges and universities saw average revenue per student rise by $730 over the same period. Once tuition goes up, it tends to stay up.

Supply And Demand

Between 1970 and 2020, undergraduate enrollment in the U.S. grew from 7.4 million to 15.9 million — a 115% increase, per the Education Data Initiative. That growth far outpaced overall U.S. population growth of roughly 60% over the same period.

Meanwhile, the number of degree-granting postsecondary institutions has been declining. NCES data shows there were 4,599 degree-granting two- and four-year schools during the 2010-11 academic year. By 2020-21, there were just 3,931 - a 14.5% decrease.

Many of the closures have been among smaller, private colleges and for-profit institutions, but the net effect is the same: fewer seats relative to the number of students seeking them.

This is a textbook supply-and-demand dynamic. When demand rises and supply contracts, prices go up.

However, unlike most markets, higher education prices are far from transparent. Prospective students typically choose schools based on rankings, reputation, location, and perceived prestige rather than a strict cost-benefit analysis. That insulates colleges from the downward price pressure.

It's also important to realize that demographic changes are happening. Undergraduate enrollment peaked around 18.1 million in 2010 and had fallen to about 15.4 million by 2022, the lowest since 2006. There was a small rebound in 2024 (reaching 10.4 million students) but demographic headwinds are approaching. 

The U.S. birth rate declined nearly 23% between 2007 and 2022, meaning the pool of traditional college-age students will shrink significantly in coming years. It's estimated that national "peak" high school graduation was in 2025, and declines will continue through 2041 unless the birth rate changes.

Whether that finally puts downward pressure on pricing remains an open question.

The Bennett Hypothesis: Does Financial Aid Fuel Price Increases?

In 1987, William J. Bennett, then Secretary of Education under President Reagan, wrote an op-ed in The New York Times titled “Our Greedy Colleges.”

His argument: increases in federal financial aid (grants, loans, work-study) were enabling colleges to raise tuition, because institutions knew students had easier access to money. The theory became known as the Bennett Hypothesis (PDF File), and it has been debated for nearly four decades.

The research evidence is mixed and varies by institution type. A study by Lucca, Nadauld, and Shen (2019), using student-level borrowing data, found that increases in subsidized and unsubsidized federal loans significantly increased tuition, with the largest effects at expensive private institutions and at for-profit schools. 

A Federal Reserve study estimated that colleges raised tuition by roughly 55 cents for each additional dollar of Pell Grant aid and 65 cents for each dollar of subsidized loan aid.

Another study found that for-profit institutions eligible for federal aid charged tuition 78% higher than those not eligible, with the tuition premium closely matching the dollar value of grant and loan subsidies available to students at eligible schools.

However, other studies reach different conclusions. A 2001 NCES statistical analysis covering 1988–1998 found no relationship between federal or state aid subsidies and tuition costs. 

When the Martin Center for Academic Renewal assessed 25 scholarly studies on the topic in 2017, the conclusion was that federal financial aid has at least some impact on tuition but it is likely smaller than Bennett argued and is one factor among many.

Given all the studies, it's likely the Bennett Hypothesis probably holds for certain segments of higher education (particularly for-profit colleges) and for certain types of aid (particularly student loans with no caps), but it is not a universal explanation for tuition inflation.

The “College Experience” Premium

American higher education has evolved into something broader than credential delivery. Students (and their families) are purchasing an experience in addition to education: residential living, dining, recreation, social programming, athletics, and campus aesthetics. This expectation drives spending.

In the 2022 Student Voice survey conducted by Inside Higher Ed and College Pulse, 63% of students said campus facilities played a role in their decision to attend their school.

Colleges have responded with an ongoing arms race of construction: state-of-the-art gyms, upgraded dining halls, high-end dormitories, and research laboratories.

That construction has to be paid for, and much of it is financed through debt, which then gets repaid through tuition revenue. Maintaining these facilities adds ongoing operating costs on top of the initial capital expenditure. And the cycle is self-reinforcing: schools that don’t invest in facilities risk losing students to schools that do and ending up a closure statistic.

Room and board costs have reflected this trend. According to the Education Data Initiative, the average annual cost of room and board is now roughly $12,986. Adjusted for inflation, that’s up 68% over costs in the 1990–91 academic year.

While room and board inflation has tracked closer to the general CPI than tuition inflation has, it still represents a significant and growing share of the total cost of attendance.

Going to an out-of-state college further inflates costs. The average student pays $9,596 a year for in-state tuition versus $27,457 for out-of-state. 

According to The Institute for College Access & Success (PDF File), 22% of students attend college out of state, effectively volunteering for a higher price tier.

The Cumulative Effect: How These Forces Interact

No single factor fully explains why college is so expensive. And that's also why it's really hard to curb the continued growth in college prices.

The power of these forces is in how they compound. State funding declines so colleges raise tuition prices. The availability of federal loans gives students the means to pay higher prices, which may reduce institutional incentive to control costs. Administrative growth adds overhead that gets passed through to tuition. Facility investment raises both capital and operating costs. And once prices rise, they rarely come down.

Each factor reinforces the others. A university facing a state funding cut doesn’t typically respond by cutting staff or deferring a building project. It raises tuition, knowing that students can borrow to cover the increase. The result is a system with many accelerators and very few brakes.

It's the same issues that have created the student loan crisis, manifesting themselves in a slightly different way.

Meanwhile, demographic trends are about to test the system. With the college-age population set to shrink due to post-2007 birth rate declines, schools that have relied on population growth to fund their operations may face a reckoning.

Institutions that can’t differentiate themselves or control costs could face the same fate as the hundreds of colleges that have already closed.

What This Means for Families

For students and parents making enrollment decisions today, the "why" matters less than the practical reality: college is expensive, the sticker price is rarely the price you pay, and the entire system is opaque by design.

The most actionable takeaway from the data is that families should treat the college financial decision with the same rigor they would apply to any investment. That means comparing net prices (not sticker prices) across schools, understanding total cost of attendance including room, board, and fees, evaluating the return on investment of specific degrees at specific institutions, and borrowing only what the expected post-graduation income can reasonably support.

If you cannot afford to "buy" certain "experiences", don't go into debt for it. Instead, look for alternative pathways that can lead to the same educational outcome without the added cost.

The forces driving college costs upward are structural and unlikely to reverse. But individual students and families can still make financially sound decisions within the system.

Common Questions

Why has college tuition risen so much faster than inflation, wages, and household income?

College tuition has risen faster than inflation for multiple reasons, including administrative bloat, ease of access to financial aid to cover rising costs, competition for customers (e.g. students), and more.

How does the growth of university administration contribute to rising tuition costs?

Many colleges have hired more administrators, faster than even student growth. The net cost of this added overhead is passed on to students.

How have state funding cutbacks driven tuition increases at public universities?

Many public universities receive state funding. As funding has been cut to colleges over the years, schools have offset the losses via higher tuition. 

Will shrinking college-age demographics finally put downward pressure on tuition prices?

Shrinking college-age demographics is not likely to put a downward pressure on tuition, simply because the underlying costs won't decrease. The more likely scenario is that there will be winner an loser institutions, with the loser institutions forced to close.