When President Barack Obama takes a bus tour of colleges and announces reforms related to college affordability, the refrain grows louder that the financial model of American higher education is broken and unsustainable. Yet few people are looking at the real problem.
Income inequality is the major factor contributing to the challenges facing higher education and is a significant public policy issue. In the 1970s, the share earned by the country’s top 10 percent of the income distribution was about 33 percent of total income.
According to a 2013 analysis by economics professor Emmanuel Saez, by 2011 that share had grown to a little more than 48 percent. Much of this movement is explained by shifts in incomes of the top 1 percent.
This rise in income inequality matters for colleges and universities: It has contributed to increased tuition, increased spending and, as the Education Department reported last month, greater financial aid at many colleges and universities, which calls into question the financial sustainability of those institutions.
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Increased access to higher education would help moderate the expansion in income inequality over time. Yet the increasing inequality itself presents obstacles to achieving this goal.
Real income growth that skews toward higher-income families creates challenges for higher education. The highest-income families are able and willing to pay the full sticker price. Schools compete for these students, supplying the services that they desire, which pushes up costs. Restraining tuition and spending in the face of this demand is difficult. These students will go to the schools that meet their demands.
At the same time, many schools are committed to recruiting and educating a socioeconomically diverse student body. At private, nonprofit institutions, this commitment has been supported through financial aid policies. At public institutions, low tuition has historically supported access. But the lagging incomes of families that earn less escalate the need for financial aid.
If the income distribution were less skewed, the willingness and ability of higher-income families to pay for services and, at the other end of the spectrum, the need for financial aid would both moderate; this would reduce the financial challenges to many colleges and universities.
Ironically, some of the proposed “solutions” to make higher-education finances sustainable would exacerbate future income inequality rather than address the trends that are creating financial challenges for institutions.
For example, in his 2012 State of the Union address, Obama called on colleges to slow down tuition increases and threatened to reduce public support. “If you can’t stop tuition from going up, the funding you get from taxpayers will go down,” he said. But slow tuition growth not tied to offsetting expenditure savings can result in reductions to financial aid. This is playing out in the private, nonprofit sector. Lower tuition combined with lower financial aid benefits higher-income students and hurts lower-income students. As a result, it reinforces income inequality.
The federal government is in the best position to directly address the rise in income inequality. Changes to revenue and expenditure policies could alleviate some of the pressures on higher-education institutions. Among other changes, Obama is proposing incentives to help ensure that the education system contributes to, rather than worsens, future income equality by continuing to educate a socioeconomically diverse student body. Tying access to government subsidies to the education of low-income students, not holding tuition down, would help accomplish this.
Ultimately, income inequality is primarily the responsibility of the government and society. The higher-education sector cannot adequately address this problem on its own. It is disingenuous for policymakers who are best positioned to address income disparity in the United States to make higher education out to be the culprit.