A 20th-century system has led to perversities in the 21st.
A 20th-century system has led to perversities in the 21st.
O ne of the reasons American colleges are the most envied in the world is because of the lavish subsidies they receive. And yet, American colleges are in trouble. Enrollment is down and will continue to go down because of depressed foreign-student access and because Americans hit a baby bust two decades ago. Colleges are beginning to close at an alarming rate. Confidence in American higher education is polarized. Only 23 percent of Republicans place trust in higher education. But that trust is slipping overall. Only 50 percent of Democrats say they have confidence in these institutions of learning.
That lack of confidence may be due to the fact that American universities seem to defy the laws of gravity. Every intuition about markets tells us that when demand falls, prices fall with it, especially if forecasters can see a shrinking customer base in the future. But from 1977 to 2024, published tuition rose by roughly 1,513 percent, an average of 6.1 percent a year against general inflation of about 3.6 percent. The number of colleges multiplied in this time, making the degrees ubiquitous and less useful as a status signal. Yet while the market is imploding, all-in sticker prices at elite universities are reaching six figures a year. Incentivized to invest for themselves, many top-tier universities have enormous endowments that produce tens of millions in income every year.
The machinery of higher ed that drove it here is woefully outdated. The 1965 Higher Education Act, and the federal loan system built on it, assumed that the bottleneck was access to capital — that capable American students existed in abundance but could not afford college. For a generation, this worked, but over time colleges simply raised prices to meet rising subsidies. The system assumed that colleges would remain what they were: frugal institutions that held out the privilege of liberal education and surrounded it with the challenges of a more stripped-down, spartan lifestyle of cramped dorms. Instead, the absence of a profit motive took the brake off spending. Colleges competed for students arriving with loans subsidized by the U.S. taxpayer. An explosion of amenities occurred, with administrators making colleges more like resorts or cruise ships, with endless food courts and luxurious gyms, while at the same time governing them through an expanding commissariat of deans.
The part that is least understood is the decoupling of sticker prices from net prices. The market pressures are there but rendered opaque. Declining enrollment has been met with steeper discounting. For 2025–2027, colleges are discounting a record 57.1 percent off listed tuition for first-year undergraduates, up from 54.5 percent a year ago. So, in one sense, prices are falling, but not in a way that is transparent to students and parents. Instead, prices are managed by financial-aid bureaucracies governed by institutional and political constraints that aren’t visible to the public.
Because price signals in higher education are haywire, the only corrective outcome has been institutional death. Over 800 colleges have closed in the past decade. That’s the market-clearing mechanism at the bottom. Schools with small endowments that are dependent on tuition-paying students can’t discount their way to break even.
The squeeze for cash has fallen on the affluent who expect their children to go to college as a matter of course. Households earning between $200,000 and $400,000 are too rich for need-based aid. These families are well-off by any standard, but affording a high, five-figure tuition bill in after-tax dollars is a serious strain, especially on families who expect multiple children to attend college.
Some in this income bracket take advantage of 529 savings accounts, essentially piling up investments for education from birth the way 401ks do for retirement — though some families only find themselves reaching these upper brackets just as their children are preparing for college. Furthermore, admissions and financial aid are also likely using other demographic factors, including proxies for race, in making discount decisions. While the One Big Beautiful Bill Act capped borrowing for student loans to finally provide downward pressure on institutions with runaway tuition costs, the cap is first experienced by parents who have the option of digging deeper or trying for a home equity line of credit to act as a bridge.
These institutions have had a strong, and in some ways strengthening, hammerlock on access to the social and political elite in the country. Colleges at the lower level have voraciously tried to colonize fields in which no college degree was ever needed: turf management. And an Ivy League law degree is now seen as nearly a requirement at top levels of the judiciary. The status they confer is built on centuries of reputation, but the mistrust they’ve earned from the public is from the last three to five decades of dysfunction.
The populist itch in American politics is a response to dissatisfaction with elites. Our university system is a major sorting and formation mechanism selecting and grooming American and international elites. The financial system on which they exist now is perverse. We must provide alternative sorting mechanisms for those who don’t want to begin their lives indentured.
Perhaps most of all, it calls out for the two virtues that American elites resist most: restraint and humility.