For decades, rising college tuition seemed like a one-way trend. Recent data suggest that may be changing.
Adjusting for inflation, the average yearly tuition and fees charged for full-time undergraduate students increased from about $6,000 in 1980 to over $20,000 by 2019, an increase of some 234 percent.
Figure 1 displays the trend of average tuition and fees since 1968. The data show that tuition rates, in real terms, were relatively affordable in the 1970’s by modern standards. Interestingly, the data also show that tuition costs have been in decline since 2019, falling for four consecutive years to about $18,000 by 2023.
Demographics are undoubtedly one factor that explains the downturn in tuition prices as the pool of available students shrinks, reducing demand for higher education. But the decisions of high school graduates also matter. Figure 2 below shows that after decades of a growing share of high school graduates enrolling in college, this trend has reversed since the late 2010’s.
In 2016, 70 percent of high school graduates enrolled in college, up from about 50 percent in the 1970’s and 1980’s. However, since 2018 this share has fallen for five consecutive years from 69 percent to just 61 percent in 2023, the lowest share since 1990.
Another potential factor behind an increasing share of high school graduates choosing not to go to college might be the flattening of the wage premium. As we have noted in prior research, in the 1980’s and 1990’s going to college paid an increasing return on investment compared to simply finishing high school. However, since the turn of the century that wage premium has flattened.
As figure 3 shows, going to college still rewards young workers with a roughly 60 percent wage premium compared to high school graduates, but over the past decade, this premium has not increased. If anything, its slightly lower now that it was a decade ago.
As for students’ financial aid, since 2010 the share of students receiving federal grants or taking out student loans both decreased from 48 percent and 50 percent respectively to 42 percent and 37 percent in 2023. Meanwhile, as figure 4 shows, the share of students receiving institutional aid and scholarships has increased significantly from 36 percent in 2010 to 55 percent in 2023.
However, federal grant aid only makes up a fraction of total federal and state government financial aid. Figure 5 shows federal grants, federal loans, state grants, and state loans going back to 1970, all the way up through 2024. In 2024, total government aid was roughly $173 billion. More than half of this government aid is federal loans, nearly a third is federal grants, while about 18 percent is state loans and grants combined.
Finally, with aid in mind, financial risk is another factor that prospective students must consider when deciding whether to invest in higher education. Figure 6 shows the rate of delinquency since 2010, which represents the share of student loans that are unpaid for more than 90 days. Historically, this rate fluctuated between 8 and 10 percent, before falling below one percent during the repayment freeze policy period of 2020-2024.
With the end of the repayment freeze policy in 2025, delinquency rates increased notably, before falling back down to their lowest level outside of the pandemic repayment freeze period, at just 7.4 percent as of Q2 2026.
On the other hand, the share of federally managed student loans in default (270+ days of non-payment over a lifecycle) has climbed to record highs in recent quarters. As figure 7 shows, the default rate on outstanding principal and interest balance of direct loans and ED-held FFEL program loans is now 20 percent, or 1-in-5 student loan borrowers.
For decades, colleges operated in an environment in which demand for higher education seemed almost inexhaustible. Enrollment was rising, the earnings premium from a degree was increasing, and expanding federal grants and subsidized student lending increased students’ purchasing power, allowing colleges to capture part of those subsidies through higher tuition. In effect, policies intended to make college more affordable helped weaken the price discipline that normally constrains sellers.
That environment is beginning to change. Colleges are competing for a smaller and increasingly price-conscious pool of students, while the economic payoff from a degree has stopped rising as it once did. The recent decline in tuition may therefore be an early sign that market discipline is returning to higher education. Policymakers should be careful not to reverse that adjustment by pouring still more taxpayer subsidies into the sector.
Decades of federal intervention have demonstrated the problem with trying to make college affordable by subsidizing demand: when government gives students more money to spend on higher education, colleges have less incentive to economize and more opportunity to raise prices. A better approach would be to reduce the federal government’s role in financing higher education and allow colleges to compete more directly for students on price and value.
This is a very interesting piece by Jack Salmon showing how universities have capitalized government subsidies into higher tuitions and bigger budgets which, in turn, has led to increased loan debt. But that may be coming to an end as universities must adapt to shrinking enrollment and more price-conscience students. The lesson is that ending federal subsidies will speed the decline in the cost of higher education.
What do you want to bet the colleges will refuse to fire all the useless admin staff they added over the last couple decades, despite decreasing revenues?