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  • Writer's pictureThomas Meloche

Why Education Costs Are Out of Control | A Theory

Updated: Aug 11, 2020

The cost of college education in the United State, average total tuition, fees, and room/board paid by full-time undergraduate students was $3,951 in 1984-85. In 2011-12 it was $23,066.

Question, "Why did the cost of college rise 584% in 30 years?"

Inflation? Partly, but in the same period medical costs increased 286% and the consumer price index rose only 121%. It appears something unique happened to college education costs. Can we use systems thinking to better understand what happened? Can we stop it?


Key Idea #1: All human systems are feedback systems.

The cost of a college education exists in a feedback system which includes what colleges can charge, what students can pay, the availability of money, and the value of the education.

When a feedback system demonstrates a highly directional trending behavior over an extended period of time look for system wide rules which naturally produce those outcomes. Specifically, did we create rules with naturally create out of control college tuition increases?

A rule in the college cost feedback system demonstrating a pathological outcome like massive tuition increase need not be the results of an intentional rule.

It is possible nobody set out to massively increase tuition costs. In systems, we frequently see a rule created for one reason causing an unintended consequences. The offending rules may well be written by people who didn't even realize they might accidentally create terrible outcomes... they have had only the best of intentions.


A good systems thinker has a few tricks to use when looking for answers about a problem such as too high college costs. The first question a systems thinker might ask is "When the trend begin?"

For college in the United States it wasn't until the early 1980s that college costs began to rise so dramatically. This may be a clue. So systems thinkers begin to look for possible causes beginning in the late 70s and early 80s. A second question a systems thinker might ask is "Where did the trend occur?" If tuition costs rose dramatically only in one State we would look just at that State for the cause. If it rose only in public colleges but not in private colleges that would be an interesting clue. In our case, the cost of college rose disproportionally everywhere in the United States in both public and private colleges. Therefore we looks for rule changes which affect everyone equally.

What rules affect everyone in the United States equally at the same time?

Federal Law.

Federal law consists of rules everyone is forced to follow in all 50 States. If we see an effect in all 50 States Federal Law is a good place to look. A quick search suggest there are at least three Federal Government Interventions in the time period worth considering as unintentionally causing out of control growth rates in the cost of higher-education. (I say unintentionally as none of the laws is called the "Make College Ridiculously More Expensive Act.") Here are a few candidates which fit snugly within the time frame of the geometric growth in education expense:

  • 1976—Law: Federal Student Loans become non-dischargeable

  • 1978—Law: Federal Student Loans dramatically easier to obtain

  • 1984—Law: All Student Loans (Government and Private) become non-dischargeable.

Before 1976 a student loan was as dischargeable as a credit card debt. Go through bankruptcy and the loan is wiped clean. When a debt is made non-dischargeable then you owe it until it is paid off, or you die. A 60-year-old may be paying on a bad decision they made at 18 to attend a few years at college.

Two fundamental things happened as a result of these rule changes. First, it became dramatically easier to get a college loan. Second, nobody but the 18-year-old student really had a vested interest in making sure the money was well spent. Nobody but the 18-year-old had skin in the game that the tuition costs were actually a good investment. Of course we all know 18-year-olds are perfect rational agents.

Before these rule changes the typical college student loan was much smaller, more like a loan one would take out to finance a car. The loans were much smaller because the cost of college was much lower. And these loans were dischargeable. If a student got in over their head with debt for a degree that would never make enough money to live on and pay off the debt, the student could go bankrupt.

So why didn't every student go bankrupt? Even though the loans were discharged, bankruptcy is not without costs. It is not worth the negative connotations of bankruptcy to default on a loan if you can actually repay the loan.

Also, if a students investment in a college education has a clear benefit to them many are delighted to support an organization that had such a positive influence on their lives—notice the success of alumni endowment campaigns.

Being able to escape a debt through bankruptcy is an important feedback system. It help inhibit bankers from indiscriminately making bad loans. It tightens the money supply. Bankruptcy is a moral hazard, but it does have personal costs which help prevent people from entering into it lightly, especially if they want a credit card, or to borrow money to buy a car, or to obtain a mortgage.

What happens when you make a debt inescapable via bankruptcy? Well, it means whoever is selling the product or service gets paid no matter how bad their fundamental product or service. It means the bankers can write bad loans.

What happens when you make it incredibly easy for 18 year-olds to borrow massive sums of money? Well, it turns out, all of the pressure is removed on the service providers to reduce costs. All of the pressure is removed from bankers to restrict the money supply.

It doesn't seem surprising that costs sky-rocket.

In the case of colleges, they get their tuition. And, with government paving the way, they get it no matter how high they raise their rates. The bankers are willing to provide the money since they take no personal risks, they have no skin in the game. The lenders have 50 to 60 years to extract payment from the teenagers. Graduate $80,000 in debt with a PhD in Greek Literature and no ability to get a job in a field that will pay off the debt quickly, it is your problem. Not the colleges, and not the bankers. They have been removed from all responsibility.

Perhaps college is the new debtors prison?

Good bankers actually have real wisdom about what is a good loan risk. You actually want the wisdom of bankers applied to how much money should be paid for a college degree. Ignore the wisdom of bankers at your peril. (I know this is the exact opposite of what most people think about bankers, that too is a crying shame and another story.)

Added to this equation of colleges and bankers having no skin-in-the-game is the profile of the buyer, a teenager. A teenager without the life experience to realize that a large debt for a career field that doesn't earn the money back is probably not a good trade, and you have, from our analysis anyway, an insight into some of the most significant causes of out of control college costs.

So the Federal Government in the 70s and early 80s made college loans risk-free for colleges and bankers, removing the wisdom of bankers from the equation, and made it easier and easier for college students to borrow large sums of money for any and all degrees, all within a few years. It should not surprise anyone who is actually paying attention that tuition costs rose and rose and rose and rose.

Of course, diagnosing the problem is not remotely equivalent to fixing it. These rules were put in place for political points and for, in theory, good reasons like making college more accessible and more affordable to more students. The fact that the results are 180-degrees out of sync with these goals, however, has not led anyone to change the rules.

It never does.

Why? Because members of large bureaucracies which create bad rules usually don't even recognize that their rules even exist inside of a larger feedback system. They are totally unaware that their original rules cause new problems which are frequently worse than then problem they were trying to solve in the first place. So their solution to each new problem is almost always TO WRITE MORE RULES.

The current wrong conclusions around higher education is that we need MORE government funding of higher education to fix the out of control costs. Today, 40% of all education dollars spent are now spent on higher education. Another fix being proposed is to forgive the loans. As if that itself doesn't simply add to the existing moral hazard.

This is a theory as to the cause of the out-of-control spiraling cost of college tuition. It is a pretty solid theory.

If we make higher-education loans dischargeable in bankruptcy then college loans will be harder to get and more expensive, especially if we do not guarantee them. It will become more difficult for teenagers to borrow great piles of money with no real plan on their part or the lenders part on how it will be paid back. Responsible adults with more life experience will be challenged to come up with different solutions for advanced education, perhaps even one that works.


Applicable Lessons

Do not trust a few people at the top of large systems to come up with good rules for everyone. The problem with creating rules at the top levels of large bureaucracies is unintended consequences ALMOST ALWAYS are worse than the original problem. Good rules are extremely difficult to make and broken rules nearly impossible to fix. A Feedback System that requires an “Act of Congress” to create also requires an “Act of Congress” to fix. They are almost never fixed.

Educational college tuition feedback system have been broken for decades, and there is no evidence that Congress understands they caused the problem to begin with, much less have the wherewithal to fix the problem.

Do you want to understand why Education, Healthcare, and Your Business Costs are out of control? It is probably because the people making the rules do not appreciate they are creating rules in the context of wickedly complex feedback systems. It is probably because the people making the rules do not appreciate it is extremely difficult to ever make a rule that doesn't produce devastating unintended consequences.

A few guidelines for avoiding this mistake in your organization:

  • Do not create very many general rules that apply everywhere.

  • When rules are desired, let them be created as low in the organization hierarchy as possible.

  • Allow different groups doing the same thing to generate different rules.


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