Popping The Myth of The "College Bubble": College Is Being Privatized, Not Inflated

So just about everyone has gotten this wrong, speculating that there's a "bubble" related to college which of course is caused by big government evil socialism. It's been hyped by right-wing libertarian groups like the National Inflation Association and even by supposed Serious People like Freakonomics co-author Stephen J. Dubner (although in his defense he isn't an economist but writes with an economist). 

The theory goes something like this:

• Government has increased subsidies to pay for student loans 
• There is a price distortion since the money is guaranteed to colleges
• Colleges spend more and then increase the price of tuition
• Repeat

At first glance the theory doesn't even make economic sense, subsidies lower prices, the obvious example being corn subsidies and the record low prices of corn in the United States.

The bigger problem is it assumes colleges inherently get paid through tuition which is only a very recent phenomenon. In fact for the first time ever public schools get more money through tuition than state funding.

So what's the actual problem?

Well put simply the burden of college cost is being shifted away from government funding to the students, or even simpler, colleges are being privatized. So yes, it's true that government is subsidizing tution more then ever leaving students with debt, but that wouldn't even exist if colleges weren't being privatized.

A great study (pdf.) that looked at this was done by the Delta Cost Project. As the study points there is a "pattern of cost shifting to student tuition revenues in times of economic downturn" which explains the increase in tuition and decrease in state funding. It's also worth noting that the operational cost of college, outside of private colleges, have not significantly increased, or at least not to the extend tuition has.

Put simply, schools are being privatized and students and parents are feeling the pain.