Who's Behind the U.S. Higher Education Bubble?

We didn't set out to go looking for it, but we couldn't help but notice what would appear to be a really unique correlation between the average annual tuition at a four-year higher education institution in the United States and the total amount of money the U.S. federal government spends every year.

To better see that correlation, we mashed up our charts indicating the presence of an unsustainable bubble in U.S. higher education with our chart showing the level of federal government spending, covering the period from 1976 through 2008, which includes all the tuition cost data we have.

We then multiplied the annual tuition cost data by a scale factor of 243, which indexes the data to the year 2000, and show the data plotted against household median income for these years.

What we find is that changes in the average cost of college tuition closely pace the growth of total U.S. federal spending, and has done so almost perfectly since 1998.

This correlation suggests that the U.S. federal government is directly behind the bubble we observe to exist in the cost of U.S. higher education, with federal spending during years of recession effectively insulating U.S. colleges and universities from the nation's economic circumstances by subsidizing their operations.

These subsidies, delivered at times of recession, free U.S. higher education institutions to set the price of their tuition independently of their students' ability to pay based upon their or their family's current household income.

The only limiting factor for U.S. higher education institutions then would be the actual growth of U.S. federal spending. This would be why the average cost of college tuition in the United States would appear to have come to track the total level of federal government spending so closely.

As a result, the cost of college tuition has skyrocketed with respect to the typical family's household income. Consequently, when a student attends college today, they must increasingly rely upon subsidies from the federal government that fill the gap between what their institutions charge and what they must pay for out of their own pockets.

And if that spending cannot be be sustained, then what we have is a very large bubble in both U.S. higher education and U.S. federal spending.

Coming Tomorrow

We'll take a more traditional look at how strong the connection is between U.S. federal government spending and tuition....