at minimum.

STUDENT 2: Itís really complicated. I just donít understand how we have to pay so much

money to get an education, especially in America.

STUDENT 3: Itís overwhelming. I'm not sure what Iím going to do with my major yet, so

it's kind of crazy thinking about paying off all that debt but somehow itíll disappear.

PROFESSOR LIN: College is getting increasingly expensive. Tuition at U.S. universities has

risen faster than inflation in every year since 1981. So why is the price of college

rising so quickly? It's basic supply and demand. Weíre seeing enormous increases in the demand

for higher education, and universities can respond in two ways: increasing the supply

by accepting more students or increasing the tuition. Since most colleges can't keep up

by increasing enrollment, tuitions must rise.

To understand what's happening, we need to examine what's been driving that demand. There

are two main factors. First of all, the payoff from a college degree has been growing over

time. In 1980 college graduates earned 50 percent more than high school graduates. In

2008 they earned over 90 percent more. In addition, a college degree increases your

chances of finding a job, even in a sluggish economy. In the May 2012 employment report,

the unemployment rate for high school graduates rose to 8.1 percent while the unemployment

rate for college graduates fell to 3.9 percent. So it should be no surprise then that young

people today are pursuing higher education in larger numbers than ever before. But there's

more to the story.

STUDENT 4: Itís kind of something that I don't understand. You know, costs are constantly

rising. I mean I guess it has to do withó Every price rises, every cost rises, but college

costs rise so exponentially that I think that it just doesn't equate.

PROFESSOR LIN: There's a second major reason for the increase in demand, and this one is

the result of public policy. To make colleges more affordable, federal and state governments

have been giving subsidies to studentsómost notably through government-backed student

loans, but also through grants and tax credits. In fact, as prices rise there's political

pressure to increase these subsidies.

What many students don't realize is these subsidies actually lead to higher tuitions.

When you subsidize something, it's cheaper for people to consume. So people consume more

of it and demand rises. So while students may want more subsidies to make college more

affordable, ironically more subsidies actually make college less affordable, because they

fuel the demand thatís driving tuitions upward. Instead of being helped by the subsidies,

students are just taking on more debt than ever before.

And this rising demand also drives up prices in another way. Because colleges have no trouble

filling seats, even with record-high tuitions, theyíve felt no pressure to cut costs. Instead,

colleges have spent more. Fancy student centers, dining halls, athletic facilities, and many

more administrative staff than ever before: these additions make college more expensive

without increasing the value of the diploma. The rising price of college education is a

heavy burden for young people and their families. Fortunately, because we know the main reasons

behind rising tuitionsópromises of higher wages, and increased subsidiesówe can start

to look for solutions.