I was reading an interesting debate over at The World of Wealth about the rising cost of higher education and the role government subsidies may play in adding to the mess.

We all know that college costs have been rising much higher than inflation. Colorful charts like this one from an article in Money Magazine entitled Is College Still Worth The Price, clearly show how outrageous the rise is in comparison to a select number of other financial indicators.

So why the green line and not something closer to the dotted black? It is not like the colleges are simply charging more and hoarding cash, diamonds, precious stones, and some of the worlds most expensive antiques in the closet of the dean's office. For the most part, like the government, they spend what they get, more money in means more money out, and of course everything is a very important new expenditure.

So what's the deal, why the Apollo like ascent? This excerpt from the article mentioned above sheds light on a possible contributor...

College finance experts point to a record number of applicants in recent years as the baby boomlet comes of age (many of the more selective schools reported double-digit increases for 2008); that trend, coupled with growing demand for degrees (undergraduate enrollment has jumped more than 20% over the past decade), puts heavy upward pressure on prices. Dwindling support for higher education from cash-strapped federal and state governments doesn't help the situation.

Normal supply and demand can't begin to explain cost increases of this magnitude, though. If the usual rules applied, tuition would eventually stop rising because families would cut back enrollment, especially at the most expensive private schools, just as they curtailed consumption of gas once prices hit $4 a gallon.

Colleges would then be forced to cut costs or entrepreneurs would flood the market with lower-cost alternatives. But for the most part - all those invitations you see to get your degree online notwithstanding - that hasn't happened.

Instead, prices for college have begun to follow their own peculiar logic. In the absence of any objective measure of the value of an education, price becomes the default yardstick. The more expensive a college is, the better the education it presumably provides. (After all, if other families were willing to pay this much to send their kids here, it must be worth it.)

And the better the education is presumed to be, the higher the price the college can charge. In that respect, it's like home values during the housing boom or dotcom stocks during the late-'90s tech frenzy: Prices go up on sheer momentum.

Two main ideas from the article combine with my experiences and float to the top of my brain on the subject:

1. Higher prices increase our perception of quality. Like choosing between bottles of wine, we expect something that costs more to be of better quality (read the interesting wine choice experiment here). From the quoted excerpt above, if other families are willing to pay this much to send their kids here, it must be worth it.
   
   It's a proven phenomena that schools who raise their tuition often receive an increase in applicants the following year. The opposite of Price Elasticity of Demand, marketers call it the Chivas Regal effect. To make matters worse, a greater number of applicants to a school ultimately means a greater number of rejections, boosting a schools selectivity rating and making it even more attractive to students and parents in future years. Starting to see the spiral here?
   
   
2. Free and cheap money: all that financial aid is also to blame. Different students qualify for or earn varying amounts of aid, and I know it seems pretty harsh, but if free money and cheap loans didn't pour in from the government, and it wasn't as simple as a pen stroke to accept tens of thousands of dollars in debt from public sources, would we care more about the price and what we were getting for it? Sadly I think the answer would be yes. If the government starts dolling out more aid money to students, you will likely see colleges increase their costs to suck up more. Do the freshman really need that new marble lined state-of-the-art fitness complex? Where do I sign up?
   

It is a tricky issue and I hate to take the generalized "we do it to ourselves" standpoint, but I am having a tough time seeing around it on this one. If we look less to the cost and selectivity of a school to base our judgments on, if we give up a little luxury in the expectation of a lower price, if we remember that all that money flowing in with our name on it is still money, maybe schools will be forced to adapt to a changing market.