The Upper-Middle Class Has Itself to Blame for Student Debt

When it comes to paying for college, upper-middle-class families often get the worst of all possible worlds. They're not wealthy enough to treat the cost of tuition as an afterthought. They're not needy enough to qualify for big discounts. But they're often status conscious enough to pay whatever's necessary for their kids to attend an elite college.

And so somewhat unsurprisingly, the Wall Street Journal has found that in this age of rising student debt, its risen most of late among the upper-middle class. Between 2007 and 2010, the percentage of households taking out loans to pay for college grew fastest within the group earning between $94,535 and $205,335 a year.


As someone who grew up in what the WSJ would describe as a solidly upper-middle-class family and attended a private university, I'm the first to admit that this is probably not a first-order public policy problem. But the phenomenon does provide a window into why private colleges have been able to raise their tuition at such extraordinary rates over recent years.

In a sense, this is a tragedy of the (university) commons -- the phenomenon where the rational behavior of an individual can create problems when repeated over and over by a group. It's entirely reasonable for well-off families (we're talking about households within the 80th-to-95th percentile here) to try to send their children somewhere with ivy on the walls, even if it means taking out a bit of debt to do it. Researchers have found that, even though it's certainly not the only factor that counts, where you go to college really does seem to matter when it comes to future earnings. By paying up for prestige, parents are doing what's right for their sons and daughters, who may well make back the extra investment over the course of their careers.

Problem is, it's not just one family making that choice. In recent years, elite colleges have pursued what George Washington University President Emeritus Stephen Trachtenberg has called a "high tuition, high discount rate" model. Schools charge the rich families more, then use the proceeds to slash costs for the poorer students by handing them grants. In terms of income, most of these upper-middle-class families fall into the top quartile of college attendees. Without their large tuition checks, the discount system wouldn't work. And the more they've been willing to pay, the more college administrators have been willing to raise rates, so they can spread money elsewhere.

By chasing prestige over price, the upper-middle class has also helped encourage the so-called arms race mentality among elite schools, which have piled on expensive amenities and services, along with administrators to run them. If semi-privileged families, and their academically accomplished children, were more cost conscious, you'd likely see somewhat different behavior from the colleges. But so far, the signal from parents and students has been that, when it comes to campus life, more is more.

This all stops one of three ways. Upper-middle-class families could start getting priced out of top schools, at which point it would be in the best interest of the colleges to tamp down on tuition. There could be a cultural shift, wherein they just decide to avoid debt and start bargain hunting. Or college administrators make an executive decision to slow down their rate hikes.

If anything, I'd bet on the latter. As the WSJ notes, these families are only spending about 3 percent of their incomes making debt payments. My guess is most of them are still willing to pay more.