Higher education operates in a world of its own, where traditional economic principles break down and students struggle to maximize their investment. Unlike industries where competition enhances value, colleges thrive on prestige—driving costs ever higher without clear measures of return. Fueled by limitless student loans and distorted incentives, tuition skyrockets while students navigate an opaque system. This article reveals how the structure of higher ed distorts decision-making, inflates prices, and leaves students without a clear path to financial success. Read on to uncover the truth behind the college pricing illusion—and how to make smarter choices.
About the Author: Jeff Hulett leads Personal Finance Reimagined, a decision-making and financial education platform. He teaches personal finance at James Madison University and provides personal finance seminars. Check out his book -- Making Choices, Making Money: Your Guide to Making Confident Financial Decisions.
Jeff is a career banker, data scientist, behavioral economist, and choice architect. Jeff has held banking and consulting leadership roles at Wells Fargo, Citibank, KPMG, and IBM.
Economic Laws and Their Exceptions
In economics, the relationship between price and quantity supplied and demanded operates much like a physical law, akin to thermodynamics in physics. The law of supply and demand dictates that higher prices encourage greater supply but reduce demand, while lower prices do the opposite. These opposing forces drive markets toward equilibrium, balancing supply and demand at an optimal price. Over 200 years ago, renowned economist Adam Smith described this self-regulating, emergent market process as 'the invisible hand.'
However, unlike thermodynamics, economic laws have exceptions—most notably when key market conditions that allow price to function as an information signal are not present.
The Assumptions for the Law of Supply and Demand to Hold
For markets to function properly under supply and demand principles, several key assumptions must hold:
Many Buyers and Sellers – Markets should be competitive, with many participants ensuring no single entity controls supply, demand, or price.
Voluntary Exchange – Consumers and producers must have the freedom to enter or exit transactions without coercion or artificial barriers.
Price as an Information Signal – Prices should reflect both consumer willingness to pay and producer costs, providing accurate market feedback.
Low Barriers to Entry and Exit – New competitors must be able to enter the market to drive innovation and efficiency, preventing monopolistic distortions.
Well-Informed Consumers – Buyers must have access to reliable, comparable data about product quality, price, and expected benefits to make rational decisions.
When these assumptions are met, markets are efficient—price signals ensure that producers compete on value, and consumers make informed choices. In a well funtioning market environment, consumers are like voters and what they willingly pay is their vote. The information found in their combined votes is the invisible hand encouraging producers to increase or decrease their supply. A great example is shoes: brands like Nike and Adidas compete on quality, comfort, and performance, and consumers can evaluate value based on features, reviews, and price comparisons. This fosters competition that drives innovation while keeping prices within reasonable market constraints.
Higher Education: A Major Exception to the Law of Supply and Demand
Higher education violates many of these fundamental assumptions, making it one of the biggest exceptions to the law of supply and demand. Unlike consumer industries—where competition increases value and efficiency—colleges operate in a prestige-driven system that distorts pricing signals and deemphasizes cost discipline.
One of the biggest reasons for this distortion is that students and families often cannot objectively evaluate educational quality. Unlike shoes or cars, where quality can be measured through durability, performance, or user experience, college ROI (return on investment) is difficult to quantify. The future career and financial benefits of college are uncertain and delayed, making it nearly impossible for prospective students to assess whether a particular school is worth the cost accurately.
As a result, colleges do not compete based on educational efficiency or affordability. Instead, they compete in a zero-sum game of prestige, where spending more money and/or chasing a prestige perception is mistakenly equated with providing a higher-quality education. A college administrator may bristle at the suggestion they do not keep costs down. To that I would respond that I am sure they work hard to manage costs. However, it is easy to claim efficiency when there is no real price to prove otherwise.
The Role of the Federal Student Loan System in Inflating Prices
The challenges in higher education arise naturally due to the inherent time gap between receiving an education and realizing its financial return. Because the benefits unfold over decades, evaluating the true value of a degree is inherently complex, making informed decision-making especially difficult.
However, the federal student loan system exacerbates this problem by further disconnecting price from value, shielding students from the immediate financial consequences of their choices. The Department of Education’s “Easy Money” policies ensure that nearly any student can borrow nearly any amount, regardless of their future ability to repay.
This creates a perfect recipe for price inflation. With unlimited government-backed loans available, colleges face no pressure to be efficient—spending becomes an input for perceived excellence rather than an outcome of real value creation. Worse, this easy-money structure enables availability bias, a naturally occurring cognitive bias where people discount future consequences in favor of immediate gratification.
Take, for example, the experience of attending a big-time college football game. The energy is electric—the tailgates, the sea of school colors, the booming fight songs, and the shared camaraderie among students and alumni. The game itself may be thrilling or one-sided, but the spectacle is what truly matters. Yet, few students realize that much of this experience is funded by student debt—both from current students and from past attendees who may not have even graduated. While major college sports generate revenue, most athletic programs operate at a loss, requiring subsidies that come directly from tuition and fees. If students had to pay the full, unsubsidized cost—including the interest on the debt financing the spectacle—each game could cost them thousands of dollars. The student loan system hides these true costs, shielding young, impressionable students from the financial reality behind the experience.
By deferring repayment and providing loans to cover the gap between college costs and a student's financial means, the system shields borrowers from the long-term financial reality—much like a credit card with no immediate balance due. Without real-time financial constraints or quality feedback, both colleges and students make decisions based on incomplete information and short-term incentives, hoping that the cost of education will “pay off” in the future, regardless of the actual ROI realized.
Bennett Hypothesis 2.0: The Prestige Arms Race
The Bennett Hypothesis, introduced by former Secretary of Education William Bennett, suggested that federal student aid fuels tuition increases by removing price sensitivity from consumers. Economist Andrew Gillen later expanded on this idea, developing Bennett Hypothesis 2.0, which explains why colleges not only increase tuition but use federal funding to fuel an endless prestige arms race.
Since colleges lack clear educational outcome metrics, they compete by spending more money to signal exclusivity and prestige. The primary areas of spending include:
Luxury Dorms & Student Centers – Institutions build extravagant residence halls, gyms, and dining facilities to impress prospective students.
Administrative Growth – Rising tuition fuels expanding bureaucracies, with some universities adding layers of non-teaching administrators that increase costs but add little educational value.
Exclusive Faculty Hires – Schools compete for elite professors who may contribute more to research than teaching, further increasing costs.
Sports entertainment – Schools compete for elite coaches and provide state-of-the-art facilities to attract athletes and provide a top sports entertainment product.
How College Rankings Fail as a Measure of ROI
One of the clearest examples of prestige signaling is the U.S. News & World Report rankings. As these rankings have gained popularity among students and their families, colleges have increasingly used their rank as a proxy for quality.
This is a textbook example of Goodhart’s Law, which states: “When a measure becomes a target, it ceases to be a good measure.”
Originally intended to provide useful consumer guidance, college rankings have now become a target for manipulation. Schools game the ranking system by boosting metrics like faculty salaries, student selectivity, and spending per student—regardless of whether these expenses improve education quality. Interestingly, Goodhart’s law implies the measure was originally a valid information signal. In this case, the prestige signaling measure was likely an inadequate signal from its inception. As such, this inadequate measure devolved to become an even worse measure when used for targeting.
Rather than competing on educational outcomes, cost efficiency, or long-term student success, colleges focus on gaming ranking systems—spending on research faculty and coach salaries, elite programs, and luxury campus amenities.
This arms race has led to runaway tuition increases, as schools invest heavily in perception rather than real educational value.
Definitive Choice: A Structured Approach to College ROI
Given the prestige-driven distortions in higher education, students need a structured approach to evaluate college ROI. Enter Definitive Choice, a decision technology that helps students and families systematically assess their college demand curve—a weighted, criteria-based preference set that compares college alternatives and costs.
By using pairwise comparisons, Definitive Choice helps students clarify what truly matters—academic quality, affordability, career placement, or other personal priorities. Instead of defaulting to prestige signaling, students can weigh objective factors and make data-driven decisions.
How Definitive Choice Helps Students Avoid the Prestige Trap
Clarifies Priorities – Helps students identify the criteria most important to their future success.
Eliminates Bias – Provides structured, side-by-side comparisons of colleges based on individual needs, not arbitrary rankings.
Enhances ROI Confidence – Ensures students evaluate schools based on long-term financial and career outcomes rather than prestige hype.
By applying a structured decision-making framework, Definitive Choice empowers students to ignore the prestige arms race and focus on measurable outcomes, achieving true college ROI rather than falling victim to marketing gimmicks.
Definitive Choice helps high school students and their families stay focused on what truly matters—choosing a college where they can graduate with a strong GPA and a major that leads to meaningful career opportunities. By prioritizing long-term success over prestige, students position themselves for a first job that serves as a launchpad, paving the way for future career growth and, ultimately, the pursuit of their full potential.
Resources for the Curious
For those interested in diving deeper into the economic distortions of higher education, the prestige arms race, and solutions for improving college ROI, the following sources provide valuable insights:
Economic Theories and Market Distortions
Bennett, William J. Our Greedy Colleges. The New York Times, February 18, 1987.
Gillen, Andrew. Introducing Bennett Hypothesis 2.0. Center for College Affordability and Productivity, February 2012.
Goodhart, Charles A.E. Problems of Monetary Management: The U.K. Experience. Papers in Monetary Economics, Reserve Bank of Australia, 1975.
Higher Education Costs and Student Loan Policy
Hulett, Jeff. Maximizing College ROI: Navigating the Risks and Rewards of Higher Education. Personal Finance Reimagined, 2024.
The Institute for College Access & Success. Student Debt and the Class of 2020. 2020
Federal Reserve Bank of New York. Household Debt and Credit Report. 2023.
National Center for Education Statistics. Digest of Education Statistics. 2023.
Ma, Pender. Trends in College Pricing and Student Aid. College Board. 2023.
Hanson, Melanie. Average Cost of College & Tuition. EducationData.org. 2025.
The Prestige Arms Race & College Rankings
U.S. News & World Report. Best Colleges Rankings. Various years.
Bastedo, Michael N., and Jaquette, Ozan. Running in Place: The Effect of College Rankings on Institutional Stratification. Educational Evaluation and Policy Analysis, 2011.
Cognitive Biases and Decision-Making in Higher Ed
Kahneman, Daniel. Thinking, Fast and Slow. Farrar, Straus and Giroux, 2011.
Hulett, Jeff. Absurdistan U: How the Student Loan System Holds Higher Ed on a Leash. Personal Finance Reimagined, 2025.
Ariely, Dan. Predictably Irrational: The Hidden Forces That Shape Our Decisions. HarperCollins, 2008.
Tools for Smarter College Decisions
Hulett, Jeff. Making Choices, Making Money: Your Guide to Making Confident Financial Decisions. The Curiosity Vine, 2023.
Definitive Choice – A structured decision-making tool for evaluating college ROI and avoiding prestige-driven distortions.
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