Abstract
This paper demonstrates that increasing income inequality can contribute to the trends we see in American higher education, particularly in the selective, private nonprofit and public sectors. Given these institutions’ selective admissions and commitment to socioeconomic diversity, the paper demonstrates how increasing income inequality leads to higher tuition, costs, and financial aid. A numerical example is presented that estimates how much lower tuition, spending (costs), and financial aid would have been if household incomes in the United States had grown by the same aggregate amount between 1971 and 2009, but with no increase in income inequality. The policy implications include the government addressing rising income inequality directly or changing the incentives facing higher education and will be of interest to those concerned with the rising cost of higher education and issues of access and affordability.