(quick summary) It's mainly because colleges don't provide measurements of their teaching effectiveness, so prospective students can't compare college quality. So in the end everyone assumes that cost and prestige is a measurement of quality, which drives prices up. In the college ratings (e.g. US News) the price of college is used as a measurement for quality to a certain extent. There's no strong incentive for a college to decrease its prices. Things like pell grants are government subsidies that essentially provide colleges with free money.