Why Is College So Expensive?

While I'm on vacation, some great bloggers are helping me out with a few posts per day. The following is from Advanced Personal Finance:

Yesterday I was reviewing the 529 college savings account balances for our daughter and unborn son. I was pleased to see that in four-ish years we've managed to save and invest $13,000 for her college education. Even our son has $1,200 saved.

But it also got me thinking about the high cost of college. Why do we have to save so much to be able to afford college for them?

Why College Costs So Much

For some historical family perspective, my father paid for his 4-year degree by working summers and using the G.I. Bill. He went on to get a masters degree, again without incurring loans. The story is similar for my mom.

Yet I came out of college 13 years ago with approximately $9,000 in student loan debt alone, which is relatively small from what I can tell reading other peoples' stories. And, like my father and mother, worked summers. That wasn't even close to all of my debt when I graduated, by the way.

Here are some hard numbers on college costs:

• The price of public colleges increased 28% in the last five years alone even after adjusting for inflation. Eighty percent of all students are enrolled in public colleges. [Source: American Council on Education]
• Student debt has more than doubled from 1993-2004. [Source: U.S. Public Interest Research Group]

Why the meteoric increase in tuition and fees?

I think there are several reasons why college costs so much. State funding cuts, easy loans, increased demand, and a willingness to spend on education are the primary drivers.

First, in the case of public schools, states have decreased funding for higher education. In the 2002-2003 school year, 21 states either cut higher education funding or held it steady (0% increase). In 2003-2004, support for universities fell nearly 4% nationwide.

Second, the federal government has made loans the method of choice for funding school. By giving Sallie Mae and Fannie Mae the implicit backing of the full faith and credit of the U.S., the federal government has subsidized the loans these firms make. It has shrunk grants and made loans cheaper, trying to provide education on the cheap.

In 2005-06, borrowers (both students and parents) took out $17.3 billion dollars in non-federal loans for college. That's up from about $1 billion ten years ago. Not one of those loans is interest-deferred, so that debt starts compounding immediately.

Student population increase is another reason why higher education is becoming more expensive. There has been a steady increase in demand for a college education since the 80s. Higher education operates somewhat as a supply and demand economy, allowing colleges to charge more especially at the high end.

Finally, families are more willing to spend on education. As the U.S. economy becomes more knowledge-driven, education has an increased effect on income. Part of the reason for the explosion in parental loans for higher education comes from its perceived importance in today's economy.

As the price rapidly outstrips inflation (and income), attending college becomes an increasingly risky proposition. A student who takes on tens of thousands of dollars in loans must be reasonably sure of his or her ability to repay them. But while student debt has more than doubled from 1993-2004, median earnings for 25-34 year old college graduates has fallen 8% since 2002 according to the U.S. Census.

It's worth noting that student loans cannot be discharged in bankruptcy. They are with the borrower until they are paid back or the borrow dies.

So where does this leave us? I think this trend is here to stay. As a result, middle class families will feel even greater financial pressure as the kids reach college age.

The options are few and all are difficult.  Some families will be able to save for their kids' education.  Some students and parents will take on onerous loans to make college a reality.  And unfortunately, a great many young people with the capability to attend college simply won't because it's not affordable.

And that leaves all of us poorer in the long run.

Comments

[maxconfus]

You forgot the most important reason why univ/colleges costs are rising, they are poorly run. Most univ/college campuses have enormous operating expenses. They are inefficient and use tons on utilities like oil and electric.

[beloml]

At the major research university where I work, the joke is that we were first state supported, then state assisted, and now we're just state located.

[Richard]

"Why Is College So Expensive?", easy, the money goes to administration, "resort" like campuses complete with jogging trails, workout facilities and climbing walls and building out their buildings and infrastructure to accommodate their demanding market, errr I mean students.

[JV]

Very true beloml. There was an article in the WSJ about how universities are allowing their older buildings (that housed the science, general studies, arts classes and lectures) to literally crumble, because they're getting so much money to build newer (institute of bio-tech, nano-tech) buildings. No-one wants to donate to fix up a building with someone else's name up on it.

At my alma mater, the art building has been condemned, and is now on the verge of being torn down because (following auto_loan_quick's argument) the art department is poorly run: The head of the art department is also in charge of the on-campus museum, so all the general donation checks go to purchasing new works and maintaining the museum, at the cost of the students that will continue to create the works that will fill it.

[William Tanksley]

The reason for the huge cost is elementary, and the article mentioned it but ignored its effect: the GI Bill. You can't pump that kind of money into a system and NOT have it drive up the prices.

[Beastlike]

I think a huge part to the increase is demand like you said. If the prices continue to rise at the same rate they are now, it will eventually not be worth it to go to college. Do you know if the trend for people joining the trades is increasing at the same time?

I also knew quite a few college kids that went to the more expensive schools because their parents were forking over the money. If they were like me and had to pay for it themselves, they would find the best school at the lowest price, which would lead to the slowdown of tuition cost.

If you were born "lucky" and are a minority, you have a good chance of getting a free ride through college. I knew quite a few kids that got that unfair deal!

[Meg]

I agree with JV. College costs started to skyrocked when the government started mandating the existence of cheap loans and plenty of grants. Colleges race to gobble up (I mean qualify for) as much federal funding as they can--and the only way to do that is to have plenty of students who can't afford tuition--and the only way to do that is to raise tuition until a satisfactory percentage of students need financial aid.

These schools don't need the money--many of them have billion dollar endowments. And, as you mentioned, they are throwing money at everything they can including landscaping bills in the millions. But you don't see them cutting tuition. And they never will as long as the government tries to "help" students who need financial aid. All that does is make them raise prices to make more of us need the aid!

[Mrs. Micah]

I made it through college mostly on scholarships and a bit of an inheritance from my grandfather. But Mr. Micah is getting his PhD and incurred $110,000 in debt over his 10 years of education. That's with some scholarships.

So we're doing our best to pay that off. And we plan to save for our kids. Speaking of which--can you start once you're pregnant? You mention your unborn child having an account.

[Minimum Wage]

Where can I get one of these easy loans?

[Anitra]

I think we are seeing the beginning of a long-term trend that will eventually push young people to seeking less expensive education, or to learn a trade instead of going to university.

The problem is that it will take a long time for this trend to manifest itself, since most people are only involved in college/career price shopping once or twice in their lifetime. (Once for themselves, and possibly once more for their kids.)

I have several college-aged relatives who have decided to take non-traditional paths. Ten years ago, their parents would have been inclined to push them into a four-year college anyway, feeling that the benefits outweighed the costs. Now, they are letting their kids take the cheaper paths if they want to; why waste money or saddle the kid with debts for something they don't even want?

[Mindy]

It is all greed. They need money to make there campus look appealing so they can attract students. By the way, did anyone ever take the cost of a dorm room, for one student per semester, and times that by the number of kids in a residence hall? The amount of that itself is rediculously profitable. Many of you's mentioned loans and grants and scholarships. Those are not easy to get. All I got offered was a very small subsidized loan and then of course, the expenise not worth it unsubsidized loans. No grants and no scholarships. P.s. I have to pay for college all by myself with no help from my parents or anyone, forcing me to spend all my money plus a loan. Next semester I may not be able to go at all, even with loans unless I take a loan fro mthe bank with high interest which is not worth it. I also had to choose a school that was close to home because it is cheeper then most colleges, and it was definately not my first choice. America, you gotta love it. Proud to be an American my ***.

[AJ]

FACULTY GREED!!!... Professors want more money, if they don't get it, they leave for a school willing to pay them more...So administrators are under pressure to keep faculty from leaving and basiclly the students foot most of the bill (on average at a public state school almost $0.50 of every dollar a faculty member gets is from student fees). The sad part is most faculty probably spend less the 20% of their time with undergrads, so the students are paying through their teeth for very little in return not to mention many students will be paying for their education long after they graduate. Its all greed...

[John Murphy]

This article is proven with the recent financial crisis. The government loans out easy credit which drives up prices and malinvestment of capital. The more government inteferes with the immoral act of redistributing capital...ie taking from people who don't go to college and giving it to people who do...then you will see artificial high prices. The real price of a college institution is inflated...easy loans jack up prices and the risk is obscured.

[seanaldo]

The reason that both college and university tuition is so high is not because of loans (unless given by the school) or the GI Bill or government grants or even increased demand. These are objective and classical economic arguments, but the real reason is in fact the faculty and administration of universities and colleges are abusing this situation. Consider the fact that a professor in a public high school will indoubtedly be making more than a professor at a university, regardsless that the high school teacher is putting forth more time and effort. Also, the notion that increaing demand and increasing student population are a cause for increased tuition is false. This increase in student population, along with an adjustment of inflation, should, if antything, reduce the price. It is not as if all universities need to yearly re-model their buildings to accomodate more students. Another argument is that the price does not matter in the long-run, because a college degree garuntees a well-paying job. However, as more and more students are graduating, a bachelor's degree is becoming less impressive, and eventually will turn into what employers consider a high-school diploma.

[jared]

Everyone seems to be forgetting one major fact... Schools waste money because they are rewarded to do so. The more a school SPENDS, the higher it is rated. Yes, harvard's 35 billion dollar endowment could cut tuition, but it is rated so highly because it finds ways to spend that, and spend the tuition. I know of a particular B school whose rating increased after it said it would build a new 60 million dollar business building.

[Kat]

It is really funny... I never qualified for financial aid because my parents refused to sign the parent plus loan. I resorted to private loans. My current lendor dropped my school and I am trying to find another one. My credit is not the greatest because I am 23 and live on my own. The ironic thing is, it is hard to find a decent paying job without a degree. But getting that degree is insanely expensive! I am supposed to finish in Nov. 2009. It seems if I can't find a lendor, my education was a waste and will not be recognize with out the diploma. UGHHHH so frustrating.

[amanda b]

Since the cost of collage has gone up so much children who have great dreams and plans to be something great when they grow up might never get the chance. There is nothing in this world i want more than to become a vet and help the poor homeless animals in this world but my family isn't that wealthy so i might never get that chance. I just hope that things soon change so that my grandkids and so on after that can afford to get the education the need to be what they dream.

[GI Joe]

Do ROTC. The department of defense will cover your college costs and pay you $30,000 ($40,000 if you count benefits) for four to five years after you graduate! I've bounced around colleges for a while and I've ended up studying engineering, I plan to contract with the Air Force. Dream job + free college = damn good living