In Part 1 of this blog post, I asserted that the question of whether college was worth the investment needed to be answered through the analysis of four distinct areas of concern. In this week’s post, we will examine the first of these concerns:
Higher education has become too expensive for too many families, and, as a consequence, too many prospective students are being squeezed out of the market.
This statement is widespread, and generally accepted as true. There is no shortage of “evidence,” much of it focused on the rapid escalation of the published prices for tuition—prices that, in most segments of the higher education community and at most campuses within those segments, have risen substantially more rapidly than has the rate of inflation.
Consider the following quote from an Op-Ed in The Los Angeles Times (February 10, 2014): “A big part of the problem, of course, is that college is just too expensive.” The article provides no data to support the claim, and there is no hint of any need to do so, since statements like this have been made so often they must, of course, be true.
There is also the related problem of conflating public and private education. A story on National Public Radio (“How the Cost of College Went from Affordable to Sky-High,” March 18, 2014) is focused entirely on what happened over the past 40 years at four-year public institutions, a time when most states made extreme reductions in their allocations to state institutions, resulting in ballooning tuition levels—but the title of the piece erroneously implies that all of higher education went “from affordable to sky-high.”
In an effort to understand why so many people accept the blanket statement that college has become unaffordable, let’s consider the following four points:
First, higher education is far from a monopoly. More than 4,000 campuses vie for the interests of prospective students in any given year—and the posted tuition ranges from less than $1,000 per year to more than $50,000 per year (in making this statement, I include community colleges and public universities). Those with the highest sticker prices are generally private colleges and universities with national reputations. They are, on their face, affordable only to very wealthy students and families—until one factors in financial aid, a topic I’ll return to momentarily. But the larger issue is the implicit assumption that, based on their advertised prices, colleges and universities in general are unaffordable for most families.
A college education is much more than a commodity, but the prices that colleges set are a reflection of market forces, just as is true for things that truly are commodities: if no one can afford the product, the company (or college) goes out of business. One can purchase a new automobile for prices ranging from less than $10,000 to more than $300,000, depending on the make and model. Are automobiles unaffordable? Are all automobiles unaffordable—or is it the case that some makes and models are unaffordable for some people? I am well compensated for my position as president of Roger Williams University, but I cannot afford to purchase a Rolls Royce or a Bentley. Does that mean that I think that automobiles are unaffordable? Hardly. I have many to choose from, within my price range. But a point not to be missed is that enough people can afford to purchase a Bentley to allow the company to stay in business.
So, too, for colleges and universities. In this blog post, I am not getting into the thicket of whether a given college has raised its prices to the level that some of the prospective students who once could have afforded to attend that particular college can now no longer do so. That’s a topic for a different day. The point I am trying to make is that, within the entire spectrum of colleges and universities, the large majority of prospective students and their families can find a college they can afford. It may well be that they would have preferred a different (and more expensive) college (just as I would have preferred a Bentley), but that’s not the same thing as saying that all colleges have become too expensive, and therefore a college education is beyond the financial limits of many families.
A contributing factor is something that is not much talked about: the level at which parents choose (or are able) to contribute to the costs of their child’s college education. On average, families paid $24,907 in 2009, but just $21,178 in 2012 (Inside Higher Ed, July 23, 2013). A more recent survey of parents (Personal Finance, July 7, 2014) found that, while 81% of parents helped with their child’s tuition costs in 2013, only 77% were willing to do so in 2014. Given these facts, it is not surprising to see students borrowing more money than in previous years, even at schools where net tuition is not rising.
The second point is that a significant driver of the cost of going to college is room and board, the price of which can easily equal the price of tuition (at least at public schools), and is generally anywhere from 25 percent to 50 percent of the price of tuition at private schools. A huge factor in the assessment of affordability is the choice between being a commuter student and being a residential student. Commuters generally have far fewer options, but most have at least some options.
Compounding the problem of room and board costs is the “amenities war.” Just in the past two years, 52 new residence halls, housing 19,000 students, opened at campuses across the country. Wichita State’s new $65 million residence hall, costing students about $5,000 more per year than older residence halls, has a waiting list (Huffington Post, June 21, 2014). Students and families may say they want affordability, but many of them are opting for relative luxury.
A parallel situation occurs at many exclusive private schools. In 2010, Middlebury College (ranking fourth on U.S. News’ list of national liberal arts schools) announced that it would cap its increases in tuition, room, and board to one percent over the cost of inflation—but this year, Middlebury is going to raise the room and board fees by 4.5 percent (three percent above inflation), reportedly because of the cost of providing vegan and gluten-free meals (Inside Higher Ed, April 3, 2014). Because Middlebury has almost six applications for every freshman opening, the college has no economic incentive to keep its costs low—so they tend to float up.
The third point is that the assessment of affordability—especially from higher education’s critics—is based on the list prices of tuition. Yet it is well known, and broadly acknowledged, that, even as the tuition prices have risen at private colleges, so, too, has the discount rate. In fact, when adjusted for inflation, the actual tuition paid by students has not risen at most private colleges for more than a decade.
The most recent summary of costs, compiled by the Department of Education for the 2011 – 2012 academic year, and published in December of 2013, revealed that the average sticker price (including tuition, fees, books, housing, food, transportation and miscellaneous expenses) at four-year publics was $23,200, as compared with $43,500 at four-year not-for-profit privates. However, the average net price (that is, subtracting grant aid) for these two groups of institutions averaged $18,000 for the publics and $27,900 at the privates—a savings from the advertised price of $5200 for the publics and $15,600 for the privates.
U.S. News highlighted this distinction in a report on March 20, 2014. Quoting House Speaker John Boehner: “During the 1980s, the cost of attending college rose more than three times as fast as the typical family income” and “this trend of rapidly-increasing college costs continued unfettered during the 1990s,” U.S. News showed graphically that the average net price of private non-profit four-year institutions has been essentially flat for more than a decade, during which time colleges developed differential pricing models wherein families with higher incomes received less aid than families with lower family incomes—a development that U.S. News strongly endorsed. A similar report appeared in The New York Times on October 24, 2013—and a very recent report in Inside Higher Ed (July 2, 2014) explains how this flattening of net tuition has occurred: Schools have continued to increase their discount rates, to the point where, last year, they received only 54 cents per dollar of sticker price.
But this distinction between sticker price and net price still eludes many media outlets (or perhaps it’s just more fun for them to report negative perspectives). An editorial in the Miami Herald (June 15, 2014)
on the recently failed student-loan bill accounted for the increase in college loan debt to the “fact” that “average college tuition increased 79.5 percent between 2003-2013…compared to an increase of only 26.7 percent in the Consumer Price Index.” As I have just noted, the increase in average net price of tuition in the nonprofit four-year private colleges did not, in fact, exceed the CPI during this period.
An even more extreme view was published by Roll Call on March 17, 2014, in which the author claimed that “The cost of a college degree has increased more than 1,120 percent in the past 30 years,” a blatantly inaccurate statement.
Let me say it one more time: The inflation-adjusted net tuition paid by the average student at most private colleges this year is actually less than the net tuition paid by the average student at most private colleges a decade ago. For families whose income over this time has not kept pace with inflation, it may be the case that a given college that was affordable to the family 10 years ago is not affordable today—but the idea that all of higher education has become universally less affordable to families during the past decade is simply not true.
The fourth point it may help explain why so many parents have the sense that college is unaffordable today, even though it was seen as affordable a decade ago. The Great Recession of 2008 wiped out huge chunks of the net worth of many families (much of it in the form of dramatically reduced housing prices, underwater mortgages, and stock market losses), and much of that net worth has still not been recovered.
So even if family income has kept pace with inflation over the past 10 years, family net worth often did not—and those families understandably feel that they no longer have the financial capacity to send their child to a college that they felt very much within their capacity a decade ago.
A bar graph in a recent article in The New York Times Magazine (June 22, 2014) illustrates this point emphatically. The average head-of-household net worth, for individuals aged 47 to 55, rose from $666,734 in 2001 to $756,540 in 2007, before dropping to just $610,109 in 2010. Even more dramatic declines occurred in younger individuals, who lost approximately half of their net worth between 2007 and 2010.
Moreover, family incomes in general have not kept pace with inflation. Between 2007 and 2012, the median annual household income in America, adjusted for inflation, fell from $55,627 to $51,017 (Providence Journal, June 29, 2014).
Finally, it is a mistake to think of affordability entirely in terms of money spent on tuition and room and board. There is also the opportunity cost associated with going to college: the value of four years of salary that a student is obliged to forgo when in college.
The opportunity cost—four years of earnings of the average high school graduate—is, across the entire range of higher education, substantially greater than net tuition. Interestingly, because the average income of those with just a high school diploma has declined in the past decade, the opportunity cost of going to college has declined as well—even as the amount students pay to be in college has increased. The decline in forgone income, however, is actually greater than the increase in out-of-pocket costs to go to college—and, as a consequence, the total cost of going to college, in inflation-adjusted dollars, has declined over the past decade, not increased. This is completely contradictory to what people generally believe, and what they find to be intuitively true—but it is a very important fact as one develops an accurate assessment of the costs and benefits of a college education.
Next week, we’ll tackle the problem of the student loan “bubble.”