Monday, October 26, 2009

The Problem Of College Costs

The American college system is the best in the world. Eight of the top ten, nineteen of the top twenty-five and thirty-eight of the top fifty universities are in the United States. But there is a problem: college costs too much. And guess whose fault that is. . .

As a people, we want to encourage our fellow citizens to go to college. Not only do we need more doctors and engineers, but study after study shows that people who go to college contribute more to our economy than those who don’t. The greater the level of education, the lower the likelihood of unemployment and the greater the income. (See chart below).

In fact, studies show that people who complete college are likely to earn as much as $800,000 more in their lifetimes than those who don’t go to college. The Organization for Economic Cooperation and Development (OECD) claims that even after considering tuition fees, lost earning during college and increased taxation on future income, college graduates are still as much as $82,000 better off in net present value terms than people who only obtain a high school diploma. That means completing college is like having your bills paid for, receiving an amount equal to what the high school grad has earned while you were in college and still being handed $82,000 today.

So far so good. But there is a problem. This value keeps dropping because the cost of college is spiraling out of control in the United States.

Since 1985, the average cost of college tuition has risen 412%. At the same time, the consumer price index (a gauge of inflation that actually overstates the inflation rate) rose only 100%. In other words, while that cheeseburger or stereo or car that you bought in 1985 would cost you twice as much today as it did in 1985, college would cost you four times as much. Take a look at the graph on the right to see how college costs have far outstripped inflation.

College tuition, at a four year public school, will average $7,020 this fall. That’s $31,000 in four years once you factor in the continuing effects of price inflation. Average tuition at private colleges is $26,273 a year. This works out to more than $110,000 after four year. (And none of this includes room and board.)

This is a problem.

As college becomes less valuable, fewer people will attend. That means fewer doctors, fewer lawyers, fewer engineers. It means that jobs need to be sent overseas (or overseas workers brought here). That means fewer support jobs, a smaller economy, and less tax revenue. It means our economy will become more dependent on foreign countries and that the things that give us an advantage (particularly technology) will soon be lost with the advantage being shifted overseas.

So what is causing this? The government.

In 2009, $180 billion will be spent on college tuition in the United States. Sixty-five percent of that, $117 billion, comes from the federal government via grants and loans. And if you look at college tuition over time, you will see an amazing correlation between the amount of aid made available by the federal government and the price of tuition. Look at the chart on the left. Compare the rise in financial aid with the rise in college tuition costs -- it’s absolutely correlated. Now it’s true that correlation does not mean causation, but there are no other realistic factors to explain this correlation. The truth is that colleges have simply raised their fees to eat up the available aid.

Interestingly, if you eliminated federal aid, the amount spent on college tuition today would be roughly 200% the amount spent in 1985. In other words, college tuition would be at the same level as the inflation index for other consumer products and services if you excluded the federal government’s involvement.

What does this tell us? It tells us that all of the financial “aid” that the federal government has given is a chimera. It’s a trap. Every penny of financial aid given to help students afford college gets eaten up by higher tuition costs the moment it is given!!

Basically, while the feds claim to be helping people afford college, they are in fact subsidizing colleges with loans that work like a long term tax on students. Consider it a “professional tax.”

Think of it this way. Imagine that you could buy a cheeseburger in 1985 for $1. But in 1985, the federal government decided that it would start “helping you” to afford that cheeseburger. Thus, the government loaned you money to buy the cheeseburger. But each year, the burger joint raised the price of the burger dollar for dollar with the amount the feds made available for loans. Today, the burger costs $11. The feds will loan you $10 to “help you.” But is that really help? You are still paying the original $1 yourself, only now you are being saddled with a $10 loan just so that you can buy the same burger.

So it will come as no surprise that Obama is proposing to increase the amount of federal aid available again. Liberals will congratulate themselves for helping people go to college. Colleges will rejoice that their subsidies will continue. And college grads will find themselves under an ever increasingly, crushing debt load. College grads are already leaving college with an average debt load of $20,000, with grad students (lawyers and doctors in particular) averaging $91,700 last year. (And don’t forget that with interest, students will pay back far more than the amount of the loan.)

In fact, most of what the government does to help you is counter-productive. Have you ever heard of these programs where you put money into an account now so that your kids can go to college in the future? These are called 529 Prepaid Tuition Plans. If you’re thinking about one, look into it carefully. These accounts can have various traps -- from the funds being lost if not used for college to requiring that the recipient go to school in a particular state. More interestingly, while this sounds like a great way to save for college because these plans are usually tax free, you may actually not be better off. Depending on the school and how the fund is set up, any amount in the fund may end up merely offsetting need-based grants. Thus, you will turn over that money, but your kids will still end up with the same amount of loans. (Public schools may not do this, but private schools can.)

Every time the federal government ups the financial aid limits, all we do is put students further in debt. It strikes me that it’s time to cut off the federal spigot for a while and see if that brings the cost of this cheeseburger back in line.


LawHawkSF said...

Andrew: As I mentioned the other day, the costs at public universities have gone up at almost the same rate, but even less justifiably. First, the taxpayers'money is used to fund the university, and then when they figured out that students could afford much higher fees with government loans and subsidies, the costs went up even though the base costs changed only with the base rate of inflation. The difference is accounted for by frivolous majors, grossly overpaid instructors, even more grossly overpaid administrators, and general profligacy. Run out of money? Don't worry. There's always more where that came from.

And another contributing factor is rabid egalitarianism. Everybody should have the right to go to college, qualified or not. Why? Because you can't get a job without a college degree. Well, that's because they give degrees to idiots, so if you don't have one, you must be stupider than an idiot. As I've said before, I can find a dozen PhD's who can't find their own way to the bathroom, but I play hell finding a good auto mechanic.

LawHawkSF said...

Andrew: I should add that many of the smartest and most competent people I know have high school diplomas or less. That is largely attributable to the fact that they went to school twenty to thirty years ago, when an education actually included an education. I place the average college graduate today at the same academic level most of my generation had achieved by 9th or 10th grade. And we did it entirely without political indoctrination.

Writer X said...

This is depressing. I agree too with LawHawk that much of the money, particularly at large public universities, goes to fund gads of worthless administrators and programs. There is so much waste and the answer is never to streamline or cut. Growing bigger serves to hide the problem. I never really thought about federal aid going up in direct correlation to tution. That is troubling and yet how else to explain it?

AndrewPrice said...

Writer X, The relationship is fairly obvious, but no one talks about it because it's easier to just vote for more money for student loans.

Who wants to be against sending kids to college? If you ask either party, both think it's a great idea to keep upping the amount available.

And the reason they get away with it is that this is a hidden subsidy. The people who take out the loans are just happy to be able to pay for college -- they don't understand that college would be so much cheaper if there were no loans. The taxpayers don't care because the money gets paid back. The schools run around talking about how valuable the degree is, "so don't worry about the amount of debt you take."

But the consequences are actually quite dangerous. Not only will we have a shortage of professionals, but how does a doctor move to a small town with a debt that can only be paid back by working in a huge city?

Joel Farnham said...


The way to find a good mechanic, is to go to an auto parts store and buy some wipers and ask the guy who puts them on who is the best mechanic around. If the parts store won't put them on, return them and go to the next one down the line.

AndrewPrice said...

Lawhawk, You're right about the money going to frivolous majors and overpaid administrators. So much of what is taught in these departments is utter crap.

I disagree about the difference in the quality of education though. Any of the sciences are far superior today. Medical school is far more vigorous. And even many law schools are turning out much more skilled lawyers than what came before.

LawHawkSF said...

Andrew: I'm afraid I can't entirely agree with you. The graduate and professional schools are turning out dedicated types at about the same rate as before, but we were talking about college grads, the vast majority of whom are near-ignoramuses. And I don't even want to get started on what I'm seeing the law schools turning out.

AndrewPrice said...

Lawhawk, We'll have to agree to disagree. But in any event, the statistics are clear that not having a college degree today is the kiss of death for long term income potential.

LawHawkSF said...

Andrew: And that we can agree on.

AndrewPrice said...

Excellent, I'll put away my dueling pistol . . . right after you do.

LawHawkSF said...

Andrew: Silly you. I have an AK-47.

Jocelyn said...

I find it astounding how expensive college is, I just graduated a few years ago with a B.S. and I'm glad I left when I did as tuition has increased 40% here almost quarterly here in California. I never realized the correlation between federal aid and tuition, to me it makes sense, very interesting correlation.

The city I live in southern Cali just voted on a Parcel tax to take 92 additional dollars from homeowners to help fund our school system. Why does education always require more money in order to work properly. What happened to just having educated discussions and being a well read individual? What did people do decades, if not hundred years ago for education? They certainly didn't have all our fancy requirements.

I debate with people at my work all the time how money does not solve all problems, they never have a real answer other than, "it's for the children". Sometimes real work needs to be done, you can't just throw money at it.

AndrewPrice said...

Jocelyn, College costs are getting worse year after year -- especially at private schools (the averages really hide how bad some of the tuition at some of the more famous schools really has become).

And I do think that this is all about the federal government pouring money into colleges. Like everyone else who has ever received a subsidy, the schools simply absorb this money like a sponge rather than making school more affordable.

I think the issue connecting money with "fixing education" arises from (1) union demands for more money and (2) legislators being unsure how to improve education, so they just throw money at it, hoping to fix it. In reality, tossing good money after bad usually just leads to more problems. And if you look at education today, you will see these vast amounts of administration that absorb the money as fast as it is given and that really serve no legitimate function.

In terms of fixing education, I think that you are right -- that we know what it takes to get a good education, and that's where any reform should start.

StanH said...

We need more lawyers? I agree in our society a college degree is an imperative, and am pushing my kids hard in that direction. I’m fortunate in that regard, my kids are bright with conservative/libertarian beliefs, …I wonder how that happened? They both want to separate themselves from the pack, yes! The days of lighting out into construction jobs, auto mechanics, or a damn fry cook are gone. The twenty million Mexicans will work harder, and for less, keeping the jobs our kids used to do, this is not good. My kids are hip to the value of an education. The wise man once said, “we all can’t be poets,” but, in America we are losing that choice.

AndrewPrice said...

Stan, Sounds like your kids are smart kids! Best wishes to you and to them on their college plans.

Wanting to excel is really the key to getting the most out of college. College is one of those places that only gives you out what you put into it.

Good quote, by the way.

(P.S. We need more lawyers for kindling, after we run out of oil! ;-))

Tennessee Jed said...

I always like to link the spiraling costs of education to the healthcare debate. I truly believe there is an incredible amount of waste in higher education just as in healthcare. Government does fuel the problem in my opinion (just as in healthcare.)

Back in the 1980's when Japan was kicking our butts, corporate america began to learn about process improvement and cost control. If you truly have to compete, successful businesses become really good about wringing out excess costs. You must do this in order to gain a competitive price advantage and provide a superior rate ofreturn to your investors.That has never been the case with government, because they have infinite capability to run at a deficit. There are a lot of department heads in government and at educational institutionsthat keep padding their budgets so they don't lose that budget. So much non mission critical spending it is unbelievable.

Government just keeps picking up the tab, and the institutions keep raising tuition. I think if they must be involved, the aim of government should be to make college more affordable so more people can purchase the product. It is basically the old game of cost vs. price. If somebody else (taxpayers) picks up the tab, that is merely subsidizing costs that continue to go up and up.

Maybe we would do better to come up with incentives which reward schools that have the best ratio of quality to price. I am up way past my bedtime so I'm not doing a great job of making the point, but I think you get the idea.

AndrewPrice said...

Jed, I would argue that each of the areas in our economy where there are significant problems (health care and education being prime among those) are the very sectors where the government has forced its way into the sector "to help" us.

The experience of Eastern Europe showed clearly that government cannot run business and that subsidies are thoroughly destructive. But sadly, some people refuse to learn that lesson. And when they scream "somebody has to do something," the first answer is almost always to pour government money onto the fire.

Tennessee Jed said...

Andrew - I totally agree, being a proponent of the adage "the government that governs best, governs least," although there is certainly a role for government to play. I have no philosophical problem with, for example, congress passing legislation attempting to define what constitutes acceptable industrial waste removal. It seems too easy for government to end up in the pocket of special interests. At the end of the day, my philosophy is just the minimum amount of regulation is generally the best.

patti said...

my day job is helping kiddos get into college. last week, i helped one private school student(college prep school) with a college application essay. it was incredibly bad, but the english teach, who helps them with these college essays, had given the student an A. an A?!?! it deserved a D, at best. this kiddo is NOT educated but will be able to get into a private university. it's disheartening. parents think they are giving a valuable education to their children by spending unbelievable amounts for private school, and these students would have been better off self-taught.

for the most part, a degree from a college has become a joke. it has NOTHING to do with education. as with most things, it's about the money.

USArtguy said...

I have felt for many years that the "help" government gives is a cause of higher tuition. Thanks for verbalizing (writerizing?) this for me. In the city limits of our town of about 120,000 with an area population of around 300,000, we have three colleges and a Tech-School. The most prestigious one is sometimes referred to as a Midwestern Ivy-league school. I've heard it has been in the top ten several times over the years as one of the most expensive in the US. It is a private school but it accepts all kinds of money. A few years ago I found out that MORE THAN 90% of the students there receive some kind of financial aid! ????

Admittedly, I'm not privy to the specifics of how institutions of higher learning are funded, but still... that just sounds crazy to me. Add to that the student population at said university has been declining for over a decade. The formula they seem to use year after year is: be one of the most expensive schools + declining student population + >90% aid = (justifies) raising tuition. I swear the new math is lost on me. It seems to me that if they would care a little less about their image, cut their tuition in half (or more) and allow no more than 10% of their students to have financial aid, their student population would skyrocket. Across town, the public university has done something similar, though I don't know what percent of the student body is getting aid. Yes, they do receive public funds but I know they have tried limiting their tuition (which is less than half of the expensive one), kept their financial assistance to more hardship cases or scholarships and have seen tremendous explosion of growth.

USArtguy said...

I don't know how endowments figure into the cost of running a university, but some weeks ago I heard Rush talk about a (California?) college thinking about soliciting a government bailout for some reason -- all the while having over one billion dollars in donated money. How can that be?

AndrewPrice said...

Patti, It's shocking how they let some students just keep moving up the system without trying to fix their problems. How can someone graduate from high school if they are illiterate? Seems impossible, but it happens all the time. Shouldn't someone, somewhere along the way, have failed them? Or made them take remedial classes?

AndrewPrice said...

USArtguy, Colleges were talking about wanting a bailout because they put large portions of their endowments into hedgefunds and they lost their shirts last year.

The thing about the system is that they talk about giving out grants, but those are few and far between. Instead, they let students get loans -- and then claim that the school has little or nothing to do with that. But they are relying on the ability of students to get loans to raise the price of tuition.

As long as the government is going to hand over enough money to meet tuition, the schools will have no incentive to cut their costs.

patti said...

andrew, a byproduct of what i do is the backlash from the students AND the parents. to point out an educational deficiency after they have paid their money to an institution they had faith in to actually educate their kiddos is like pointing out something in someone's teeth. we can see it, but they can't. at least they can't without considerable effort.

~ did i get it? no? now? no?! gaaaa! ~

it saddens me to know this is the norm and not the exception.

MegaTroll said...

Interesting article. I hadn't thought about the effects of college becoming too expensive, but you're right. This is creating a serious problem.

AndrewPrice said...

Patti, I understand that parents are a serious problem for many teachers. Well, let me rephrase that. . . parents who won't accept the idea that their kid isn't perfect are becoming a problem. I've even heard of parents threatening lawsuits over grades. Strangely, I seem to remember a time when parents expected their kids to excell, not just demand that their kid be treated like they've excelled.

AndrewPrice said...

Thanks Mega. It is a problem that should concern us. We are pricing professionals out of smaller communities and soon we will price them out of the country. That's going to be bad for all concerned.

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