COLLEGE TUITION: NOBODY PAYS RETAIL, EXCEPT YOU

The increasing cost of college has been a headline topic for over twenty years.  It basically goes something like this: annual college costs have risen x% a year, while the rate of inflation is only y% a year.  For the sake of numbers let’s use 3% and 9%.  While that 6% differential may seem inconsequential, the power of compounding over the decades has yielded a number like this one cherry-picked from an article linked to below: Since 1985, the overall consumer price index has risen 115% while the college education inflation rate has risen nearly 500%.  

All of the above is pretty much undisputed: college costs have risen much faster than inflation.  What is in contention, is the reason “why?” Some articles take the angle that college presidents and senior staff are paid outlandishly, others about how big capital projects like luxury dorms, lounges, and athletic facilities have added to costs.  Of course these type of stories have been overshadowed since 2008 by the ramifications of the higher tuition costs: the huge increase in student debt and defaults.

Lost in the haze of this outrage and vitriol, is the real reason for college costs gapping inflation: few students pay the full sticker price.  All this talk about college costing 50, 60, or 80 thousand a year is applicable to very few.  Unfortunately, if you are reading this website, you are probably one of that few.  Furthermore, you are probably not a member of the uber-wealthy, for whom this is a trivial amount.

What you are though, is a subsidizer of all those who do not pay full price.  That is because colleges came to realize that their tuition rates were very inelastic: the increases lead to very little drop off in demand.  At the extreme, think of it this way: if your child gets into Harvard, are you going to say “no” to her because the cost is $70,000 instead of $50,000? This reality seeps right down the line as we get to lesser colleges, be they Lehigh, Syracuse, or an out-of-state enrollee at Wisconsin1.  You’re going to pay whatever the price is to get your kid into the best college he/she qualifies for.  Armed with this knowledge, colleges yanked their fees up tremendously, then doled out the differential to those who couldn’t afford to pay the full price.

Why was this done?  You’ll read a lot about socio-economic diversity and other feel-good stuff, but the reason they did it was because they could.  Colleges, like any organization, are competitive, as are those that run them.  Pricing tuition in this manner allows the college to attract the best pool of students, which helps maintain college rankings and a whole host of other attributes2, without which any college leader would be put under great scrutiny and probably out of a job.  What college head wants to explain why their average applicants SAT score plunged by 100 points?  “Well Mr. Guy-whose-name-is-on-the-school-library, we decided to buck the trend and offer a lower tuition price to every applicant, instead of an even lower one to just 90% of the student body.”

Implicit in the full sticker price is a $20,000 to $30,000 subsidy, that identical subsidy is paid whether one makes $300,000 or $3,000,000 or $30,000,000 a year.  It makes the middle class flatter because everyone who doesn’t get financial aid is literally subsidizing it for those do.  That is why college is the great equalizer, and the upper middle class gets crushed again.

College Costs Top Inflation, Even With Financial Aid“Schools are very concerned about having people understand that most students don’t pay the full sticker price,” said Sandy Baum, a research professor at George Washington University’s graduate education school and a senior fellow at the Urban Institute. “But the problem is if you announce your net price and some students have to pay more than that, they get very upset.”

College Costs Out of Controla pretty standard headline

 

  1. Whether one should pay for your kid to go to these schools is a topic we’ll cover later []
  2. including the above mentioned feel-good and socio-economic diversity stuff []

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  1. Pingback: HEALTHCARE AND THE UPPER MIDDLE CLASS - The Shadow Banker

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