Monday, December 08, 2008

College Getting Increasingly Expensive (As Usual)

For anyone that has been paying attention, it’s not news to hear that the cost of attending college has been increasing at rates significantly higher than the general inflation rate for the past 30 years (see NY-Times, MSNBC, CNN Money).

CNN (echoed by NYT) reports, “After adjusting for financial aid, the amount families pay for college has skyrocketed 439% since 1982.” But the rate is not steady. MSNBC reports that it has recently trended even more steeply. “The [past] five years have seen prices rise 31 percent above and beyond the general inflation rate for other goods and services — the worst record on college prices of any five-year period covered by the survey dating back 30 years.” The rise significantly outpaces the rise in medical costs.

Costs are up, but why?
While awareness of precipitously increasing college costs is common, having an understanding of the underlying causes is far less common. As for the steeper increase in costs over the past five years, CNN reports:
“College finance experts point to a record number of applicants in recent years as the baby boomlet comes of age (many of the more selective schools reported double-digit increases for 2008); that trend, coupled with growing demand for degrees (undergraduate enrollment has jumped more than 20% over the past decade), puts heavy upward pressure on prices. Dwindling support for higher education from cash-strapped federal and state governments doesn't help the situation.”
But this isn’t the whole story. CNN continues:
“Normal supply and demand can't begin to explain cost increases of this magnitude, though. If the usual rules applied, tuition would eventually stop rising because families would cut back enrollment, especially at the most expensive private schools, just as they curtailed consumption of gas once prices hit $4 a gallon.”
Without fully explaining her analysis, the CNN reporter concludes that the increasing costs are riding on “the perceived payoff … [by parents] that going to a brand-name school will one day make their children richer.” She surmises that the situation is “like home values during the housing boom or dotcom stocks during the late-'90s tech frenzy: Prices go up on sheer momentum.”

Maybe that helps explain the recent rise, but it hardly begins to explain the trend of the past 30 years. There has been steadily increasing market demand for people with college degrees. In general, people with college degrees earn more than people without them. But as I discussed in this Jan. 2007 post, a college degree may be more of an effect than a cause of higher income.

Despite what the CNN reporter says about reduced government support, government has dramatically increased efforts to ‘make college more affordable’ over the past 30 years. This includes scholarships, grants, tax credits, and—the biggie—subsidized education loans. Many politicians have proclaimed that everyone should attend college, as if college were the only road to success in life.

The effort to get more people into college has produced steadily increasing demand, as noted in this Jan. 2008 post, where I wrote, “The higher education industrial complex has been infused with vast amounts of taxpayer sponsored cash over the past several decades. With student demand exploding, colleges and universities have little reason to keep costs down.” In other words, as with so many other things government does, ‘making college more affordable’ has actually contributed to making it less affordable.

What we are seeing today is the increased demand for a diploma rather than the increased demand for an education. Colleges and universities have responded to this demand with grade inflation and dumbed down curriculum. This reduces the value of a diploma and increases the demand for post graduate diplomas.

The current economic downturn is likely to intensify the problem, since college enrollment tends to increase during hard times. As other opportunities dwindle, people seek more education to improve their job prospects. Also, as the NYT article notes, public universities tend to increase tuition and other student funded costs during economic downturns when other funding decreases. These increases hit students when they are already suffering financially.

College not out of reach
Still, for those that wish to pursue a career that benefits from a college degree, many public four-year non-research institutions offer the best value right now. MSNBC reports, “Including room and board for students living on campus, charges for public four-year colleges were $13,589 [last year]….” If one of these institutions is close enough to home, students can save even more money by sponging off their parents and living at home as long as possible.

While costs at four-year public institutions are also increasing far above the rate of general inflation, they’re still only a fraction of the price of attending a big name prestigious university. And most undergrad courses at the smaller public universities are taught by actual educators, not research assistants.

No one should take for granted that a college degree is the best road to success for them. It pays to do a cost-benefit analysis to determine the actual market value of the type of degree that might be pursued. And if college is the right thing, it pays to do a cost-benefit analysis of the value of gaining that degree from the various institutions a student might qualify to attend.

Last January, I linked to this Money Magazine article that shows the value of certain types of degrees. I would go a step further and compare the net present value of the future earnings and of the cost of getting the diploma to get a more accurate picture.

Don’t forget to factor in interest and the net present value of payments on any student loans that might be incurred. Some have complained that, thanks to student loans the most significant thing our young people gain from a college education these days is years of crushing debt. With prudence and proper planning, much of this problem can be avoided.

Getting a college diploma is expensive, and it is only becoming more so. If the CNN reporter were completely correct in her bubble theory, we’d see the bubble burst at some point. Then we’d see the cost of a college education drop. It’s difficult to conceive of that happening soon, given the long-term trend.

So before spending a load of (often borrowed) cash on pursuing a diploma, make sure it’s the right thing for you (or our student) and that you’re getting the best bang for your education buck.


Tom said...

Good points, particularly about NPV, etc.

One of the problems (in public ed too) is that the industry is highly depended on local qualified personal. In a "traditional" manufacturing business (e.g. Apple) or supply chain business (Amazon, Wal-mart), it's easier to find economies of scale, see the strategic value of increased production on an experience curve, etc., etc., etc.

As Clayton Christensen correctly pointed out, the cost of delivering personnel intensive products like education without obviously outsourceable (or offshoreable) process components has historically risen significantly faster than inflation. We're seeing that in pay disparities for starting teachers compared with industry.

There are strategies to improve productivity that can be applied (e.g. technology), but I think education is in the paradoxical place where it can't do them without money (because of the high downside risk of project failure), and they can't do them until money is tight (necessity is the mother of invention).

Scott Hinrichs said...

That is an interesting point, and no doubt scalability does impact costs. Some of the forays into distance learning aim to blunt this problem to a degree.

But there are too many examples of other extremely localized services, both public and private, that have not seen the kind of inflation we've seen in formal education costs. These examples run the gamut from food services to vocational training to participatory sports.

What is it about formal education that makes it so dissimilar from these kinds of things? Could the way we structure our educational bureaucracies have something to do with it, including how we seek to imbue personal prestige and create centralized bastions of elitism?

Tom said...

I put the emphasis in the wrong place--the emphasis is not on "local" personnel (although that is true). The key here is that education is a personnel-driven operation, where nearly every dollar is spent on people rather than on materials or supplies. The same is not true of food service (food prices are relatively stable) or participatory sports (scalability achieved by increasing number of volunteers).

I believe technological levers exist that can improve scalability, but (as I said above) the scarcity of dollars and the high ethical and social cost of failure prevent much experimentation. (It's extremely difficult to get an education effectiveness experiment through a university's ethics review board, so it's rarely done.)