For most of my childhood, my parents and the media put me under a constant barrage of pressure that emphasized higher education and the need to go to college in order to have a shot at a decent economic future. In fact, many argued, by the time I got to college a bachelor’s degree was probably not going to be enough, I needed a master’s degree and maybe even a doctorate one day. This was enough to scare me into staying in school, taking as many classes as I could, racking up as many degrees as I could, in order to face the onslaught of competition that was to confront me once I reached the real world.

I took all the toughest courses, bounced around different majors, economics, math, chemistry and engineering. Eventually I settled on a B.A. in math and a B.S. in economics before going on to receive a Master’s in International Finance. However after all the schooling, I found that I ended up starting from the bottom of the corporate rung against people who had been more focused, doubled up on classes and graduated in 3 years with a bachelor’s. It started to make me think, what went wrong? Why are we paying so much and spreading ourselves so thin in order to say we have a college degree?

Not only was this relevant to me looking back but is even more relevant moving forward now that I have a son who I would like to see attend college one day and see succeed. The question of why college is so expensive has crossed my mind many times and I would like to offer a few explanations that I think are some of the driving forces behind why the cost has become so prohibitive in the past 20-30 years.

More People Go to College

In economics and business, people always get into trouble when they start saying things like “supply and demand doesn’t apply here” this is definitely not the case when it comes to college in the US. Demand for higher education has increased dramatically in the past 60 years as you can see from the proportion of the population 25 or over that have completed 4 years of college or more.

This is a profound shift in the social fabric of the country. We went from 5% of the adult population having 4 years or more of college in 1940 to around 32% in 2013, an increase of 540% or about 2.6% annually over the past 73 years. There is no way that this proportion of the population attending college could increase so much given a set number of colleges and not have the price rise, so in theory more colleges and universities must have sprung up to meet the demand.

While there certainly seem to be more colleges than ever around, as everyone knows the price of college has spiraled out of control.

Although the chart above is not a story of a gradual and inevitable increase, it does show a slow creep from the cost of college in 1948. In addition, despite all the advances of technology in communication, that could help to disburse lectures and teaching, college seems to be the only industry not benefitting from technology in terms of lowering the cost. With the room, board and tuition at public schools averaging $19,548 in 2016 and a private school averaging $43,921, it begs the question, where is all that money going?

What They Do With All the Money

There are some areas of academic life that will always be at the forefront of technology and will require grants and funding in order to pay for them. However, if we look at college in terms of paying for a service and what you are getting out of it, the value has been slowly eroding away over the last few decades.

To me the most glaring example is real estate. My school was a constant construction site the entire time I was there and everything was new. In addition, the school purchased numerous private buildings in the area to turn them from private renters to mostly private student housing to university owned housing for students. Many schools are already the size of small cities in terms of their population and administration and they are just getting real estate to match that size.

In fact as as a recent report pointed out many small and less selective colleges even used building as a strategy to lure students in with flashy facilities, only to not have as many students as they expected enroll and ended up saddling the schools with debt burdens that they have to try to figure out how to make up. If they don’t get alumni to donate and the state won’t subsidize the costs, the only way to get the funds to pay back that debt is to increase tuition.

Recreation facilities for students and sports facilities for players are top notch and in some cases, better than what you would find in private industry. Take a look at the University of Oregon football team’s weight room and the description

The 25,000-square foot weight room is fortified with Brazilian Ipe wood floors, which have a reputation for being dense enough to bend a nail. Above the free weight and plyometric area is one of the world’s only 40-yard electronic tracks.

One excuse that many university presidents give is that the government has scaled back their funding of universities at the state and federal level. In a New York Times opinion piece in 2015, one law professor pointed out;

In fact, public investment in higher education in America is vastly larger today, in inflation-adjusted dollars, than it was during the supposed golden age of public funding in the 1960s. Such spending has increased at a much faster rate than government spending in general………

……In other words, far from being caused by funding cuts, the astonishing rise in college tuition correlates closely with a huge increase in public subsidies for higher education. If over the past three decades car prices had gone up as fast as tuition, the average new car would cost more than $80,000.

The author points to the fact that although state funding has increased, so has the proportion of the population going to college so that net public spending per student has actually dropped slightly.

However, with more students come more bureaucracy and as noted by a professor at California Polytechnic University, Pomona, although full time faculty staffing moved up 3.5% between 1975 and 2008, the administrative staff grew by 228% over the same period for the California State University system.

When you factor in that many college presidents are now making salaries in the millions, it starts to fit a pattern seen in government and large private companies of creating budget wasting bureaucracies and pet projects by management (think that fancy real estate) that end up being time and money wasting endeavors, the only difference being that the universities get to hike their tuition or go cap in hand to the government or donors in order to get more funds.

How Much Will College Cost in the Future?

Hopefully this type of wasteful spending and the debt that students are stuck with after has gotten to a point where people are starting to question why they are paying so much to attend college and starting to actually ask the question, is it all worth it? This sentiment may put a damper on tuition increases going forward but for people having kids today it still begs the question, how much will college cost for my kids?

If tuition increases in the next 17 years at the rate that it has increased in the last 10 years at 6.5%, tuition will look something like this in 2034;

However, if we consider a pullback in increases and a slowing down of the wasteful spending as of late and see a slower period of tuition growth at 5%, the cost will be lower but still will look something like this;

In each of these cases, on the high end of a private school, students would need $545,000 in the 6.5% growth case and $422,000 in the low growth case to pay for 4 years of school.

If we were to break that down in terms of what one would need to save per child, in the first case, the parents would need to stash away $14,597 per year for 17 years if we assume a real growth rate of 6% on their investment. For case 2, the parents would have to save $19,317 per year assuming the same growth rate of their investment in order to be able to meet college costs.

What if We Made it All Free?

Is college good for society as a whole? I would argue yes, a more informed and critically thinking population makes for better public discourse holds leaders more responsible and can increase innovation and technology that drives the economy forward.

Politicians are constantly emphasizing that they would like more of the population to attend and complete college and that they are willing to go to great lengths that the government will do all it can (or get out of the way, depending on your leanings) in order to ensure that even more attend. But we have to ask ourselves, if everyone had a college degree, is it really worth anything anymore? Or would it just go the way of a high school diploma, a necessary milestone on the long journey to a career?

There are plenty of examples of countries that give college away essentially for free, especially in Europe. However out of every top 100 universities in the world list, the US universities take up a large majority of the slots and almost all of the top 25. Although the US schools are the world’s most expensive, the students end up paying for world class facilities, researchers and the prestige that attracts even more money to those schools.

I personally have met a lot of people who have attended foreign universities and can say I don’t see a great level of difference in terms of their education compared to much more expensive universities, however they do not have nearly as many Nobel prize winning professors and huge research budgets that the American schools do. There is something to be said about having access to some of the greatest minds in the world while attending a world class school and if you plan to be a scholar that is great. However, while the rest of us are just looking to get our foot in the door of the professional job market, being cost conscious may pay off more than we realize in the long run.

 

 

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