A few years ago I wrote a post about how much college would cost in the future and made reference to where tuition money goes when it is spent by a college or university. I noted that during my time at both universities I attended for my undergraduate and master’s degrees, the campuses were constant construction sites and seemed to be in a never ending cycle of building, remodeling or updating. I also noted that some universities had sports facilities that were superior to those of professional for profit sports teams, an irony not lost given that most colleges and universities are non-profit institutions.

My conclusion was that I didn’t believe college costs would increase as fast as they had in the past few decades and therefore wouldn’t need to devote as much as some advisors recommend to my son’s 529 plan. Of course this could turn out wrong but my hedge would be my personal investments, which would give me year another incentive to save and invest just in case.

I wanted to revisit that topic in more detail for this post and started as always, to dive into my normal research on the topic. What I found though, started to pull me in a different direction and ask the question, should we really be that worried about the cost of college at all?

Are the Typical Arguments True?

Most colleges and universities make an argument as to why their costs are increasing that usually goes as follows:

• Colleges and Universities are dealing with more students than ever. It’s simply a case of supply meeting the huge demand and prices adjusting.
• Declining public funds are to blame for shifting costs into students. States have not made higher education a priority for their budgets and schools are just trying to keep up. Unfortunately this means that they will have to shift some of those costs onto the students when state funds dry up.

The first point may have been true in decades past. Baby boomers, Gen X and millennials attended school in ever high proportions of their respective populations. As of the last 10 years and post the Great Recession however, this has not been the case.

Source: NPR

Granted that this chart is since 2011 and from 2009 to 2011 enrollment grew. The strong economy and low unemployment since 2011 however can take some of the credit for falling enrollment.

The other factor driving this is that the number of high school grads is flat. This is a demographic trend that started 20 years ago when birth rates fell and isn’t going anywhere in the near future, assuming high school graduation rates stay steady.

The other argument has some truth to it but only for public schools. Private schools do not get direct apportions from state budgets like public schools do, although they get a back door subsidy from the government in the form of low interest student debt that can be used for private schools. Public school tuition has indeed seen an increase in tuition at a greater rate than private schools but at a rate that is not as eye popping as you would think.

The below chart I grabbed shows increases in the past 30 years for the average college tuition for public and private schools.

Source: Business Insider

This chart takes into account inflation so the cost of college is indeed rising. Keep in mind though that this is over a 30 year period so the longer we go the more small changes will build. The chart is a bit deceiving in the sense that it seems as if private tuition is rising faster than public school tuition which is not the case.

If you divide the actual figures, public school tuition rose 212.5% over this period while private school tuition rose by 128.3%. When you annualized these figures they come out to public school tuition rising at 3.87% annually and private school tuition rising by 2.79% annually.

If you factor in increased college enrollment over the years which is up 54% over the period from 1987 to 2017, this explains about 75% of the increase in private school tuitions and a bit less than half the increase in public school tuition.

So there seems to be some truth to their argument that lower public funding and increased enrollment are to blame in the past. This is not likely to be the case in the future. Assuming the high school graduation rate stays constant, the number of high school grads is expected to start falling some time in the mid 2020’s.

Source: Bloomberg

So if public funding were to continue a decrease we could indeed see costs of public schools rise but the numbers show they can’t hide behind increasing enrollment numbers for tuition increases going forward.

The Debt Story

The media loves the narrative of the private liberal arts college student who works at Starbucks and has 6 figure debt. This just isn’t the case for the overwhelming majority of college graduates though.

The 2018 the figure for debt on graduation from the Federal Reserve is $29,800. Considering that the median college grad earns a $20,000 premium on earnings compared to a high school grad, this means that a four year college degree should pay for itself within only a few years.

The true problem may be people that attended for profit schools that ended up adding no value and people who follow the college is the best option for everyone narrative and end up going to school then dropping out without completing a degree. A quarter of this particular demographic ends up defaulting on their student loans.

In addition, most of those people who attend private for profit schools or drop out of college tend to be older and from more modest backgrounds. They likely attempt to follow the seemingly well intentioned narrative on going to school but don’t have the same guidance as someone whose parents may have completed a 4 year degree or higher. This increases the likelihood, I believe, that they can be led astray from the traditional path by for profit schools who are just after a buck or doesn’t prepare them for the financial hardship that students have to endure at 4 year schools, especially if they are working to support themselves or a family at the same time.

Some additional interesting facts that work against the student loan crisis dialogue are the following:

• A third of college grads who earn a 4 year degree have no debt upon graduation at all.
• Low income students only hold 11% of all outstanding student loan debt.
• Almost half of the $1.3 trillion student loan debt is held by 25% of graduates who are making a high income.

Conclusion

Apart from the point that states are cutting funding to schools, there seems to be an argument that college costs will not rise as quickly in the future and the student debt issue is not at a crisis level.

There is an argument to be made that those who are not able to finish school or attended shady for profit schools may be good candidates for some form of debt forgiveness as it will impact lower income people to a greater extent. The biggest impact in terms of falling enrollment over the past few years has been in the for profit space.

Source: Student Clearing House

There is also a point to be made against making college free for all as this will be primarily a giveaway to the middle and upper classes who already are doing well. Forcing colleges to contract spending with the falling enrollment will also push them to be more efficient with the funds they have and cut down on waste. I can’t make a good argument as to why a college president needs to fly on a private jet.

Another way that colleges have attempted to fill the gap of lower state funding are to shift costs onto private investors. These attempts are also running into roadblocks. Why students need a “luxury dorm” at Oklahoma University is beyond me.

These points are something for voters to think about as candidates and the media push the idea of free college. Not many seem to be pointing out that this would be a giveaway to the already well off. If the intention is to really help people do better, maybe the free college discussion needs to shift to how better to get first time students to complete college and stress the employer value of a 4 year degree.

The information provided by www.cashchronicles.com is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney or other professional to determine what may be best for your individual needs. www.cashchronicles.com does not make any guarantee or other promise as to any results that may be obtained from using our content. No one should make any tax or investment decision without first consulting his or her own financial advisor or accountant and conducting his or her own research and due diligence. To the maximum extent permitted by law, www.cashchronicles.com disclaims any and all liability in the event any information, commentary, analysis, opinions, advice and/or recommendations prove to be inaccurate, incomplete or unreliable, or result in any investment or other losses. Content contained on or made available through the website is not intended to and does not constitute legal advice or investment advice and no attorney-client relationship is formed. Your use of the information on the website or materials linked from the Web is at your own risk.