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.