Why Does College Cost ‘So Much’?

A few posts ago I gave my opinions on why people should stop complaining about the price of college these days (College is Not a Yard Sale ). After sitting in a seminar given by an economics professor (and president of a liberal arts college) about the costs of higher education, I felt the need to share *objective data on the subject. For clarity, I am dividing this post into general data, data relevant to public colleges, and data relevant to private colleges.

General Data Points

  • There are 4,314 degree-granting institutions in the country
    • These schools serve 21 million undergraduates
    • 40% are public colleges
    • 38% are private colleges (3-4% are liberal arts)
    • 8% of those are for-profit colleges (up from about 3% just 10 years ago)
    • (the remainder are 2-year or vocational colleges)
    • The graduation rate for online education is less than 10%; the default on loans rate is 15% for this population  compared to 5% for private college graduates (I have another post outlining my distaste for online learning: My Beef with Online Learning )
    • 15% of students pay more than $30,000 a year for college
    • Almost 60% of students pay less than $12,000 a year for college
    • The average amount of debt per college graduate is $25,000.
      • The average difference between yearly salaries of college graduates and high school graduates is $30,000
      • The worst the economy, the higher college enrollment (because people can’t get work so they go back to school with the hopes of improving their likelihood of being hired)
      • Household incomes have decreased across all SES groups since 2000 (in some groups as large as an 11% decrease)

Public College Facts

  • While public colleges comprise 40% of all colleges, they educate 76% of undergraduates
  • As the economy gets better, the cost of public education goes down
  • As the economy gets worse (like now), the cost of public education increases because of lower state appropriations (i.e. they get less money from the government so they have to make up the difference by increasing tuition)
  • Since 1981, the cost of a public college education has increased 3.5x (or 350%)
  • 50-60% of the cost of attendance at a public college is subsidized (when appropriations allow for such a large amount)

Private College Facts

  • While private colleges comprise 38% of all colleges, they educate only 15% of undergraduates
  • As the economy gets better, the cost of private education rises (because more families can afford to pay)
  • As the economy gets worse, the cost of private education remains stable (with appropriate increases for inflation)
  • Since 1981, the cost of a private education has increased 2.8x (or 280%)
  • Approximately 30% of the cost of attendance at a private college is subsidized by the college (through gifts, financial aid, and the endowment)

Summary Points

In the words of the presenter, ‘this is the perfect storm’. What she means is that we have 3 things that give the illusion of significantly higher college costs: increased enrollment, increased costs to meet enrollment demands, and decreased family income.  The former two will always rise and fall together, but with the addition of the third, the gap between what people can pay out of pocket and the cost of college is much wider than it has been for 30 years. College tuition is determined by the intersection of supply (operating costs) and demand (students). Non-profit colleges do not make money. Any extra money at the end of a fiscal year is reinvested in the college endowment. Conversely, 85% of the profit made by for-profit colleges is from federal funds (e.g., Pell grants, federal aid), and it is not reinvested in the college (it often is moved into the private sector).

The point here is that the general public is outraged at tuition prices, yet the reality is, most college students are not being ‘overcharged’. In fact, they are almost always undercharged (even full pay students) because of subsidies. What is it that you want colleges to do? Lower the price? With that comes lower quality. Choose your choice.

Rock the Vote.

*Sources for these data: The College Board, Annual Survey of Colleges; NCES, Integrated Post Secondary Educational Data System (PEDS); U.S. Census Bureau, Current Population Survey

7 comments on “Why Does College Cost ‘So Much’?

  1. KM says:

    Can you supplement this data with median instead of just mean data? I think adding in those points would really add an interesting angle.

    1) Shouldn’t increased enrollment lead to SOME reduced costs from economies of scale?
    2) Where is the causation (not merely correlation) of the above facts that lead to higher prices? 280% and 350% inflation in 30 years is still a pretty big deal.

  2. 1) This isn’t my data, so you would need to consult the sources I provided if you want more specific information about medians.
    2) In what ways would increased enrollment lead to reduced costs? It makes good sense that for every student I add to campus, I need to find more money to subsidize their tuition OR choose not to subsidize at all. If the cost of attendance is 45k a student but they are only paying 29k, then for every student I enroll, I am losing money hence the increased tuition to recover some of the costs. And even if every student was a full pay student and we didn’t have subsidies, costs would not go down. I still have to provide space for housing and classrooms, enough food for each student to have 3 meals a day, increased access to technology, and all the other things associated with college life.
    3) In education you can almost never have causation because you cannot control for confounding variables. For example, I can’t say that the cost of tuition has gone up solely because of increased enrollment. The interactions between increased enrollment, subsidies, students’ academic aptitude, the number of students in a particular major influence my operating costs and therefore, my tuition. There are dozens of variables affecting a single variable in education. This is why making causal claims in education is heavily frowned upon.

  3. KM says:

    1) Not gonna get into a data debate, just pointing out that the sample provided could be enriched.

    2) I don’t see where your understanding of economies of scale account for several points:
    a) Overall profitability of colleges/universities (Having been a part of the budgeting process for two very different institutions in very different economic climates, I can pretty fairly attest that most institutions are not running deficits. Declining profits? Possibly.);
    b) I can’t get into the cost shifting argument right now (not enough time), so I’ll yield it in the spirit of moving forward;
    c) Quick example on economies of scale.
    Say a university meal plan costs $5 per meal. A university has to pay for one week’s worth of meals for 100 students (2100 meals) each meal at that volume costs $3 per meal (covering the fully burdened rate to run a Food Service Program) ($6300 per week of food). The university makes ($4200 profit) per week.
    If the university increases enrollment to 200 students (4200 meals), assume that the cost to run the program stays constant at $3 per meal ($12600 per week of food) (although it would likely go down because of volume discounts and sunk costs to run Food Service) The university’s profits now go up to $8400 profit per week.
    This holds across most types of costs that lead to some type of return (professors, buildings, books) (e.g. in inflation adjusted dollars its probably cheaper to build a super-cluster like East Wheelock than it would be to build a new Rip-Wood-Smith, maybe even Shabazz Hall)

    3) True, in education. But this is data from an economist and while direct causation can never be statistically proven, degree of causation can be statistically estimated through regression analysis. Just wondering if anyone ever bothered to do it. Since my SPSS is kinda old, I’d prefer not to have to do it myself.

    • Dude, Im not an economist so your points in number 2 should not be directed at me. I did not gather this data, but the sources are validly reviewed sources. If you want richer data–and I am positive it is in the original report–consult it. I’m not debating you, I am directing you to the answers you seek. And as for regression analyses, again–consult the original data. We always do predictive analyses in education and because it is common, that information is there. However, no matter how much you would like it, causal statements will not be present. It was not my intent to analyze massive data sets in this post; I was simply relaying summary points. For further information, I encourage you to consult the original report(s).

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