I ran across this article featured on a blog done by a friend of mine, Jeremy Kisner, of Surevest Wealth Management in Phoenix, AZ. The piece was written by Peter Bos, a summer intern at his firm and a sophomore at the University of Michigan. It's a well-reasoned analysis of the problem that at least shows this young man is getting a good education -- and provides some evidence that we are getting a decent return on our outsized investments in these institutions of higher learning.
Over the last 40 years, the cost of tuition has really skyrocketed, rising at an average yearly rate of 6% above inflation. This has led to tuition increases of 284% for public schools and 210% for private schools.
You know it’s bad when costs have increased at twice the rate of medical care, as seen below.
This substantial increase in tuition has led to an explosion of borrowing through college loan programs. Students and families are borrowing an average of $100 billion a year to pay for college, with total student debt outstanding now over $1.2 trillion. This is more than the aggregate amount of credit card debt or car loans.
The proportion of college students graduating with debt has increased to 59%, a record high. They owe an average of $35,000 upon graduation (up $4,000 in the last two years). Even the great recession did not temper the willingness to take on more student loans (see below).
The increase in debt per graduate means that:
- Graduates are much less likely to pursue entrepreneurial ventures.
- They
are less willing to make risky investments, keeping their money in
savings accounts rather than investing in stocks and bonds.
- They are less likely to buy homes and more likely to rent (reflected in home ownership rates now at a 48-year low).
- They begin saving for retirement much later.
Is College Worth It?
Many families are questioning whether college is worth the cost. Enrollment peaked in 2009 and has since been decreasing. Yet there is plenty of evidence that college is still worth the cost.
College graduates make almost double the weekly wage with half the unemployment rate compared to high school graduates (see graphic below). However, many people have concluded that you have to be more selective about the type of degree and type of school you choose in order to make sure your investment in education will pay off.
Why Is College So Expensive?
The main reasons for the increase in tuition are the increase in spending on amenities to attract more desirable students, colleges hiring more teachers to decrease the student to faculty ratios, colleges wanting more control over financial aid and scholarships (usually to attract more competitive applicants), and colleges receiving less financial support from the states.
Tuition has increased as a percentage of total school revenue from 17% to 25%, whereas funding from the states has decreased from 32% to 23% over the past ten years. If the cost of tuition continues to increase at the current rate, by the year 2030 the typical tuition will rise from some $20,000 a year to $41,000 a year for public schools, and $44,000 to $91,000 a year for private schools.
Have you personally been affected by rising tuition? Do you think college is too expensive? Do you think it's worth the cost?
Finding the right college at a reasonable cost for your children or grandchildren may seem like an overwhelming task. But a whole cottage industry of college planning consultants has emerged to help prospective students. Check out college planning sites such as Stratagee or College Planning Consultants to learn more.
Also, take a look at a lendedu report which ranks U. S. colleges and universities in each state by the amount of debt the average student owes upon graduation. The site also offers tutorials on scholarships and other aspects of financial aid to help students finance their educational dreams, without going broke in the process.
23 comments:
I agree with the reasons of why it's so expensive and I add in administrative bloat. The growth in middle management is expensive. I put myself through a state university working a minimum wage job for 15 hrs a week and graduated debt free. Granted, I was poor as a church mouse, but that's virtually impossible now.
Such an important problem. I'm afraid the cost of an education will only increase the demise of the middle class.
That was a shock -- cost of college has increased more than medical care! My cynical side wonders if this is an example of the 1% trying to preserve their ivy covered old chronies system.
Tom, this is so interesting to me. When I went to college (yes, I went through in three years) from 1971-1974, my total college costs at the hometown state university was 1/3 of my father's annual income, which was very middle class. (My mom worked also, but it was not a significant amount). By the time we had children in college (2002-2005 and 2007-2011) the cost was more than their father's income at the private school #1, and at my alma mater, it was 2/3 their father's income, and actually he had retired by the time #2 graduated. BUT, we saved from the time they were born, and they both had scholarships and work-studies and they both graduated debt-free. Blessedly, they were both able to go on and complete their Masters because #1 had her employer pay it (virtually unheard of today!) and #2 had inherited some money from my brother (as did his sister).
Because of this, they have both gotten GOOD jobs, one family makes more than the other, but they have good jobs and we do not have to help them. Many people say (and some of your commenters will) that they will not help their children with college education, and they do saddle them with debt while mom and dad travel the globe in their retirement. We chose to help them, so that we could spend our last years not having to worry about if they are going to make it or not. Our children are totally "Off the payroll," we do not have to help them in any way, and we may not be wealthy, but we have enough money to enjoy retirement.
I don't think tuition should be free, it should cost something to make it valuable, but it shouldn't cost as much as it does. I also don't think college is for everyone and we should return to placing an emphasis on trade schools.
Even though it was much cheaper when I went the first time (1969-1973) it still took me ten years to pay off the loans. The kids now have my sympathy, though. That kind of debt is brutal for most of them.
Wow! These stats are mind-boggling Tom. We all know how health insurance has gone through the roof but this is just criminal. As with so many things, you just have to follow the money to realize why these costs have gone so high. Sure the state and feds have stopped supporting it as much, but I believe the big culprit is all the lenders who are literally making a killing on our young people. The interest rates are higher than for borrowing for a home and there is no way to expunge the debt if bankruptcy becomes necessary. This is a huge problem and I hope that it resolves itself someway in the future. ~Kathy
Our only went to the loveliest of state universities here in Washington state and also a great educational institution started out as a normal school for women school teachers. Western Washington University in Bellingham, wa..she adored it and worked for the president of the university which enabled her to get thru quickly and happily..She was paid an enormous amount in our thinking and room and board she dined with the faculty and had use of a Toyota truck with gas and insurance paid, she mostly did what she needed to get thru, she graduated with two majors and 2 minors and no money owed.>She also got a big scholarship she did not need to touch and handed out it to several young women who needed the money desperately..She is well employed and when people ask me how we did it I say she worked hard and got the job she needed and tuition in 1997 thru 2000 was small compared to what it has grown but still and excellent investment..I tell moms and dads what she did to get thru school and they listen they want their children to attain a college education and don't want to have to second their home and retirement..But I do wish there were more money for kids to attend her alma mater..It is very expensive now and the kids who go get jammed up on loans and this and that..Our daughter knew from the get go what you borrow you must pay back and usually with interest if you have more than one child some people only can help one child of the two or three which is in my opinion ridiculous..I am with Bernie on helping young people to get their educations not free but enough to help them get in and out and able to get good jobs to repay what loans they must absolutely use to get those degree or degrees and I don't mean repaying them for a lifetime a year or so is one thing 10 years is another~~~~~~~~~~~~~~~~~~~~~~~~~~~~~
Stephen, I agree with you. Tuition shouldn't be free, but it should be much less, certainly at state schools, and especially at community colleges. And Kathy, I think you're right. Somebody is making money off these kids and their parents. Why can't colleges and universities offer interest free loans (or maybe 0.9% interest) like the car companies often do? Most of the universities can certainly afford it.
It seems to me that the cost of college has risen in proportion to the rise in the limits of the student loan program. The more the government is willing to guarantee, the more is available, and therefore the more the institutions are able to charge. This just my observation.
I've been acutely aware of higher education's increasing costs beginning when I returned mid-life for a graduate degree. In retrospect the increases compared to when I obtained my undergrad degree years earlier have been small compared to the costs in recent years when my granddaughter went to university. The costs for higher education now are obscene and student loan interest rates are usury.
The student loan program is important for many. Do we want an educated electorate capable of logical reasoning? We surely need one this year. Like all assistance programs there are those who abuse them. So, do we eliminate the programs? Do we make more effort to monitor for abusers? One place to start is with those "colleges", those individuals profiting from them -- "colleges" that have sprung up all over the country simply exploiting students and the student loan funds. Some have closed but their founder(s) should be behind bars, or at least prohibited from starting up another such con.
i'm a great fan of community colleges. And they give you the most bang for your buck. About ten years ago I developed a report on this subject for the Department of Education.The report was used by advocates to argue for renewal of the Act tht crested CCs.
My grandSIL just back from Yemen and the Army, immediately went to a job as a skilled mechanic, a trade he learned in a CC. Not yet out of his 20s, he has no debt, a good skill, and a good income.
I also think that the reason college is so expensive is that the colleges now profile students a lot more than they used to do..Minorities have an advantage to a certain respect but if one doesn't have money it doesn't matter, unless you are related to some uber wealthy relative who gives a bundle to the college you want to attend unless you got the money and tons of loans you are not going to go to the rodeo as it is stated in many peoples vernacular.. I think it is a way for some colleges and universities to keep a certain type of person from a certain type of household in and or out, plain and simple..Many movie stars and wealthy film people can send their kids to any college and or university they want they are usually loaded and can afford anything, but mere mortals cannot plain and simple. Heaven help us if Trump is elected he only wants for himself and his uber rich children and no one else..There was an obituary in our local newspaper that stated on the last line to NOT vote for Hillary Clinton, his family and or himself paid for that, what a nutcase!
Having put 5 kids through State colleges, I can say it was financially difficult and crazy to get a tuition and fee increase EVERY year. Here is an interesting article that even starts with the same chart. :- )
http://www.forbes.com/sites/startswithabang/2016/03/01/why-college-is-so-expensive-and-how-to-fix-it/#456a80f2265b
Putting some numbers to this:
35,000 over 10 years at the moderate rate of 4% is 354.36 per month. Students can generally defer payments for the first few years as necessary. Keep in mind that with inflation the value on this will go down. A basic inflation rate of 3% would mean that the final payment in the 10 year cycle would have a value of only 263.68.
The average transaction price for a 2016 personal vehicle is 33,560 which is then paid in full during a FIVE year time loan, half the time. When graduating from college leaves you with an average debt that is comparable to a new car purchase (35,000) I have to wonder if we are not on the wrong track.
With the median household income(using Oregon numbers - hey, you can't swing a dead cat here without hitting a college graduate as she rings up your fries at the local fast food joint) at 51,075 that average new car is roughly 65% of one years income (33,198). While I do no expect a new college graduate to make the median household income, we are not loaning the college students funds based on their current ability to pay but the projection that the increased earnings will pay for the college attendance.
Again, assuming that the college student is not paying back the loans, but the person they will become, A family of four will be paying 830 dollars a month (in current dollars)in food on a moderate meal plan (per the US) The final year of the debt repayment you would pay 354.36 on the loan but 1,115.45 for food.
My point here is simply to say that comparing the price of college, then and now, is one way to look at it. Another would be to compare it to basic consumer goods that are purchased each year. I think student loans are generally folly but they are rarely taken in context.
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