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Why Does College Cost So Much?

A Half Century Of Tuition Inflation Adds Up

By Mark Huffman
ConsumerAffairs.com

February 12, 2007

• Aging Parents Face College/Savings Squeeze • New York Lawmakers Toughen Student Loan Rules • Multi-State Agreements Reached in Student Loan Investigation • Colleges Agree to Clean Up Student Lending Practices • New York Sues Student Loan Lender • 529 Plans: A Tax-Free Way to Save for College • Why Does College Cost So Much? • Financial Aid Information --- • More about Education

When gasoline prices surged in the wake of Hurricane Katrina, many angry consumers believed Big Oil was engaging in price gouging. But as the costs of a college education have skyrocketed, few have accused Big Education of doing a little gouging of its own.

But are colleges overcharging students and parents? And if not, then why is a college education today so expensive that many can't afford it and others can do so only by racking up substantial debt?

Ronald Ehrenberg, Professor of Economics at Cornell University and author of "Tuition Rising: Why College Costs So Much" says there are rational economic reasons for tuition's constant creep upwards.

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While businesses are structured to keep costs as low as possible, Ehrenberg maintains that colleges today operate on a starkly different model. They actually have an incentive to spend money.

"In private higher education, the quest is to be as good as you can," Ehrenberg told ConsumerAffairs.com. "Tuition increases in private higher education reflect increased expenditures per student, in real terms."

Public colleges and universities are raising their tuition as well, he says, because of reduced support from state governments. But there's also the supply and demand factor.

The Spending Race

In his book, Ehrenberg concedes that as long as there are plenty of qualified applicants, no institution is going to end the spending race. And when tuition rises at one institution, others are more likely to raise prices as well.

"When you have the elite schools pushing tuition six, seven and eight percent higher, the next-level schools can follow," said Joel Naroff, chief economist at Naroff Economic Advisors, a private forecasting firm.

Naroff, who taught economics at the University of Massachusetts and Northeastern University, says that for elite colleges, raising their tuition doesn't necessarily discourage applicants; in fact, it can increase an institution's perceived desirability.

"There is very little pressure of any kind to keep costs down at private schools," Naroff said. "For most of the private schools, especially the better and elite schools, the more expensive it is, the more elite it is, and the more having a degree from that school is a perceived value."

These days, all universities -- public and private -- are directing some of that spending to a bidding war for faculty members with reputations. As a result, salaries and perks for college professors have risen dramatically.

The bidding war also extends to students, with colleges erecting plush dorms, state-of-the-art health clubs, gourmet restaurants and other amenities, all designed to lure the brightest and most talented students, who desire creature comforts as well as a challenging education.

State universities that once had an open enrollment policy -- admitting any high school graduate in the state -- now screen entry using standardized tests, grade-point averages, and other factors to limit enrollment to a more elite group. However, they are finding they must compete harder to get those students.

Competition Raises Costs

As a result, colleges spend more money making their institutions attractive, and charge more to attend them. Normally, competition drives prices down but apparently not in academe.

Naroff makes an analogy to professional sports.

Forty years ago, players in the National Football League were poorly paid. They played in baseball stadiums and it cost very little for fans to attend games. Now, teams pay their players millions of dollars and the average fan might spend $200 for an outing at the team's multi-million dollar stadium.

"Basically, if you can pass on your costs, you don't care what your costs are," Naroff said.

Today, tuition at state universities is around $12,000 a year and $25,000 and up at private schools, but it may surprise some to learn that rapidly rising college tuition is not a new phenomenon. In fact, figures compiled by the College Board show that college tuition has risen at about twice the general inflation rate since 1958, when statistics first began to be tracked.

The rate of increase has been sharply higher in some years than others. For example, in 1964, when the first Baby Boomers headed off to college, tuition inflation rose 4.61 percent, which was more than four times faster than the overall inflation rate. Between the years 1980 and 1982, when raging inflation in the economy increased a total of 30 percent, tuition costs surged by 40.3 percent, and have been steadily rising ever since.

Increases in tuition since 1992 have been steady, but comparatively tame, never rising above six percent, as the overall inflation rate has hovered around 2.5 to 3.0 percent.

But all those yearly increases have taken a toll.

In 43 of the last 49 years, college tuition inflation has exceeded the nation's inflation rate, with the cumulative increase pushing the costs beyond many students' ability to pay.

Financial Aid to the Rescue?

Student Aid • Bankrupt Helicopter School Shoots Down Student Aspirations • Student Loan Company Agrees to End Kickbacks to Schools • Nelnet Agrees to End Payoffs to Alumni Associations • Cuomo Corrals More Student Lenders • Johns Hopkins Settles Student Loan Probe • Wells Fargo Agrees to Clean Up Student Loan Practices • New York Sues Drexel Over Student Loans • Sallie Mae Settles Student Lending Probe • Financial Aid Probe Focuses On Johns Hopkins Official • Colleges Agree to Clean Up Student Lending Practices • NY's Cuomo Blasts "Unholy Alliance" of Colleges, Lenders • Scams Target Students Seeking Financial Aid • Cuomo Widens Probe of Student Loan Industry • House Approves Cutting Student Loan Interest Rates • Study Endorses Cutting Student Loan Rates in Half • January is Time to Submit Student Aid Info • Congress Jacks Up Cost of Student Loans • About Student Financial Aid • Timeline --- • Why Does College Cost So Much?

As the cost of attending college has risen, so has the availability of student financial aid. Students and parents who can't afford the yearly cost of tuition, room and board, and books can apply for scholarships, grants and loans to make up the difference.

By the College Board's accounting, there was $105 billion in financial aid flowing into higher education in the 2002-2003 school year. Has all that money inadvertently fed tuition inflation?

"There is very little evidence that this has occurred," Ehrenberg said.

But others disagree. David L. Warren, president of the National Association of Independent Colleges and Universities, calls financial aid the driving force behind rising fees, claiming it is responsible for nearly one-third of all tuition increases.

Where does the financial aid come from? There are a variety of sources, but at many schools, scholarship and grant money comes directly from the schools themselves, paid for through endowments and, to a large degree, by the ever-rising tuition paid by other students.

And how is that aid distributed? Highly prized and recruited students are most likely to receive the scholarships and grants. Everyone else must take out student loans.

A 2003-2004 study by the National Center for Education Statistics found that more than 65 percent of students borrow at least some money to pay for education, with the average student graduating with more than $17,000 of debt. Many graduate with an even heavier debt load.

Rudy Arndt, a retired high school guidance counselor in the Toms River, New Jersey School District, witnessed the rising costs of college over the span of his career.

He said he first began to see high school seniors looking for college loans in the mid 1970s. By the time he retired in 1992, he saw students taking on dangerous amounts of debt to pay for their schooling.

"We've got to warn students not to get so overloaded with debt that it will affect their ability to live once they graduate," he said.

Ehrenberg shares that concern, and thinks it might unduly influence a student's choice of career.

"I am very much concerned and worry especially that it may preclude students from entering socially important but low-paying occupations," Ehrenberg said.

"Just as law schools have loan forgiveness programs to encourage law students to go into public interest law, states should consider loan forgiveness programs for public higher education graduates who enter socially important occupations," he suggested.

Buyer's Remorse

While many students graduating with $100,000 or more of debt often express "buyers' remorse," it's clear not all do.

"Craig," a 2005 graduate of an elite northeastern university who works in Washington, DC, pays $700 a month on his student loans, but has no regrets.

"I received an excellent education for a reasonable price," he told ConsumerAffairs.com.

He suggests high school seniors begin discussions with guidance counselors early about their financial needs, and focus on schools that offer what they want but that are also willing to offer the students financial incentives to attend.

"With good colleges it's a two-way street. Not only do you want to go there, but if you have the grades, potential, desire and experiences, they want you and will make monetary sacrifices to enroll you," he said.

Congress Gets Involved

The level of student debt has become such a sensitive issue that Congress has taken action to cut the rates on federally-guaranteed student loans. In New York, Attorney General Andrew Cuomo recently launched an investigation into charges some colleges have steered students to certain lenders in return for favors.

"My office is seeking to ensure that students are being steered toward lenders offering the most competitive rates, not those who offer the best perks to schools or financial aid administrators," said Cuomo.

Cuomo is looking into allegations that some lenders have offered trips and gifts to higher education officials with whom they do business. Cuomo says when people across the country are struggling to keep up with the cost of tuition, that behavior can't be tolerated.

Meanwhile, the news about college tuition is not all bad. Since 1996 a number of private schools have actually cut tuition -- some by steep amounts.

According to the National Association of Independent Colleges and Universities, Lourdes College in Sylvania, Ohio cut tuition 41 percent; North Park University in Chicago cut tuition 32 percent. For a complete list, see www.naicu.edu/news/TuitionCuts.htm.

More cuts may be coming.

"Private colleges and universities are launching -- and expanding -- initiatives to control operating costs and enhance efficiency," the association says. "These include outsourcing services, targeting cost reductions, streamlining staff while safeguarding quality, entering into collaborative cost-cutting arrangements with other institutions, and implementing new environmentally friendly systems that reduce energy consumption."

States are also investing greater amounts in their community college systems, which by and large maintain open enrollment policies and cost considerably less than four year schools. In many states, a student earning a two year associates degree at a community college may transfer as a junior to most public universities to receive their bachelor's degree.

"I think the community college system has been under-funded and under-valued," Naroff said. "It has helped millions of people earn a college degree and I think it should play an even greater role in education."

Another alternative emerging in recent years is the for-profit college -- institutions like the University of Phoenix and DeVry University.

Typically, their tuition is more -- often much more -- than community colleges but comparable to public universities and less than most private colleges. They don't need plush campuses because most of their students spend their non-school hours at a job.

Derided by many in traditional academia and often the source of bitter complaints by students, these colleges nonetheless have appealed to low-income, minority, and working students and adults in ways traditional colleges haven't, by offering courses in the evening and on weekends and pioneering the use of online and distance learning.

More importantly, while traditional colleges struggle financially, despite ever-rising tuition, for-profit schools do indeed turn a profit.

David Kird, professor of public policy at the University of California at Berkeley, acknowledges for-profit schools have their limitations. But he stunned a 2005 conference on higher education when he praised work being done by DeVry, noting that it "graduates more African-American engineers than any other institution in the United States."

But criticism of the for-profit schools, particulary University of Phoenix is mounting. Former students and the school's own staff and faculty complain that the relentless quest for profits has hurt the quality of the education that students receive, the New York Times reported in a front-page story today. The school has only regional accredition.

Prospective college students and their families would do well to consider community colleges and less expensive state schools rather than mortgaging their future to attend a supposedly more prestigious institution.

While a for-profit school may be the answer in some cases, students should investigate thoroughly to be sure they know what they'll be getting for their money. Check the ConsumerAffairs.com complaints about the University of Phoenix and DeVry University before plunking down money or taking out a loan. Chances are, a community college would be cheaper and would offer a better education for most students.

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