College Tuition: LOL! WTF?

Today, as I was looking at my Twitter feed, a message seized my attention.

Apparently, according to the article, “The total cost of undergraduate education for the 2011-12 school year will be $55,416; of that amount, tuition is $41,853, and the remaining $13,563 is for room, board and fees.” To which I responded by shooting warm coffee out my nose, as I laughed.

Now, I don’t want to reveal too much about my current writing projects, but one of them is an essay about the coming crisis in higher education. My thesis, that a credit crunch in student loan markets will precipitate the collapse of that $1.25 trillion asset pool, which will in turn preclude otherwise bright and eager high school students from attending decent colleges because of financial issues, is, I admit, a little alarmist. But today’s news release from my college reveals a different, and significantly more troubling scenario.

But first, some facts:

  • According to a College Board tuition survey made public last week, tuition and fees at four-year public universities are up 7.1% from a year ago, with the average bill at $5,491. At private nonprofit four-year institutions, tuition for one year averages at $21,235, an increase of 5.9%.
  • According to the College Board aid report, also released last week, the average student at a public university will graduate with $15,500 in loans. At private colleges, that jumps to $19,400.
  • The College Board says, according to a Wall Street Journal article on March 17, that a degree remains a worthy investment. In 2003, the typical full-time worker with a college degree earned $49,900, 62% more than a worker with just a high school diploma.
  • According to a recent issue brief from the Economic Policy Institute, US productivity grew by 62.5% from 1989 to 2010. For college educated workers in the private sector, real wages grew by only 19.4%.
  • All the way back in 1989, as evidenced by a New York Times piece, Americans were worried about the increasing cost of higher education. The average cost of tuition at private four-year colleges was $8.737, up 9% from the year before.
  • Using the Consumer Price Index (accessed through WolframAlpha) to normalize 1989 dollars to current valuation, the real increase in the cost of a college education far, far outpaces the rise in real wages for college-educated employees. $8,737 (1989 dollars) is equal to $15,577. The 36.32% increase in tuition costs over twenty-two years, versus the 19.4% increase in real wages for college-educated employees indicates that, in terms of earning power, in terms of real value, a college degree is steadily declining in value.
  • Assuming George Stigler’s data was current in 1989, when his paper, The Future of Higher Education was published, tuition plus fees “reaches a respectable $13,000 or $14,000 in the Ivy League.” Although, the NYT piece cited above quotes a number as high as $20,000. Because I like to think Professor Stigler’s numbers were more accurate, we’ll run with those. $14,000 (1989 dollars) equals about $24,961 today, which means that in real terms, the cost of a degree at America’s most expensive (and, putatively, highest quality) universities increased by 67% since 1989, which, again, outpaces the rise in real wages for college-educated employees in the private sector. (Note: I used UChicago’s newest tuition figure of ~42k to calculate the change. This assumes that UChicago is 1) currently among the (allegedly) highest quality institutions and entails 2) that UChicago’s tuition was somewhere near those of Ivy League colleges in 1989. I could not confirm UChicago’s, or any individual institution’s, tuition for that year.)
  • I could not find data concerning the rise in real wages for Ivy League-educated private sector employees, despite forty-five minutes of looking. The dearth of such data is telling.

Anyways, on to the disturbing scenario… It doesn’t take an economics PhD to determine that the current, longstanding upward trend in college tuition will eventually collapse in on itself. At some point, the total financial benefits of going to college will be eclipsed by the total costs. According to the data I found, and the regression analysis I performed, the cost of a high-end four-year degree in 35 years, when I will likely be the parent of one or two college-bound students, will be $1,044,800 per child. [(PV= 41,853, i=5.371%, n=35)*4] I don’t have the attention span, or a sufficient data set, to calculate when this is. But recent attention has been paid to this matter.

In a February, 2010 article in the Wall Street Journal, reporter Mary Pilon examined somewhat inconclusive data in her piece “What’s A Degree Really Worth?” A few excerpts can be found here:

In recent years, the nonprofit College Board touted the difference in lifetime earnings of college grads over high-school graduates at $800,000, a widely circulated figure. Other estimates topped $1 million.

[…]

Mark Schneider, a vice president of the American Institutes for Research, a nonprofit research organization based in Washington, calls it “a million-dollar misunderstanding.”

One problem he sees with the estimates: They don’t take into account deductions from income taxes or breaks in employment. Nor do they factor in debt, particularly student debt loads, which have ballooned for both public and private colleges in recent years. In addition, the income data used for the Census estimates is from 1999, when total expenses for tuition and fees at the average four-year private college were $15,518 per year. For the 2009-10 school year, that number has risen to $26,273, and it continues to increase at a rate higher than inflation.

Dr. Schneider estimated the actual lifetime-earnings advantage for college graduates is a mere $279,893 in a report he wrote last year. He included tuition payments and discounted earning streams, putting them into present value. He also used actual salary data for graduates 10 years after they completed their degrees to measure incomes. Even among graduates of top-tier institutions, the earnings came in well below the million-dollar mark, he says.

[…]

The $800,000 number, it turns out, was pulled from a footnote of the College Board’s 2007 “Education Pays” report that explained lifetime earnings. The report’s author, Sandy Baum—an emeritus Skidmore College economics professor who didn’t write the promotional text on the Web site—says that $450,000 is actually a more reasonable estimate of the difference in lifetime earnings, something she’s said in interviews for more than a year.

Steve Talbott, a journalism professor at Cleveland State University who is researching the cost of education and student-loan debt, says he urged the College Board to take down the “misleading use” of the $800,000 number a year ago. Others have voiced their objections to the College Board figure via letters and blogs.

A College Board spokeswoman says it doesn’t have a record of when the content was written and that “it’s possible that during an update of the content the writer misinterpreted the data within the report.” She also says the text represented old data and reflected “a different methodology.” The $800,000 figure was removed from its Web site in December, once the group learned of the error, she says.

Let me put it this way, I don’t know when or if my proposed cost-benefit doomsday will happen, but it could. The problem with the current discussion surrounding the expense of higher education, and the ever-increasing nature thereof, is one of framing. Discussion should not concern whether the increase in tuition or post-graduation earnings outpaces inflation; rather, the focus of the debate henceforth should involve the scarier number, the number that matters more. Policy wars, I promise you, will be fought over the increase in tuition relative to increases in real wages of college graduates; that one is increasing faster than the other is an uncomfortable reality. If economists are correct and we are the at least semi-rational beings they say we are, a simple cost-beneit analysis, at some point down the line, will dictate what’s heretofore been anathema to every single message promulgated by parents, high school faculties, the US Government, the College Board, and the universities themselves. Getting a degree would become irrational. That is, unless something changes.

But if there’s one thing that we’ve learned in recent years, it’s that markets can change their whole calculus very rapidly. I defy someone to prove that markets, whether debt or equity or labor, when in a state of flux induced by sudden reevaluations of their evaluation and valuation schemas, induced by sudden fits of rationality, behave rationally. It will be an exciting time, to say the least.

Author: Jason D. Rowley

As I mentioned elsewhere, I wear a lot of hats. Currently, I'm interested in VC data, early stage startups, and journalism. Previously I've been a blogger, designer, researcher, startup founder, (temporary) college dropout, connector, occasional branding designer and amateur chef.

2 thoughts on “College Tuition: LOL! WTF?”

  1. And to think, thats just what the University says, not the actual cost. I currently evaluate my tuition / fees / mandatory insurance / books / food / and housing at 59k per academic year. That doesn’t normalize the extra $1000 you get charged to be a freshman. The tuition and fees above is an $800 increase, so my senior year I will in fact pay $60k for a piece of paper, the education was a farce.

    1. Why do you think I left? I realized paying UChicago a little over $100 for library privileges will get me a better education than the totally onerous tuition I’d otherwise pay to be infantilized by my professors, and to be coerced by same into doing soul-killing research on thoroughly researched topics.

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