"College Costs - How High Will They Rise?"

Sydney M. Williams

Thought of the Day

“College Costs – How High Will They Rise?”

November 9, 2011

I recall a board meeting, in the mid 1980s, of the day school in Connecticut my daughter attended. The subject of tuition increases was on the table. By the mid ‘80s, economic conditions had improved and the opportunity to make up for the difficult 1970s seemed timely. As to how high we should raise tuitions, the suggestion was made: until they meet resistance. Let the market be your guide. Tuition at the school has risen from $1400 for the first grade in 1974-75 to $30,000 this year, an 8.6 percent compounded annual increase, close to triple the rate of inflation. No one on the board at the time realized how far and by how much rates would rise.

What has been true for schools has been true at colleges and universities. Costs have persistently outpaced inflation and average incomes. Gordon Wadsworth, author of The College Trap wrote recently that over the past 25 years, while overall inflation rose 115.06 percent, tuition increased 498.31 percent. The numbers tell an ominous story. According to CNNMoney.com, in a report last week, the average one year cost for a private four-year college is $42,224. IRS data suggests that less than three percent of tax returns filed in 2009 were based on adjusted gross incomes of more than $200,000. Fewer than 12 percent of students pay the full freight. The 88 percent who do get assistance in the form of scholarships, grants, or federal tax benefits receive on average $15,530 according to the College Board. That means that the average student must come up with $26,694. A June 2009 study found that only 5 percent of workers make more than $100,000, suggesting that a private college education, without incurring debt, is available to a very small percent of the population – a situation that will only amplify the gap between rich and poor.

Two William & Mary professors, David Feldman and Robert Archibald have attempted to answer the question as to why tuition costs have been rising so fast. The primary reason they found is that labor is their largest cost and, in the classroom, labor is thus far resistant to productivity improvement. They point out that in 1960, students paid about the same for tuition and fees as they did for room and board. Today, tuition and fees cost between two and four times room and board. The trend has been exacerbated by the very fact that those with college and advanced degrees have out-earned those without. They seem pessimistic as to a solution.

However, market forces appear to be at work. In an article in yesterday’s Wall Street Journal, entitled “Is an Ivy League Diploma Worth It?”, a young student who turned down Cornell for an honors program at Queens College is quoted. The young man aspires to be a doctor and felt that he would rather spend his family’s scarce resources on medical school than undergraduate college. Very maturely, he says, “I have to grow up. I have to incorporate what I want with what I can have.” Feldman and Archibald do suggest that the nation’s “flagship” public universities, where tuition remains relatively low, will attract more elite students. That is the thrust of the Journal article.

But colleges, in persisting to raise tuition in difficult economic times, are running counter to the trend of consumers toward reducing debt and, more importantly, are encouraging a widening of the gap between the haves and the have-nots. But, most meaningful, they are encouraging the President to lighten the load of student loans by off-loading them on the American taxpayer. As of June 2010, student loans, at $830 billion, exceeded credit card debt for the first time. Default rates have been rising and have now reached 8.8%, while default rates on credit cards have been declining and are now below that of student loans. For example, as of February according to Bloomberg, credit card default rates at Bank of America were 8.84%; American Express, 3.8%; Chase, 6.21%; Discover, 5.79%, and Capital One, 5.91%.

In a recent speech at the University of Colorado’s Denver campus, President Obama proposed that he would accelerate an income-based repayment option to forgive more student debt and limit monthly repayments. Borrowers, according to an editorial in yesterday’s Wall Street Journal, will not have to pay more than 10% of their discretionary income each year. “Discretionary income” is defined as the difference between the borrower’s adjusted gross income and 150% of the poverty line. As of 2011, the poverty line is $22,350 for a family of four. So that if one’s adjusted gross income is $75,000, the former student’s repayment would be no more than $4,148, regardless of interest rates. Because money is not free, any shortfall will be made up by taxpayers.

But it gets worse. If the money is not repaid in twenty years, whatever debt remains will be forgiven. If the student has chosen to become a “public servant” (read: government or nonprofit employee) the debt will be forgiven in ten years. In other words, the President is pushing the country toward one more entitlement. Additionally, with the President making it easier for students to pay down, and even renege on student loans, there is less pressure for colleges to lower tuitions.

Is college worth the high price? Yes, assuming one can afford it. But are the costs harmful for society? They are, because tuition costs serve to drive a wedge further separating rich and poor. Could colleges do something about it? Of course. Endowments have risen substantially over the past thirty years. The money has been used for a variety of purposes, but has not been used to make college more affordable. There is no easy solution, but the President’s response is exactly wrong. It will accentuate the trend of Americans toward the very factors that helped create the credit crisis – a combination of too much debt and a moral lassitude toward individual accountability. The President, while seemingly compassionate, encourages a sense of entitlement and discourages personal responsibility. And nothing he has done will halt the rising cost of college.