Now that I have a renewed interest in college costs (read: a kid), I’m paying more attention to the ongoing student loan debt discussion. One major talking point is the rising cost, but there seems to be a big difference between the published or “sticker” prices and the actual prices paid by students after grants and scholarships. As illustrated by this SmartMoney article, only 1/3rd of private university student pay the full sticker price, and the most attractive students get the best aid packages. Therefore, I wanted to find information comparing the differences between actual and sticker prices. The results were surprising:
Consumer Price Index (CPI)
The Bureau of Labor Statistics tracks the cost of college tuition and fees as a component of the Consumer Price Index, commonly used to measure inflation. According to this BLS.gov informational page, their methodology does attempt to track out-of-pocket costs and adjust for financial aid, but it is unclear exactly how they do it:
College Tuition is now eligible to be priced including adjustments for various types of student financial aid. Scholarships and grants are now eligible for inclusion, and probability sampling techniques are used to determine if scholarships or grants should be included when pricing tuition for a specific college. All College Tuition quotes will price student tuition and fixed fees. Selected quotes will additionally be adjusted by financial aid.
Using the seasonally-adjusted CPI-U (All Urban Consumers) and the College Tuition and Fees component, the index rose from 362.4 to 691.26 from 2002 to 2012. That’s a 6.7% annualized growth rate. Overall inflation for 2002-2012 was 2.5%. That’s a big number, leading to scary charts like this:
But is it accurate?
The National Postsecondary Student Aid Study (NPSAS)
Per their website, The NPSAS is one of the most widely used sources of information about student financial aid and is based on multiple sources, including institutional records, government databases, and student interviews. Their latest report on net tuition costs is for the 2007-2008 school year, and all amounts are inflation adjusted to 2007 dollars. I will use the “net price after grants” as it is the total price (tuition, housing, books, etc) minus grants but ignoring things like loans. The “out-of-pocket net price” subtracts loans which must be paid back eventually.
For a public 4-year college, the annual net price after grants increased from $13,000 to $15,200 between 1999 and 2007 (in 2007 dollars), which is 2.0% annualized. For a private nonprofit 4-year college, the annual net price after grants increased from $21,300 to $25,500 between 1999 and 2007 (in 2007 dollars), which is 2.3% annualized. The CPI inflation rate from 1999-2007 was 2.7% annualized. Over that 8-year span, that’s a 4.7% annualized growth rate for public, and 5.0% annualized growth rate for private.
College Board Trends in College Pricing Report
College Board, known for the SAT and Advanced Placement exams, releases a report every year called Trends in College Pricing. The report also tracks the total average net cost of a year on campus including (tuition, housing, books, etc.) minus grants, scholarships, and tax credits but excluding loans or campus jobs. For comparison with the NPSAS, the 2011 report states the net price of a 4-year public university is $11,400 a year, and the net price of a 4-year private university is $26,700. The report finds that sticker prices are indeed growing faster than net prices:
Between 2006-07 and 2011-12, average published tuition and fees at public four-year colleges and universities increased by about $1,800 in 2011 dollars, an annual rate of growth of 5.1% beyond inflation. The average net tuition and fees in-state students pay after taking grant aid from all sources and federal education tax credits and deductions into consideration increased by about $170 in 2011 dollars, an annual rate of growth of 1.4% beyond inflation.
Average published tuition and fees at private nonprofit four-year colleges and universities are about $3,730 higher (in 2011 dollars) in 2011-12 than they were in 2006-07, but the average net tuition paid by full-time students in this sector declined by $550 in inflation-adjusted dollars over this five-year period.
The inflation rate per CPI from 2006-2011 was 2.1%. In terms of nominal changes to net price, their numbers work out to a 3.5% annualized growth rate for public, and 1.7% nominal annualized growth rate for private (0.4% less than inflation!).
So that’s three different sources with three different numbers, from 4.2% above inflation to 0.4% less than inflation. Over several years, those are huge differences. Here are my takeaways:
- Tuition is rising faster than inflation, but maybe not as fast as you think. When reading information about skyrocketing tuition, be aware of the difference between actual out-of-pocket costs and full published prices. Both public and private school give out more aid along with those hike prices. If you’re saving for a young child, you’re simply not going to be able to predict future tuition rates.
- Averages can be misleading. Even if you could, you’re not going to pay the average tuition. 1/3rd of people really do pay the full sticker price for a $60,000 a year private school(!). The rest get varying forms of grants, I know many people whose kids got a half-to-full ride even with above-average incomes. Public university may not be the cheapest option.
- Acceptance on a sliding scale. The uncomfortable premise here is that just because you got into that private university, you can only tell if they really want you if they give you a big tuition discount via grant or scholarship. Universities must balance the desire for the best students and the need for funds. I think this is a valid conversation to have with your child, perhaps applying to some lesser-known private schools which are known to give aid to strong applicants. I know that if I had limited money and my child was “accepted” somewhere under the condition of taking on $150,000 in loans, I wouldn’t really consider that much of an achievement.
Like everyone else, I have lots of opinions on college and education in general, but I’ll save those for some other time.