College Tuition Hasn’t Risen As Much As You Think

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gradcapThe new fall semester is underway, which means more college articles! Morgan Housel of recently talked about how the increasing cost of college is exaggerated (emphasis mine):

According to the College Board, the annual sticker price of attending a private four-year college increased from $17,040 in 1992 to $29,060 in 2012, adjusted for overall inflation. But grants and scholarships more than doubled during that period. On net, the median annual cost of attending private college went from $10,010 in 1992 to $13,380 in 2012, meaning the amount students actually paid grew half as fast as the sticker price suggests.

Ditto for public four-year schools. The sticker price of tuition was $3,810 in 1992, and $8,660 by 2012, adjusted for overall inflation. That’s a gain of 4.2% per year. But the actual amount students paid went from $1,920 to $2,910, or an annualized gain of 2%. Adjusted for grants, the inflation-adjusted cost of two-year college has actually declined over the last 20 years.

Why would schools balloon the sticker price but make it up with scholarships? A lot of it is marketing. If I say, “Billy, tuition is $20,000 a year,” it sounds high. If I say, “Billy, tuition is $40,000 a year, but we’ll give you a scholarship to bring it down to $20,000,” it’s an offer he can’t refuse. There’s also a rich student, Jimmy, whose parents will pay $40,000 without batting an eye. Jimmy is actually making Billy’s scholarship possible.

By those numbers, the cost of 4-year public college grew at 2% annually above inflation over that 20 year period, while the cost of 4-year private college grew at 1.5% annually above inflation.

The average student debt is roughly $30,000, about the price of the average new car. As Jim of the FreeBy50 blog points out, only a tiny 0.3% of graduates end up with over $100,000 of student loan debt. Any media piece about a struggling student with a six-figure student loan is an outlier.

Now, I’m not saying there aren’t problems. For one, the wages of new graduates are stagnant. But the sky is not falling.

Increasingly, parents should look at listed tuition prices like the sticker price of a car. It’s just a starting point for negotiations. Colleges, especially private colleges, can easily adjust what they actually charge per student based on two variables:

  • Their financial situation, using need-based aid.
  • Their desirability as an applicant, using merit-based aid.

Universities have all sorts of financial aid tricks to adjust actual out-of-pocket costs… various grants and scholarship funds that they can draw from, work-study guarantees, comped room & board, and so on. You can even negotiate your aid package with them further after getting your acceptance letter.

In fact, the industry term is tuition discount rate, which measures the upfront tuition discount given directly from private universities, thus excluding outside scholarships, tax breaks, or subsidies. The NACUBO tuition discount rate for 2013 was 45% and had risen every year for the previous 7 years.

If Billy is a somewhat borderline applicant and his parents have a high income, he’ll may get accepted but must pay full sticker price. If Billy is a very strong applicant, he may get accepted with a partial or full scholarship regardless of income.

This is why parent shouldn’t automatically just tell their kid to go to a state public school. If your child finds the right fit, they could go to private school for close to or less than the cost of public. Many households with modest income and financial assets will be offered substantial grants. Of course, you have to be ready to say “no” if your kid gets in without any aid, meaning the total cost is more than a house (my personal fear!).

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  1. I’d be interested to see a breakdown of actual cost by decile (rather than just the median). It’s still true that average student debt burden is rising, accounting for inflation, which means there’s some small contingent of students that are taking out massive loans for their schooling.

  2. Very interesting. Although I’m sure the media doesn’t really want to know this information because it’s not nearly as inflammatory and fear-mongering

  3. Jonathan,

    I am in a similar situation as you…2 small children. I would love to hear how you plan financially for college for you little ones. Do you plan on contributing financially to your child’s college education? If so, you much do you plan on saving? With sticker prices in 2014 dollars ranging from 50K to over 200K, how do you develop an 18 year savings plan? With unknown variables of tuition growth rate, scholarships, and the unknown true cost of the college, I find it difficult to properly plan. Thanks in advance.

    • Hi Steve. We have two children. One just started preschool and the other just started kindergarten. We started saving for each in a 529 plan before they were conceived so that we had been saving for about a year by the time they were born. My goal is to be able to pay for half of their college education.

      Given that it will take them four years to spend their college funds starting at 18, we actually have 20 years to save on average plus one since we started early or 21 years. We are currently putting away $600 per month for each and I have estimated that that will cover half of their college costs under a reasonable 5-6% compound return assumption. I hope to boost that if my income rises over time so maybe we can cover more than half for them. Given our financial situation, financial aid isn’t likely.

      • Hi Andy. Thanks for the reply. My situation is: 6 year old in Kindergarten, 3 year old in preschool, and 1 on the way. I have a giant excel spreadsheet, and based on my savings plan, I am estimating that I will have around $100k saved per child when they enter college (in 2014 dollars).

        My problem is that 100k may be too much, or much too little. Here is a single example. In 2014, NC State has a total cost of attendance for in state students of $19,500/yr ($78,000 for 4 years). Duke has a total cost of attendance of $62,248 ($249,000 for 4 years). In one case I have too much money in a 529, and I will need to pay penalties to withdrawal the excess money. In the other case, I am $150k short.

        Jonathan writes in this article that much of the cost of private universities (Duke in my example), is a bunch of hocus pocus trickery, and that once the financial aid magic is complete, I will most likely pay nowhere near $62k per year for college. My problem is that I don’t know where the goal line is. How much should I be saving? I am saving far too little? Far too much?

        Andy, you mentioned your goal is to pay for half of their college education. My question is…how do you determine what half is?

        • Excess? You can use a 529 for grad school and an unused portion can be rolled to another sibling.

          Got a five year old and two year old. My goal is near two hundred k per kid.

        • My math is college is currently $50k per year or $200k for four years. In 15 years at 4.5% annual growth, the total cost for four years will be about $400k so I want to have $200k saved for each of my kids in absolute dollars (not in constant 2014 dollars).

          I’m not worried if for some reason our return exceeds expectations or tuition doesn’t increase at a rate this high because I figure there will always be a need for educational dollars in my family. My kids can use any overage for graduate school. Or I can accrue those excess balances and someday change the beneficiary to my grandchild, niece/nephew, etc. I can think of many worse outcomes than over-saving and creating a tax-deferred inter-generational higher education trust fund for my heirs!

  4. The psychological effect is also interesting. People may be convinced that if they have to fork out money that they’re getting a better education. Paying full freight for a reach school feels virtuous in that regard.

    Also the sticker price causes families to save more money, making the discounted price feel like a bargain, even if it has risen sharply. “What else are we gonna do with all this money in the 529?”

  5. Inflation rose at an average of 2.65% per year over that period. So, during that time, college costs grew at nearly twice that rate. Sure, it’s not 3 times the rate of inflation, but it’s still a problem, especially for the vast majority of Americans whose wages aren’t even keeping up with inflation.

  6. While the lower income benefit from “grants”, “need based scholarships”, and other cost-shifting (i.e. theft) socialism schemes, the middle class is taking it on the chin. The middle or upper middle class don’t qualify for any of the discounts.

    Work study and other forms of “aid” that are actually loans shouldn’t be included in the “discount”, or even in the analysis of tuition inflation as these are not discounts off sticker price, and loans are actually a negative due to compounding and the exemption from discharge in bankruptcy.

    What people should really be asking is why we aren’t seeing deflation in general education like we should expect out of a mature, commodity product. It’s not like the humanities and calculus have changed over the past hundred years. Removing the lender protections and making the debt dischargable would go a long ways to restoring some balance in the pricing of education.

    • “The middle or upper middle class don’t qualify for any of the discounts.”

      Yes they do.

      About 1/4 of Pell grants go to families making over $40k.
      Over 50% of Education tax credits go to families making over 50K and 21% of them go to families making > $100k
      Most of the savings from tuition tax deductions go to families making > $100k.
      Families making over $100k get an average of $3600 in NEED based grants at private non profit schools.

  7. These sticker and actual price variances make used car sales people and Kohls look honest by comparison.

  8. I have to say this article just isn’t accurate, or there is a lot of fuzzy math involved with the ‘median’ statement and/or not including the increase in mandatory fees that accompany tuition. If you calculate all the costs, FEES with a capital F, forced room and board for freshman and a lot of sophomores at state colleges the bill has skyrocketed. Tuition and fees are listed separately but its not like you have a choice of paying 1 but not the other, it should just be lumped together for studies like this.

    I graduated in 1999 from one of the largest state schools in the country when tuition/fees were $3600 a year, its now over $10,000/yr inclusive of fees. That is annualized 7+% increases over the past 15 years, nearly double what this study says. If you are a freshman you have to live on campus (unless you obtain a waiver which is usually only if you live in the area) which will cost you $11,000 for room and board, so $21k out the door for year 1 at a huge state school. I applied for every possible scholarship and qualified for no financial aid as a student, I’m assuming my kids won’t either.

    Considering the introductory nature of most classes the first 2 years people should seriously look at community colleges. Most of my colleagues kids are doing just this, and we work at a high tech company that pays well. Nobody here thinks its a good idea to drop 20k for 1 year (at a state school!) when you can get the same intro classes for 2k or less at the local community college and they transfer right in a year or 2 later.

    • Agreed. Community college with a transfer to a place like ucla makes good sense financially. Flip side, I would have gone nuts staying home another two years. I assume my kids will feel the same way. There was more to college than classes… In fact if you’re not in engineering it is kinda questionable how important undergrad is in general. I feel like we are essentially buying them a degree so they can go to grad school or get an entry level job.

    • Ron, the data is from the College Board. They DO count tuition AND fees.

      Note that they say the increase is 4.8% after adjusting for inflation. So with inflation on top of that the norm is closer to 7% like your alma mater experienced.

  9. Also, watch out for this trick, some schools tuition rate includes only up to 12 hours of credits. Want to take more then that, you will pay more. My last 3 quarters of college I took 21,22, and 23 hours because there was no difference in cost between 12 and those numbers. I squeezed as many hours as I possibly could in to be cost effective but they won’t let you do that anymore. Bottom line costs have skyrocketed no matter what this article says.

    • To Ron’s point: parents, if you’re out there and your son/daughter is about to go to college. Make sure to look at the Tuition and Fees page and see if the institution is charge per credit hour or if there is a range where the price is the same. If it’s per credit hour, then they will be punishing the student for taking even 15 credits versus 12. At my school, they changed it to where 15 to 18 credits was the same cost, so I always took 18 and saved myself some money in the long run because I graduated a year early. Especially the first semester, if you know you have a good student on your hands and they are taking at least one “intro to college” class which is a blow off class anyway, tack on another class if you’ll be getting it for free. That way, even if they don’t graduate early, they can get away with only 12 credits in their junior and senior years when the classes are tougher.

  10. Here is another NYT article on college admissions, tuition, and economic diversity. In it, they mention another student who appealed their initial financial aid offer and successfully negotiated a better deal which their family could afford.

  11. I have multiple neighbors who pay more on their student loans than their mortgage. Being a doctor or lawyer isn’t as great as it used to be with some areas being saturated with graduates. It’s not just cost but availability of jobs after graduation. With more people continuing to work later in life because of retirement issues there aren’t as many high paying jobs out there so demand is less.

  12. I agree, while the cost may not have risen as much as we thought after accounting for scholarships and grants, that is not the only hardship facing new graduates on the economic plane. Additionally, because most grants come out of the government’s pockets, not the institutions, there is no incentive for universities to keep their costs down. They are making money weather it is coming from your pocket or the tax payer’s.

  13. I Agree with Lance @ Healthy Wealthy Income when he says being a doctor or a lawyer isn’t what it used to be. This is especially true of lawyers. This is a profession who is know to have had its market saturated, making it hard to stand out and find a job.

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