College Tuition Inflation: Net Out-of-Pocket vs. Published Sticker Prices

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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 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.

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  1. There are bound to be outraged commenters, since there always are after an article on tuition. I work at a public university, and we’ve effectively seen no increase in budget for 10-15 years. Yet tuition has grown substantially faster than inflation to (partially) offset reductions in state appropriations.

    I can’t speak for every state of course, but in our case what you are seeing is not so much a lack of efficiency as it is a realignment of state fiscal priorities away from public higher education. I’m not deeply critical of that change (though many of my colleagues are); when the budget is tight and you have to decide if someone doesn’t get essential food support or medical care (programs for the poor), a college has a secondary revenue stream. Legislators have made cuts to higher education, knowing that colleges and universities can increase tuition and offset some of the pain.

  2. Interesting data. You are correct in pointing out the significant difference between sticker price and what students actually pay. However, I bet that most of your readers by virtue of their income and/or savings will unfortunately be in the 1/3 that do not receive need-based grants, so they will be paying above the average in the numbers you cite.

    I work for a private university and know that even the full tuition that students pay does not cover the full cost of their education, which is subsidized by other revenues, payout from the endowment, and annual gifts made to the university every year.

    Many people make the argument that tuition has increased at an unsustainable rate over the last three decades. I would counter that some variables that start out way out of equilibrium can grow at abnormal rates for very long periods of time. For example, if my father could go to a private university 40 years ago and pay only hundreds of dollars in tuition per semester and his ROI was 10,000% or even 100,000%, then there was plenty of room at that point for colleges and universities to reclaim some of that ROI before bringing it down to a point where it was no longer a good investment for the student. They could increase tuition by many multiples if the student could still enhance their earning power enough. That’s how pricing power works.

  3. I have a degree from one of the Ivy schools and now working in a state school. Actually I am not completely convinced that students from the Ivy are paying that much more than students in a public school. In my old school, students with household income under $90K get the tuition waived while only students with household income over $200K have to pay the full tuition if they do not have other form of scholarships already. Most important of all, you do get much more resources from my old school: smaller class/sessions size, free tutors every night, counselors monitoring each student throughout the semesters, and many social events. It did give a sense of entitlement for the students, which can be bothersome for the teachers. In my current school, nobody cares if a student goes missing. And all the basic courses are enrolled with 50% more students than planned. There are not even enough graders to grade every problem sets. It is not that uncommon for students to drop out all together.

    As of the tuition hike, as far as I know, the extra revenue is rarely given to the professors or used to hire more teaching assistants. Per “Club College: Why So Many Universities Look Like Resorts”, schools are spending a lot of money on non-education-related things, e.g. fancy gyms and expensive coaches for football teams.

    For my family, I hope at least one of us can be working for a better school at the time our (imaginary at this moment) kids are 18 so that we can get half-tuition.

  4. College is becoming more and more a direct pathway to poverty.
    The FMV of a college education/degree is between $0 and $100.

  5. Student loans and hidden variations in true cost have skewed free market forces in tuition. We’d have a much more efficient and fair system if grants were based only on academic excellence, and student loans were limited to say, 6 or 8K/year. It is very frustrating to look at universities for your child and have no idea what the actual cost of their schooling will be. It makes it impossible (or at least extremely time consuming and difficult) to compare apples to apples. I suppose that is no accident, because every industry that can obfuscate actual costs does so.

    My youngest, who is a great student, is going to a community college and working. He insists that he be self sufficient despite my willingness to help him. He also refuses to take out student loans. He is also very upset about the ridiculous cost of text books. I suspect we probably have a lot of kids in the same boat.

  6. I would love to hear your opinions on college. I am in my 40s and going back to finish my BA. I’ve had the same medical transcription job for 20+ years and the ability to make the amount of lines I used to has significantly decreased. I now make about 1/2 to 1/4 of what I used to make just 6 years ago, which was a decent living. When looking for a new job, all jobs I might possibly be qualified for require at least a Bachelor’s degree. So, back to classes I go.

    I’m stuck between a rock and a hard place since I need to make money to help with the family finances, but then I have to put time into school and studying, which takes away from my work time. So, currently I’m suffering through, and taking out federal loans to do so.

    When the job world requires a college degree, do they give us much choice but to bear the burden of the cost of the college education?

  7. Sadly, responsible parents who scrimp and sacrifice at every turn to save money (such as most readers of this blog) will get little to no aid. The proverbial grasshopper who lives beyond his means and doesnt plan for the future will be showered with aid and grants. Yes there are many poor families who are responsible and deserving of aid, but there are many who are not. In my humble opinion, aid should be based on your level of family income over the past years, not how much you have / havent saved.

  8. The best way to get a decent amount of free money (grants/scholarships) is to 1) not make much money or 2) have a genius kid. While my kids were smart and made good grades, they weren’t in the top 5 – 10% in ACT, SAT required to get merit-based money. And, we made too much money to get any need-based grants. My oldest daughter cost around $80K for everything (over 4 years at a state school). She worked part-time the entire 4 years and paid for a lot of stuff herself.

    My middle daughter saved me some money by taking advantage of community college and will probably get out of the 4 year state school for around $40K. She’s working almost full time. My youngest will be in college in 4 years. I’m planning on around $100K to get him through state college. Fortunately, we have the funds to do this.

    Tuition/Fees are less than half of what it really costs to go away to college. Plan accordingly. I imagine a child born today will cost $200k+ in 18 years.

    The other way to do it is the way I did. Eight years of night school – working full-time. I really, really didn’t like it, but I got through with no loans. Not the “fun” way to go to college.

  9. DonB is absolutely right about public schools. THe primary reason tuition for public schools has gone up is reduction in state funding. Thats generally true across all the states. e.g. back in the 80’s the U Texas schools got 50% of their funding from the state and how they provide 25%.

    Tuition funds 27% of university budgets (22% for public and 41% for private). If you cut other funding and/or need to increase revenue then tuition is the easiest thing to increase.

  10. Everybody forgets that they don’t have to take out the loan in the first place. Work at taco bell or walmart and save up for the education. You aren’t forced to take loans. You signed it, now pay it like a responsible being.

    You don’t have to go to a private or state school to get a good education. Go to your local community college, then transfer.

  11. Go to the CHEAPEST accredited university you can (if self funded). Work hard, then 10 years later, go to a TOP university(if opportunity costs among other things are ok at that point, and you get in).

  12. Still increasing annually over the rate of inflation with no end in sight. Even though it’s “only” 2% over inflation, compound growth is a ***ch. The only worse inflation in the economy is in healthcare. Both are bankrupting the government.

    This type of cost escalation might be justifiable if our youth were better educated and ready for the workforce, but the evidence is to the contrary. Most of the excess credit from the student loans is making its way to high paid worthless administrators and shiny new buildings since colleges feel the need to market themselves as a “4 year vacation” with commensurate amenities to attract more excess student loan debt.

    I just hope that the student loan bubble blows up before I have to send my kids off.

  13. “Most of the excess credit from the student loans is making its way to high paid worthless administrators and shiny new buildings ”

    Academic support is 11% of university spending. And its grown ~1% annually in the past 10 years. So no, ‘worthless administrators’ is not the problem.

    Data on capital spending is harder to find. One study reported Texas planned to spend $10B over 5 years or about $2B a year and their 4 year public schools had funding of about $12B. So for Texas their capital spending would be around 17% of total. Other states will vary of course.
    But you do have to build new buildings as old ones crumble and student enrollment grows.

  14. Tuition at my school went up every year I was attending. If I remember right, by the time I was finished with my four years, it had doubled since the time I started. Unfortunately, I think this is true at many schools.

  15. Let’s say you have a really gifted child. He has the grades and scores to get into an Ivy League school, but will be at or near the waitlist.

    At most IL schools, he will get very little non-loan aid.

    At very good private schools, he will probably get a very generous aid package. They want to drive up average test scores and gpa’s.

  16. Thanks for the info. Your interpretation of actual costs being lower than sticker has an inherent assumption. That grants/scholarships (“G/S”) will continue at approximately the same rate in the future as they’ve been in the past. As G/S funds come the government, college endowments, ‘polite’ alumni, etc. it may not be a valid assumption when your specific child arrives at school because each of these sources can be highly variable year to year.

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