Why does education cost so much?
It’s an important question as students await the “fat envelope frenzy” that accompanies college acceptance and their parents fill out confusing and intrusive financial aid applications. Increases in tuition have long outpaced inflation. In inflation-adjusted terms, tuition is more than three times what it was in the ‘70s. A small, private college in Sewanee, Tennessee made national headlines when it cut its total price tag by 10%. When’s the last time we saw that?
And it’s not just private residential four-year schools. For-profit and community colleges have seen the same trends. Part of the reason is capital costs. Students need big computing resources and other high-tech equipment because future employers demand this. But the main reason is that education is labor-intensive where most of the expenses are salaries and benefits. It’ss similar to health care, and it’s called “Baumol’s Cost Disease.” Labor-intensive industries have to compete for workers with firms that can use technology to make their employees more productive. As a result, real wages rise for everyone. Colleges can’t do this. The process of mentoring students hasn’t changed in millennia. So they have to pass their labor costs through.
The situation is self-perpetuating. Higher education does lead to higher real wages, but these higher wages now get captured the cost of student loans. Is this a problem? You bet it is! Those high sticker prices discourage otherwise qualified applicants. And the byzantine financial aid system is a disincentive to save or earn more, where they punish you for saving money and setting it aside. There’s a small financial aid industry built around gaming the colleges’ financial aid rules.
Public Domain. Source: Pxhere
What’s the solution? As in most other economic challenges, the solution to higher prices is higher prices. If something cannot continue it will stop. Higher prices create incentives for innovation and creative destruction. And disrupting a system that costs more than a quarter million dollars for a sheepskin can’t come fast enough.
Douglas R. Tengdin, CFA
Charter Trust Company
“The Best Trust Company in New England”