Learning to Spend

Why does college cost so much?

It’s a relevant question as students await the “fat envelope frenzy” that accompanies college acceptance and their parents fill out confusing financial aid applications. Increases in tuition have long outpaced inflation. In inflation-adjusted terms, tuition is roughly triple 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 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. In this it is similar to health-care. But they have to compete with industries that can offset higher payrolls with greater productivity. Colleges can’t do this. The process of mentoring students hasn’t changed in millennia.

This situation is self-perpetuating. Higher education does lead to higher real wages, but those are captured by future education costs. Is this a problem? Sure it is. Those high sticker prices discourage otherwise qualified applicants. And the byzantine financial aid system is a disincentive to save or earn more, with an effective marginal tax rate in excess of 100%.

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 creative destruction. A simple need-based tuition formula that requires college-prep work would go a long way. But the market will figure that out. In the meantime, we’ll all be filling out those forms.

Douglas R. Tengdin, CFA
Chief Investment Officer
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