Category Archives: Financial Planning

College Finances II – Do [Tuition] Trees Grow to the Sky? (06/12/2014)

Last time we reviewed current college costs and recent growth. Continuing with the theme, this post will be taking a look at longer history of tuition growth and how it compares with other indicators.

Exhibit 1 shows costs for selected schools. Once again, I’m picking on three schools: University of Michigan since it’s my Alma Mater (Go Blue!), University of Arizona as it is my adopted home school in Tucson (Go Cats!); and Harvard because, well, it’s Harvard! By the way, the lines on the chart use the official school colors with custom RGB settings: Harvard Crimson, Michigan Maze & Arizona Navy Blue – how is that for attention to detail!

The first panel of the chart shows costs in actual dollars. But the second panel is more interesting as it compares apples to apples and includes the “College Tuition and Fees” component of the CPI (consumer price index) from the Bureau of Labor Statistics. Basically, schools with lower starting price tags increased them at a faster pace to close the gap. The green line shows that since 1986 the average cost of attending four-year college has increased 5.5 times or 450%!

Exhibit 1


“So what”, you say, “inflation is a fact of life and our country has become much more prosperous since then!” Let us compare college inflation with overall CPI and median family income (Exhibit 2). We are using Median Family ages 45-54 since that’s a common age range for parents with kids in college. As you can see, the increase in college costs has outpaced the broader inflation and growth in family income by a factor of two. Even as income growth slowed to a crawl in 2000’s and 2010’s, the education inflation continued unabated. To drive the point home, look at ludicrous divergence in Exhibit 3 that puts those numbers in graphical form.

Exhibit 2


Exhibit 3


Source: Bureau of Labor Statistics; PlanByNumbers

Yet another way to look at it would be to compare college costs as a percent of median family income over time (Exhibit 4). In 1978, typical family would pay about 22% of their income to cover college costs including room and board. This was doable and most families were able to cover it from their cash flow. By 1995 that number has increased to 36% and then reached almost 60% by 2012. This has led to huge increase in student loans and created the entire 529 College Savings industry.

Exhibit 4


This situation is clearly not sustainable and the political will to address it is building. The Obama administration and congress are working on addressing the student loan debt and penalties for universities with large tuition increases. I suspect at some point the market forces will reign in the costs as the college value proposition becomes less clear. In the meantime, there are some early signs of moderating price increases in the last few years:

Exhibit 5


Source: Bureau of Labor Statistics; PlanByNumbers

In another post I plan on taking a look at whether the increased earnings for college graduates make up for the escalating tuition costs.

College Finances I – What Does It Cost Today (05/29/2014)

In the past several years there has been a public outcry about escalating costs of college tuition. Obama administration even announced a plan last year to force universities to slow down cost increases or risk losing federal student aid. I have decided to take a closer look at the data in a three-post series. The first one will show how much it costs to get an undergrad degree now; then examine how fast it has grown over the past 30 years or so; and conclude with analyzing whether this growing investment in your future still makes financial sense.

Throughout the series I plan to focus on three schools: University of Michigan since it’s my Alma Mater (Go Blue!), University of Arizona as it is my adopted home school in Tucson (Go Cats!); and Harvard because, well, it’s Harvard!

So let’s take a look at what the current “sticker prices” are. Exhibit 1 shows tuition costs for 20-school sample of leading public universities. They are ranked by Out of State tuition, which basically varies from $20,000 to $40,000 a year. In State costs are much more reasonable ranging from $6,200 to $17,000. Out of State students typically pay about three times as much as their In State classmates, with a broad range from 1.5x in MN to 4.6x in FL. In the past ten years the In State costs more than doubled (+7.4% annualized), while non-resident tuition increased by 83% or 6.2% annually.

Exhibit 1 9-1

Exhibit 2 has the same data for the Ivy Leagues schools – I use this group to represent elite private universities. I don’t mean to snub Stanford, small liberal arts schools and other great choices but this is the data I have. The average sticker price for Ivies is still 44% higher than out of state rates for their public competition. However, the rates have been increasing much slower at “only” 3.8% per year.

Exhibit 2


There are several reasons for rapidly rising costs at public universities (administrators galore!). Chief among them is the declining support from their respective states. Exhibit 3 show a graphic from University of Michigan’s website. In 1960’s the state footed almost 80% of the bill but that has dropped to only 16% in 2013. The situation is quite similar in most other states and it has been exacerbated by the “Great Recession” and resulting deterioration in state finances all across the country.

Exhibit 3 9-3Source: University of Michigan

Real Costs

Don’t forget that these numbers do not include room and board, which currently runs $12,000 to $15,000 a year. Thus, four-year non-resident bill at a quality public university can easily top a quarter million dollars!

Now, there is quite a difference between the “sticker price” and what the students end up paying out of pocket. All universities have tuition assistance programs for lower and middle income families. Ivy League schools have made a big effort to make their education affordable. Given their huge endowments (relative to competition) they are able to offer much more assistance than the public schools. As shown in Exhibit 4, on average the students pay less than half of the headline price out of pocket. In fact, for many middle income families sending a kid to Harvard will cost much less than Michigan!

Exhibit 4


Next time we’ll take a look at longer term college cost inflation and compare it to other important metrics.