This is a guest post I wrote for Free Money Finance that was published two weeks ago.
ooOoo
Yesterday I was reviewing the 529 college savings account balances for our daughter and unborn son. I was pleased to see that in four-ish years we’ve managed to save and invest $13,000 for her college education. Even our son has $1,200 saved.
But it also got me thinking about the high cost of college. Why do we have to save so much to be able to afford college for them?
Why is college today so expensive?
For some historical family perspective, my father paid for his 4-year degree by working summers and using the G.I. Bill. He went on to get a masters degree, again without incurring loans. The story is similar for my mom.
Yet I came out of college 13 years ago with approximately $9,000 in student loan debt alone, which is relatively small from what I can tell reading other peoples’ stories. And, like my father and mother, worked summers. That wasn’t even close to all of my debt when I graduated, by the way.
Here are some hard numbers on college costs:
- The price of public colleges increased 28% in the last five years alone even after adjusting for inflation. Eighty percent of all students are enrolled in public colleges. [Source: American Council on Education]
- Student debt has more than doubled from 1993-2004. [Source: U.S. Public Interest Research Group]
Why the meteoric increase in tuition and fees?
I think there are several reasons why college costs so much. State funding cuts, easy loans, increased demand, and a willingness to spend on education are the primary drivers.
First, in the case of public schools, states have decreased funding for higher education. In the 2002-2003 school year, 21 states either cut higher education funding or held it steady (0% increase). In 2003-2004, support for universities fell nearly 4% nationwide.
Second, the federal government has made loans the method of choice for funding school. By giving Sallie Mae and Fannie Mae the implicit backing of the full faith and credit of the U.S., the federal government has subsidized the loans these firms make. It has shrunk grants and made loans cheaper, trying to provide education on the cheap.
In 2005-06, borrowers (both students and parents) took out $17.3 billion dollars in non-federal loans for college. That’s up from about $1 billion ten years ago. Not one of those loans is interest-deferred, so that debt starts compounding immediately.
Student population increase is another reason why higher education is becoming more expensive. There has been a steady increase in demand for a college education since the 80s. Higher education operates somewhat as a supply and demand economy, allowing colleges to charge more especially at the high end.
Finally, families are more willing to spend on education. As the U.S. economy becomes more knowledge-driven, education has an increased effect on income. Part of the reason for the explosion in parental loans for higher education comes from its perceived importance in today’s economy.
As the price rapidly outstrips inflation (and income), attending college becomes an increasingly risky proposition. A student who takes on tens of thousands of dollars in loans must be reasonably sure of his or her ability to repay them. But while student debt has more than doubled from 1993-2004, median earnings for 25-34 year old college graduates has fallen 8% since 2002 according to the U.S. Census.
It’s worth noting that student loans cannot be discharged in bankruptcy. They are with the borrower until they are paid back or the borrow dies.
So where does this leave us? I think this trend is here to stay. As a result, middle class families will feel even greater financial pressure as the kids reach college age.
The options are few and all are difficult. Some families will be able to save for their kids’ education. Some students and parents will take on onerous loans to make college a reality. And unfortunately, a great many young people with the capability to attend college simply won’t because it’s not affordable.
And that leaves all of us poorer in the long run.
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With Christmas in a few months, I’d make the same recommendation. Please, oh please don’t buy a toy for my baby. Just put the money in his college fund. Believe me, the last thing we need is more toys.
