“The U.S. is in a class of its own.” - Andreas Schleicher, Director for Education and Skills at the OECD
Each year the Organization for Economic Cooperation and Development (the “OECD”) studies the global landscape of higher education and publishes a detailed accounting of their findings in a report called Education At A Glance. While the amount of information provided in these extensive reports is mind numbing, each and every year one finding in particular seems to stand out to those of us with kids in or approaching adolescence: college is expensive. This is especially true here in the U.S. where we spend more on higher education than virtually any other country in the world.
What’s particularly interesting to me, though, is that the cost of higher education in the U.S. has been accelerating at a pace much higher than broader inflation in recent decades. It’s for this reason that we apply inflation rates as high as 5-6% to college costs when building financial plans for our clients.
So why is this exactly? It’s an interesting question, but one for which a concrete answer has been elusive despite extensive study and research. The fact of the matter is that the trend is being caused by a convergence of a number of different factors at once and can’t be boiled down to a simple attribution analysis. That said, here are the most cited reasons based on our own reading and research:
More People Are Going To College
The first, and perhaps simplest, contributing factor is simply that more and more people are going to college. Richard Vedder, author and professor of economics at Ohio University, was stating the obvious in an interview with Business Insider when he said, "The demand for higher education has risen dramatically since 1985. Once demand goes up and nothing else happens, that will raise prices."
The increases in enrollment rates is partially explained by the normalization of higher education within our society. The expectation has simply grown over time that college is “what you do” after high school. The trend has also been helped along by the elimination of financial barriers for college enrollment. While arguments could be made as to whether or not this is a healthy thing for society overall, the proliferation of government aid, particularly in the form of student loans, has made it far easier for the average American to go after their degree. (Perhaps we’ll follow up with another Insight soon profiling what we would consider a disaster developing in student loans.)
State Governments Are Spending Less
While this factor may not directly affect the private institutions, it certainly does impact the network of publicly subsidized institutions that account for the vast majority of students in our country. State budgets are finite, and unlike the Federal government the States are far more limited on what they can borrow and thus how large their deficits can run. In the face of wild economic (and tax revenue) swings as well as ever expanding “mandatory spending” line items, particularly Medicaid, the amount of money left to go around to other programs has dwindled in proportion over the years. There are simply fewer dollars available to fund higher education, and state funding has not been able to keep up with growing enrollments. Colleges, by extension, have had to rely more on tuition and fees to keep the lights on.
Amenities and Ancillary Services
While higher demand might make it easier for colleges to keep classrooms full, they are still in competition with each other to attract the most desirable student populations – those high performers that have the financial resources to pay full sticker price. Over time this has led schools to expand their amenities and ancillary services in order to become more attractive and capture the imagination of their would-be attendees. Think costly athletic programs, indoor rock climbing facilities, flashy dormitories and dining facilities, lazy rivers, etc.
Along these same lines, one data point I stumbled across that I found particularly interesting is that U.S. colleges spend more on nonteaching staff than on teachers, which apparently is not the case in any other country reported in the OECD report other than Luxembourg. As pointed out by the Atlantic,
Many U.S. colleges employ armies of fund-raisers, athletic staff, lawyers, admissions and financial-aid officers, diversity-and-inclusion managers, building-operations and maintenance staff, security personnel, transportation workers, and food-service workers.
While the full college experience is clearly about more than just classroom work, it’s rational to assume that this staffing issue is exacerbated by the rapid expansion of ancillary programs colleges are rolling out in order to make themselves more appealing to their target audience.
College Is A Professional Service, Not A Manufactured Good
The final and perhaps most interesting reason for the continual rise in the cost of higher education is that college is essentially a professional service rather than a commoditized product. Higher education is typically delivered by well-educated individuals capable of generating significant earnings in private careers if they so choose. As such, the personnel cost of colleges has continued to inflate at higher rates than, say, the price of big screen TVs. Broader measures of inflation that include all sorts of manufactured goods have benefited from revolutionary advances in all kinds of technology, whereas the delivery system for higher education has not evolved in such a way. Colleges still pay up in order to staff their classrooms with, well, college educated educators.
We’re not sure what specific blend of the above factors has directly led to the ever increasing cost of college in recent decades, but we think the trend can be primarily attributed to these handful of factors. The big question for us and our clients is, How long can this trend continue? It’s irrational to assume that the cost of college can continue growing at the same rate indefinitely…at some point everyone would simply be priced out.
In looking towards the future we see two structural changes that could break the trend of higher and higher college costs. First, demand could simply fall. There could be a cultural shift away from the default expectation of attending college towards some alternative means of education and professional development. Second, technology could be harnessed in more productive ways to make the delivery of higher education more cost efficient. The expansion of online learning and artificial intelligence are two drivers that could further commoditize learning and bring down unnecessary overhead. I suppose a third option to bring down retail cost could be an expansion of government subsidies, but rather than bringing actual costs down this would only shift the burden to a different payer.
Typically being in “a class of your own” is considered a good thing. As the father of three rapidly growing kids, however, I’m not thrilled with this description of the United States as it pertains to the cost of attending college! More than ever, solid long-term planning and careful consideration of all options is paramount when approaching the incredibly informative life decisions surrounding the college decision – not the least of which is how to cover the expense.
Author David Houle, CFA is a founding member of Season Investments. He serves as the firm's Chief Compliance Officer as well as sitting on the investment committee overseeing the management of client assets. David spent nearly ten years in various roles primarily managing individual client assets prior to co-founding Season Investments. David graduated with a degree in Finance from Colorado University in Colorado Springs in 2003 and earned the Chartered Financial Analyst (CFA) designation in 2006. David and his wife Mandy have three children and spend most of their free time with friends and family.
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