• Home
  • About
  • Services
  • Contact
  • Media

College Finances II – Do [Tuition] Trees Grow to the Sky?

Posted June 12, 2014 by Denis Smirnov

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

10-1

“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

10-2

Exhibit 3

10-3

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

10-4

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

10-5

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.

Share this:

  • Facebook
  • LinkedIn
  • Twitter
  • Pocket
  • Email

Sign up to the newsletter

Categories

  • Bear Markets
  • Bonds
  • Economy
  • Education
  • Financial Planning
  • Indexing
  • Investing
  • IPO
  • Retirement
  • Taxes
  • Uncategorized
  • Valuation

Archives

  • January 2023
  • October 2022
  • September 2022
  • August 2022
  • July 2022
  • May 2022
  • April 2022
  • February 2022
  • January 2022
  • October 2021
  • September 2021
  • July 2021
  • February 2021
  • January 2021
  • November 2020
  • October 2020
  • September 2020
  • July 2020
  • June 2020
  • May 2020
  • March 2020
  • February 2020
  • January 2020
  • November 2019
  • October 2019
  • September 2019
  • July 2019
  • May 2019
  • February 2019
  • January 2019
  • December 2018
  • October 2018
  • September 2018
  • July 2018
  • June 2018
  • May 2018
  • March 2018
  • February 2018
  • January 2018
  • December 2017
  • November 2017
  • September 2017
  • August 2017
  • July 2017
  • June 2017
  • April 2017
  • March 2017
  • February 2017
  • January 2017
  • December 2016
  • November 2016
  • October 2016
  • September 2016
  • August 2016
  • June 2016
  • May 2016
  • April 2016
  • March 2016
  • February 2016
  • January 2016
  • December 2015
  • November 2015
  • October 2015
  • September 2015
  • August 2015
  • July 2015
  • June 2015
  • April 2015
  • March 2015
  • February 2015
  • January 2015
  • December 2014
  • November 2014
  • October 2014
  • September 2014
  • August 2014
  • July 2014
  • June 2014
  • May 2014
  • April 2014
  • March 2014
  • February 2014
  • January 2014
  • December 2013
  • October 2013
About
  • Background
  • Who We Are
  • The Gordian Knot
Services
  • Services
  • Planning Process
  • Investment Philosophy
Contact
  • Contact Details
  • Inquiry Form
  • Map
Media
  • Articles
  • Blog
  • Reviews
Dave
Denis
 
 
 
 

Gordian Advisors Financial Planner

Office: 2200 E. River Rd., Suite 109, Tucson, AZ 85718

Phone: 520-615-2779

Email: info@gordianadvisors.com

Download Form Form CRS Client Relationship Summary

Download Form ADV Disclosure Brochure

Gordian Advisors may only transact business or render personalized investment advice in those states where we are registered, or have filed notice, or are otherwise excluded or exempted from registration requirements. Material discussed is meant for general illustration and/or informational purposes only, and is not to be construed as investment advice. Nothing on this web-site should be interpreted to state or imply that past results are an indication of future performance. Although this information has been gathered from sources believed to be reliable, please note that individual situations may vary. Therefore, any information should be relied upon only when coordinated with individual professional advice.