In many areas of our lives, prices are inflated far beyond the values they would ordinarily command in a truly free market. There are various causes; speculation, artificial scarcity, monopoly pricing, mandated production, and the ripple effects of higher energy prices.
In my last column, I said the effects of extraction are hammering the upcoming generation’s future. Nowhere has the effect of rising costs exploded the way it has in higher education. The numbers, from tuition rates to student loan figures, are staggering.
Take a look:
The Federal Reserve Bank of New York recently issued a new study that reports:
- The price of going to public colleges has jacked up 559 percent since 1985.
- The latest report on student loan debt says totals have soared beyond $1 trillion.
- Average student loan debt runs about $25,000.
- Twenty-seven percent of borrowers are at least 30 days behind on payments.
How did this happen? Most of the increase comes from three sources: state funding cuts, “tuition discounting,” and the expense of paying teachers and administrators. At for-profit colleges, which we’ll look at later, there is also executive compensation.
75 percent of college students attend public universities, and state support for public higher education has been on a roller-coaster, with an overall downhill trend.
Sources: State Higher Education Executive Officers. Figures are per full-time equivalent student, in constant 2010 dollars adjusted by SHEEO Higher Education Cost Adjustment (HECA).
The National Science Foundation looked at state funding per student for public research universities and found a 20 percent drop between 2002 and 2010. The San Jose Mercury News reports that California public universities have been hit so hard by state funding cuts, Harvard, Yale, and Princeton are now a better deal for middle-class students.
Steadily increasing tuition costs are driving heavier borrowing. This is why total student loans outstanding are now greater than credit card debt. Keep in mind these numbers are only for tuition – they do not take into account the additional – and increasing – costs of housing, food, and transportation.
By far, most student loans are government-issued. Is the Direct Loan program making a profit? Perhaps surprisingly, no. Why? The feds can borrow at low rates and lend at higher rates, but default rates among borrowers are high. Not a big surprise in an economy just getting off the floor after being hit hard.
An entire generation – people under 40 – of present and former college students are carrying a twenty-five grand ball and chain everywhere they go. People 40 and below hold more than $580 billion of the total student loan debt.
Even seniors are finding their retirement options cramped or eliminated due to long-standing student loans.
It’s not as if borrowers have much option – a college degree has become the new high school diploma. If you aspire to the ranks of management, you’d better have a degree. Otherwise, get ready to don a uniform and become another worker bee. Students are caught between a rock and a hard place – the need for a degree and the increasing expense of obtaining one. As a purely economic question, is the value of a degree is worth the skyrocketing cost? Is it a good return on investment? Here’s a comparison using data available through the College Board and the U.S. Census from 3 years ago:
And this chart only looks at private colleges. The big increases are happening at public universities.
So where is all this money going?
Much of it is going to make up for the reductions in state support. But a huge chunk is going towards “tuition discounting” and administrative costs. Mark Kantrowitz, founder of the college finance website FinAid.org, reported in 2002:
“The practice of tuition discounting, in which a college awards financial aid from its own funds, is responsible for 27% to 32% of the increase in college tuition. On an absolute scale, tuition discounting accounts for 2 to 3 percentage points of the college tuition inflation rate. Tuition charges would be 22% to 25% lower without tuition discounting, but lower income families would be unable to afford to pay for a college education.”
“The most significant contributor to tuition increases at public and private colleges is the cost of instruction. It accounts for a quarter of the tuition increase at public colleges and a third of the increase at private colleges.”
Ten years on, that observation holds true – administrative costs are a major driver of increasing tuition. If you’d like to see for yourself, check out the Chronicle of Higher Education’s survey of average faculty salaries for 2011-12.
The numbers are even more startling at for-profit schools. Executive compensation at the top 15 publicly-traded education firms amount to two billion dollars. Worse, students attending these schools are defaulting at three times the rate of private non-profit schools. The four-year degree graduation rate is 22 percent. That translates into a lot of dropouts burdened with student loan debt and no degree.
The Economist reports that in 2009, the average yearly tuition at for-profit colleges was about $14,000, compared with $2,500 at a community college. Not coincidentally, these schools are the source of the greatest growth in student borrowing, accounting for nearly 25 percent of federal loans and Pell grants.
So put it together – executive compensation at for-profit colleges are more than 26 times that of the highest-paid president of a traditional university. These salaries are funded mainly by public education subsidized loans, all repaid by students – get ‘em while they’re young! – who are locked into loans that may or may not yield work earning enough to pay it off.
In the for-profit education sector, it’s clear where the money is going – from public coffers to private interests, with the students left holding the bag.
What does it say to our youth that the rate of extraction in education exceeds even that of health care in America?