College tuition, which has been rising at a breakneck pace since 1990, is starting to moderate to a pace in line with inflation. Causation behind the leveling of costs is due to several factors, a Goldman Sachs report notes, pointing to supply and demand factors as well as household income growth numbers. But don’t get accustomed to a normalization in prices because it won’t last long, analysts say.

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College costs are finally dropping

From 1990 to 2016, US advanced education costs have risen nearly double that of inflation. With US student debt now near $1.4 trillion, such price increases have come in the face of college enrollment decreasing over the last five years. Supply and demand theory would note that as demand drops price might also drop, which hasn’t occurred until recently.

“Declines in college enrollment may have nothing to do with prices; we are coming off a recession (which always increases enrollment due to lack of jobs) and it could be that,” Temple University college affordability researcher Sara Goldrick-Rab told NPR, pointing to a potential political factor influencing prices. “If people want college to be more affordable then they need to be far more vocal than they are currently.”

While political pressure hasn't been applied yet, prices are beginning to moderate nonetheless.

In June, higher education PCE prices rose just 1.9% year-over-year, which is the slowest pace since of inflation growth since 1973, an August 9 note from Goldman Sachs observes. This inflation adjustment is occurring at nearly half the pace seen in mid-2014 “despite the sharp drop in labor market slack over the last three years.”

College Tuition

Several reasons why college tuition costs are moderating, but it won't last, say analysts

Causation for the relative taming of college expenses is due to several factors, Goldman Sachs researchers Jan Hatzius and his team observe. They observe three primary idiosyncratic factors are driving the cost reduction trend.

Improving state budget balances have allowed regional governments to increase university funding, a factor that reduced the need for public universities to raise tuition. At the same time, those universities are showing management discipline, as operating expense growth has slowed at both public and private schools, reducing the need for additional revenue. And there is also reduced demand, as a slowdown in household income has reduced demand-side pressures on tuition growth.

“I think that the period of rapidly rising college tuition rates is over at this point, especially as students and their families become more price-sensitive and politicians pressure colleges to hold the line on tuition increases,” Seton Hall University’s Robert Kelchen told NPR. “I think we're moving into a period in which tuition prices increase at something close to the rate of inflation and students who choose to attend community colleges will often have tuition-free options for their first two years.”

Even with political leaders calling for "free" college tuition, the relative calm in higher education inflation isn't likely to last long.

Empirical evidence points to a significant wage premium for college graduates relative to those with only high school degree, a factor which has been increasing recently. The income differential that college graduates receive is driving demand, which could actually increase if the economy begins to falter.

Goldman expects improving household income growth to add to demand-side tuition pressures with the economy near full employment. Looking at various financial models, they think tuition growth could significantly rise in two years, moving from 1.9% today to 3.3% or more by mid-2019.

Likewise, Preston Cooper, a research analyst with the American Enterprise Institute, is “reluctant to declare victory over tuition increases.” He thinks tuition hikes could re-emerge, particularly if the economy heads south and “people decide to take refuge in college” to improve their job prospects.

If Goldman is right about college tuition costs, expect student loan debt crisis to get worse.