How College Costs Lie To Us
When I graduated high school, my parents and I decided that I would go to community college before proceeding to university. This was to sharply reduce the cost of college (two years of tuition, rather than four), and thereby keep us from taking out college loans. Surprisingly, this economical choice is made by fewer students and parents each year, despite the ever-rising cost of a college degree.
Common sense seems to dictate that the more expensive college becomes, the fewer people will enroll and take on that financial burden. But that is not what currently happens; in fact, the opposite seems to occur. Why?
Carlson Capital's Double Black Diamond Fund returned 85 basis points net in August, bringing its year-to-date net return to 4.51%. According to a copy of the fund's September update, which ValueWalk has been able to review, its equity relative value and event-driven strategies outperformed during the month, contributing 131 basis points to overall P&L. Double Read More
College Costs – The Supply and Demand of Knowledge
In 1996, a year of private university tuition cost $19,117 on average. In 2016, that increased to $32,405 (a 70 percent increase). Similarly, a year of public university tuition cost $4,399 in 1996, and raised to $9,410 by 2016 (a 114 percent increase). At the same time, inflation increased 53 percent, meaning the cost of a public school rose twice as fast as inflation. Are college graduates today 114 percent better educated than college graduates two decades ago? Doubtful, yet today’s graduates pay tuition as if they are.
Knowledge is a commodity, just like a coffee bean or an iPhone. Like any commodity, knowledge can be sold, and therefore has a price.Students and their parents continue to pay for universities, both public and private. More correctly, students, their parents, and government loans pay. In 2000, 32 percent of students received a federal government loan, with an average loan amount of $2,486. In 2014, that rose to 45 percent of students (a 41 percent total increase), with an average loan of $4,531 (an 82 percent increase).
What is this money buying? Knowledge is a commodity, just like a coffee bean or an iPhone. Like any commodity, knowledge can be sold, and therefore has a price. That is why a professor has a job, and earns a salary for doing that job. The more knowledgeable the professor, the higher the salary.
Furthermore, universities are businesses, as are coffee shops and the Apple store, and knowledge is their commodity. Like those businesses, the knowledge that universities sell is subject to the law of supply and demand – the more people want something, the more expensive it becomes; the more that thing is made, the less expensive it becomes.
Universities have only a limited number of professors, or knowledge purveyors. As more students go to universities seeking knowledge (buying knowledge), universities will respond by increasing the amount of money it takes to be given that knowledge (selling knowledge).
By this economic law, there are only two ways to hold the price constant: 1) hire new professors faster than you admit new students (increase the supply of knowledge), or 2) admit fewer students (decrease the demand for knowledge). Since 1995, the total number of full-time professors in the United States increased by 44 percent. During the same time, total national enrollment increased by 43 percent.
This shows two things: universities have only added enough new professors to simply account for new students, and there are a lot more students. In other words, new supply has only kept up with new demand, and the imbalance remains.
To economists, this paradoxically implies that students and their parents do not believe that college is too expensive. Specifically, it indicates the benefits of paying for college outweigh rising College Costs. But that is not true, and it’s the federal government’s fault.
College Costs – Encouraged by Illusion
Federal aid awards (federal loans) have kept pace with rising enrollment figures (41 percent increase and 43 percent increase, respectively). In so doing, the federal government has allowed students and their parents to largely ignore the rising cost of tuition. Rather than a student or parent having to pay 114 percent more for college today, federal loans allow that student or parent to only pay 33 percent more for college, a small price for “future job prospects.”
Federal aid awards have kept pace with rising enrollment figures, thereby allowing students and their parents to ignore rising tuition costs.The effect is that nothing keeps the price from going up. By its loans, the federal government (in conjunction with state governments) distort the cost-benefit analysis of college. Students and parents are shielded from the real cost of college, and never have to make the tough choices that result. The government is enabling – encouraging – poor decisions.
Experience shows that the law of supply and demand cannot be suspended, no matter how we wish it could. The price of a cup of coffee is only kept in check by people’s willingness to pay that price – if Starbucks begins to sell a tall cup of coffee for $4.39, fewer people will buy that coffee, and Starbucks will have to drop the price back to $2.95. The same should be true for college, yet it is not, because the government makes it look as if that cup of coffee is only $2.95, rather than $4.39.
Therefore, the only way – the only real way – to reduce the cost of college is to stop lying to students and parents about it. Only if the real cost is made plain will families be able to make good decisions about whether college is worth it. Likely, many will find it is not, and that there are great job prospects to be had at much lower cost.
Hayden Padgett is a product manager at PayPal.
College Costs article was originally published on FEE.org. Read the original article.