Stock investing for dummies
You’ve read the headlines for years – the cost of college continues to rise, and the amount of student loan debt graduates leave school with continues to grow.
According to the College Board, the average cost of tuition and fees for the 2016–2017 school year was $33,480 at private colleges, $9,650 for state residents at public colleges, and $24,930 for out-of-state residents attending public universities.
And according to Student Loan Hero, the average Class of 2016 graduate has $37,172 in student loan debt, up six percent from last year.
The fact is, people are demanding an education. And they need to pay for that education. As long as there is strong demand, it’s hard to see costs falling. But let’s take a look at some of the underlying factors that are driving the situation, and talk a bit about what can potentially be done.
Why College Tuition Costs Have Been Rising
According to The College Board, between 2011-12 and 2016-17, published tuition and fee prices rose by 9% in the public four-year sector, by 11% at public two-year colleges, and by 13% at private nonprofit four-year institutions, after adjusting for inflation.
It’s also important to realize, that along with increased tuition costs, enrollment in colleges nationwide has surged in the past 20 years. Since 1995, enrollment in higher education has increased 50%.
However, many students never actually pay full price. In fact, the average “discount rate” at private colleges is approaching 50% – that means that students are really only paying half the advertised tuition price. This could be through a combination of grants and scholarships, work study, and more.
So, there’s more students, more discounts, and yet college tuition has been rising? Why? Well, because colleges can. They are using the money to expand programs, hire more full-tenured professors, and expand administration that, in turn, can potentially provide more experiences to students.
How can they justify it? Because of student aid. Recent research has suggested that because of generous financial aid programs (i.e. student loans), colleges have an incentive to raise prices to capture as much of this as possible.
Colleges can charge more because students can pay more. It’s as simple as that. But to stay competitive with other schools doing the same thing, colleges need to offer more services, have better professors and programs, and more modern campuses. Thus, they spend, expand, and pass the bill onto students that can pay due to government-backed financial aid programs.
Looking At Student Loan Debt And Paying For College
So, moving into student loan debt, we know there is a record $1.45 trillion in outstanding student loan debt and it’s continuing to grow. And it’s incredibly easy to get student loans! While there are caps on the amounts of Federal student loans you can get, the rise over time. And there are really no limits on private student loans.
Borrowers can basically get a limitless amount of money to pay for college. Lenders are happy to lend because the collateral for student loans is future earnings. Given that there are limited ways to discharge the debt (i.e. no bankruptcy options, generous ability to collect), lenders have a “safe” bet of getting repaid over a young person’s entire life.
As a high school senior, you don’t consider much else except “this is where I want to go to school, let’s get the loans and pay for it.” Sadly, there aren’t many who do an ROI Calculation on the value of a college education.
Even fewer look for ways to minimize the amount borrowed by getting scholarships, working through school, or taking community college classes.
When it comes to paying for college, the math is skewed in colleges favor. If they create a high demand for their programs by investing in them, they can charge more, knowing full well that students can always pay because their costs are going to be covered by limitless government-backed loans (both directly backed and indirectly backed through legislative protections).
College Economics 101
Now that we understand the underlying causes, let’s do some economics 101 and really show why the cost of college and student loan debt won’t go down.
Demand For College Education: Growing
The simple fact is that growing college admissions have failed to keep pace with the rising amount of students applying for college. College Board research has shown that admissions have only kept pace with 50% of the applicant increase in the last decade. At the most competitive schools, admissions have only kept pace with 10% of the applicant increase.
Supply Of College Eduction: Limited
At the average school, admissions have increased by 747,000 over the last decade. At highly competitive schools, admissions have only increased 55,000 over the last decade. Neither of these numbers comes close to the rise in demand. And logistically, it will be difficult for schools to continue to invest in supply of education without massive expenditures in infrastructure and staffing.
Price Sensitivity Of College Students: Insensitive To Price Increases
Given the fact that college students can (and will) pay anything for college, there is no reason that suppliers need to lower prices. As such, the price sensitivity of college students is very insensitive, and tuition increases will not create any diminishing demand. The student loan system is a big driver in the price elasticity of demand of college students.
How Can We Change The System?
This is the million (or trillion) dollar question – what can we do about rising tuition costs and rising student loan debt? Sadly, not much – but here are some areas to focus on.
With anything, you have to look at the economic drivers and see what change can happen. There isn’t much that can be done for the demand side of this equation. Education is a national good, and it should be viewed positively that people want to get educated. You can potentially look at better K-12 education, but I doubt that would have much of an impact on higher education demand.
We can look at improving higher education supply, but this would be costly – and it’s likely that any increases in supply would simply be passed to the tuition payers anyway. The other solution would be more public funding, but that public funding would likely be offset through taxes or increased tuitions – still putting the burden on the public.
Finally, we can look at shifting the price sensitivity of college students. How can we make college students more sensitive to the cost of tuition? We can make it harder to borrow. That’s not a sexy or popular answer, but it would work to drive costs down.
By instituting lower Federal limits, instituting private student loan limits, and potentially tying both Federal and private borrower limits to colleges and/or degree programs, we could force a shift in the higher education marketplace.
If colleges suddenly faced a class of student who simply couldn’t borrow their way to pay for school, the colleges would be left with a choice:
- Keep costs the same and see lower enrollment (which would diminish revenue to the school)
- Lower costs to allow for students to borrow in order to maintain full enrollment (and in turn, maximize revenue)
A bonus of lower borrowing limits would likely be less student loan defaults in the future, as the ROI of a college education would likely become more in line with potential earnings after graduation.
However, in the short term this would be a huge disruption to higher education because they would have to realign cost structures to conform with a lower revenue environment. While good for students, it could prove challenging for schools (and their government or non-profit backers).
It’s hard to discuss overall structural change to the higher education system in the United States because there will always be winners and losers.
However, college, and it’s associated costs, is still a personal decision. Nobody is forcing college on anyone. Nobody is forcing student loans on anyone.
The best thing a family can do is have a rational discussion about college costs, paying for college, and working together as a unit to ensure the student is successful (both educationally and financially). Look at ROI, have a purpose for going to school, and don’t be afraid to work during school to offset the costs and gain real world skills.
What are your thoughts on rising tuition, rising student debt, and potential solutions?
stock investing for dummies