Why Does College Cost So Much?

Consider that, according to the Bureau of Labor Statistics, in the 20 years from 1985 to 2005 energy costs have risen 108%, Medical costs 251%, and college costs increased 439% — but a college degree is worth it, right?

Not necessarily. While having a college degree does open doors, and increase the odds of earning a top salary in a given field, there is no direct correlation to tuition costs and benefit.

It’s one thing to hike tuition to open up a new career offering or bring more (or better) faculty on board. Sadly, that’s not where the bulk of the tuition hikes are going. Where does the money go? In a word, perks.

Princeton recently built a $136 million student residency, and apparently spared little or no expense. Do college students really need triple-glazed mahogany casement windows of leaded glass in each dorm room? Or hot tubs large enough for 15 students, as Boston University has recently added?

It’s one thing for Ivy league universities to get billionaire donors to fund such decadence, but it’s even creeping down to State Universities. It may not be so in your face decadent, but it’s there. Many schools now feature multiple eateries with a choice of ethnic and organic foods, and massive fitness and recreation centers. And wouldn’t those donations from billionaire benefactors be better spent on the quality of the student’s education?

No free market at work

In free markets, frugal consumers eventually hit a point of pain after which they will spend no more money for the given product or service, and change their consumption habits. We see this now with the price of oil and gasoline. But in the realm of higher education, free market logic does not apply. Instead, universities are free to raise their tuition with impunity – in fact they are rewarded for doing so.

Rewards for tuition hikes

There are two basic reasons colleges raise the tuition costs: perception and ranking.

The perception is that higher cost equals higher quality. We’ve all heard that “you get what you pay for.” I happen to believe that this is only true up to a point, and we have past that point long ago with college education. But my belief doesn’t change the reality of perception. Studies confirm that after colleges raise the tuition, the number of applicants also rises.

The second reason, ranking, comes from the all important U. S. News & World Report College Rankings and Reviews. This has long been the yardstick by which higher education is measured. The problem is that much of the measurement is based upon the number of applicants that get rejected by the college. As stated above, as schools raise their tuition costs, the number of applicants also rises. Since the school has done nothing to accommodate this new influx of applicants, they will end up turning a higher percentage away, and thus appear more elite in their acceptance.

What you can do about it

  • Scholarships. Scholarships are great, if you qualify. Just don’t get scammed by anyone selling scholarship lists. The information is free, and you may have to do some digging, but it is unnecessary to pay to find a scholarship.
  • Federal and state grants. Free money is always welcome, right? Most high school grads never even bother to fill out the paperwork to apply for a grant. That’s good news for those that do, since there’s more money available for those that apply.
  • Start closer to home. 2 year, community college is an excellent cost saving option for many degrees. Every student has to fulfill basic levels of English, Math, Science and History. Why pay full price for the basics?
  • Use a 529 or a coverdell education savings account. Both of these accounts are tax deferred on withdrawals, but differ slightly in contribution rules.
  • Write your representative. Grants and scholarships are nice, but don’t do anything to fix runaway tuition costs. This is due to the fact that universities charge exorbitant amounts of money because they can. Scholarships, grants and tax credits may lower an individual’s cost in the short term, but those offsets become factored into the tuition costs and end up driving prices up in the long run.

Perhaps it’s time to reconsider the non-profit tax status of many Universities.

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6 Responses to Why Does College Cost So Much?

  1. MollyJ says:

    It is ridiculous. Unfortunately schools feel that that need to do these things to atract upper middle class students with high test scores and lots of college options, and those students are the ones who raise rankings.

  2. frugalscholar says:

    Why do colleges charge so much? Because people are willing to pay.

    I’m interested in seeing what happens this year!

  3. Hilary says:

    Every student has to fulfill basic levels of English, Math, Science and History.

    This isn’t actually true. Many schools don’t have strict general education requirements. So while this is good advice for some students, it’s not necessarily good advice for all.

    Also, the reason schools are paying for snazzy athletic centers, etc. is because they are competing for the best students.

    I have always heard that it costs much more to educate a college student than tuition (like $80,000 / student at my school).

  4. Tara Piantanida says:

    This article makes some very good points. Some students and families look at the value of the school. Is a Bachelor’s degree from an expensive private school worth more than one from a public university? Maybe, or maybe not. But there will always be those students and families who want that Ivy League seal on their diploma, and are willing and able to pay for it.

  5. jIM says:

    The blog missed a few key points. It hinted at these, but needed to dive deeper.

    Cost in some cases is also related to endowment. For example Harvard could probably fund 20k for every enrollee through its endowment. The endowment has tax favored status, meaning this is a classic micro-economic self fulfilling prophecy.

    Harvard knows it can generate 20k per student from it’s endowment so it charges 50k per year. The 30k being paid by the student compares with other schools, the 50k the school receives allows it to spend more on faculty, services and infrastructure. The 50k price tag then suggests everyone wanting to compete with Harvard needs to up their price, even though those same schools do not have their endowment funding 20-40% of the overall cost and budget.

    A good way to fix this is to take the tax favorable treatment away from the endowment, and require more than 2-3% of the endowment get spent in any given year, and also require that an endowment spend X% based on a ratio of endowment size to freshman class size. This would then increase enrollment if Harvard wanted the endowment to stay large.

    My college increased tuition 100% over a 3-5 year span right after I graduated. The logic was that our graduates are better than Harvard grads (in engineering) and the college needed a price tag to match the ivy league to attract more students or applicants.

    The best solution is for the student and family to make smart choices. Community college, state college, trade school or something which gives student a career. The college experience is fun, but it is not for everyone.

    The post should have also mentioned the tuition and fees tax deduction, the hope credit and the lifetime learning credit as other sources for financial assistance.

  6. Sandra says:

    I fell like its ridiclous that these colleges online cost so much. You get in debt paying them off. I got a loan for 9,000 and I didn’t get anything back. They charge for room and board and I go to school online. I don’t get it the price is to much. This makes me mad.

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