The High Cost of College

In the quarter system in which our university operates, the academic calendar has just about started ticking.  I wish my students well.  Many of them will be in college because they have often been told that a college degree is the only route for personal economic security, even if this takes them more than the four-years we normally think about (In the Oregon University System, "Just over half (53%) of bachelor’s graduates complete their degree in four years.")

Most students will be in colleges and universities across this country for this simple economic reason, and not with the idea of knowledge for the sake of knowledge. I hope to contribute to both these goals, which are often in conflict with each other.  (I might even explore related questions at an academic conference early next year)

But, in any case, all the students will come to know about one thing: the high cost of college. I am not talking about the opportunity costs, but simply the out-of-pocket costs.  At dinner, and later in emails, a friend asked the same question that Megan McArdle takes up in her blog (the title of this post was triggered by McArdle's post of the same title).  First, the question:

costs have gotten out of control. Why have tuition rates gone up so much? How does a six figure student loan burden affect a person's future? How are these costs affecting middle class families? Are middle class kids ending up at the University of Phoenix or the local community college, because they can't afford this nonsense? 

McArdle quotes Glenn Reynolds (better known as the Instapundit):

The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we'll have more middle-class people. But homeownership and college aren't causes of middle-class status, they're markers for possessing the kinds of traits -- self-discipline, the ability to defer gratification, etc. -- that let you enter, and stay, in the middle class. Subsidizing the markers doesn't produce the traits; if anything, it undermines them.

What does this mean, you ask?  McArdle writes:

In the case of higher education, the form this subsidy took was particularly pernicious:  student loans. 

Ok, so let us see ... government notices that successful middle class existence seems to be neatly correlated with college education. So, why not then facilitate college going in order to help a lot more Americans realize that American Dream?  As with many noble ideas, there are unintended consequences.  Or, as we learnt quite early enough in urban planning, the road to hell is paved with good intentions :(

In the past, college degrees conferred higher incomes on those who earned them.  But almost all of that surplus went to the student rather than the college, because aside from a small number of extremely affluent families, the students were young and did not have that much cash.  If colleges wanted to expand their market, college tuition was constrained to what an average student, or their family, could pay.

Introducing subsidized loans into the picture allowed students to monetize that future income now.  It's hardly surprising that colleges began to claim more and more of the surplus created by their college degree.  Think about it this way:  if colleges create an extra million in lifetime salary, you're theoretically better off if you pay them the discounted present value of $999,999 in order to earn that extra million.

Or, in other words, government subsidies and loans have become a way to transfer monies from taxpayers to colleges--and not to students!  Will this continue for long?  Even in the new world after the Great Recession?

$1 million is close to the lifetime value of a college degree (it's actually about $1.4 million), and colleges are getting better at extracting quite a lot of that value for themselves.  And I expect that trend to continue for a while, until either the political will for the program is overwhelmed by the side effects (the diploma mills add little value, and burden students with high loans), or the middle class simply revolts, and decides the risk and the higher tuition aren't worth the benefit.  The present value of an extra $1.4 million is well over a quarter of a million dollars. 

The ultimate irony is this: most of the employees of colleges and universities--public and private alike--are middle class folks.  So, we are the ones perpetuating this and making lives increasingly difficult even for our own children and grandchildren?  Sounds bizarre, right?