Society and Culture, Education

College Costs Outpacing Ability of Consumers to Pay

The recent news about wages for most Americans has been bleak. Median family income has been relatively flat for most of the decade and has fallen around 6 percent since its peak in 2007, just before the current Great Recession began. As is well-known, income stagnation has created a decline in demand for many consumer goods, especially housing, where median home values throughout the nation have collapsed.

After housing, usually the single most expensive item that many Americans purchase is a college education for their children. However, the costs of attending college is outpacing the ability of families to pay, by a long shot.

In the figure below, I take the average cost of attendance at bachelor-degree-granting institutions as a percentage of median family income. I report these percentages for each of the three types of campuses we have in the United States: public institutions (e.g., the University of California, Ohio State); private not-for-profits (Harvard, Adelphi); and private for-profits (Kaplan, University of Phoenix). We can think of this figure as charting out how much of their income the median household would need to spend each year to pay for a student enrolled on average in one of these colleges. Obviously, there is great variation in the costs between different campuses, even within each of these three categories, but the graph communicates the state of affairs of higher education in the United States: as their customer base loses the ability to pay, colleges and universities continue to become more expensive.

Consider the most expensive campuses in the nation: the private not-for-profit institutions of higher education. In the 2000/2001 academic year, the cost of attending one of these campuses absorbed roughly 40 percent of median family income. Over the past 10 years, this percentage increased year after year, and last year, the cost of attendance equaled 60 percent of median family income.

Public colleges and universities are heavily subsidized by taxpayers, so their cost of attendance is much lower than the cost of attending a private college. Here too we see a steady increase in the percentage of family income needed to pay a year’s attendance, growing from about one-fifth of family income  at the beginning of the decade to just about one-third now.

Private for-profit institutions are the fastest growing segment of the higher education industry in the United States. Traditionally, their cost of attendance has been in the middle of the high priced not-for-profits and the subsidized publics. Their cost of attendance has increased from about 30 percent in the 2000/01 academic year to 37 percent the last academic year. It is interesting to note that for-profit institutions actually decreased their costs relative to family income between the 2009/2010 academic year and the 2010/11 academic year. Perhaps being more subject to market pressure than the other sectors, the declining income of their clientele has begun to force them to figure out how to reduce prices.

Not many industries can keep outrunning the ability of their customers to pay. During the last decade, higher education was one of them. How much longer can this go on?

Notes:

The numerator is from the U.S. Department of Education Integrated Postsecondary Educations Data Systems (IPEDS). The cost is for the modal type of student in each of the three types of campuses: for public institutions this is the price of attendance for full-time, first-time undergraduate students (academic year programs), total price for in-state students living on campus; and for not-for-profit campuses, this is the price of attendance for full-time, first-time undergraduate students (academic year programs), total price for out-of-state students living on campus. Very few for-profit institutions have on-campus housing, and the price of attendance is for full-time, first-time undergraduate students (academic year programs), total price for out-of-state students living off campus (with family). Note that this is based on “sticker price” and that many schools discount their tuition.

The denominator is Median family income from the U.S. Census, Current Population Survey, Table F-6.  Regions—Families (All Races) by Median and Mean Income:  1953 to 2010.

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