Thursday, September 19, 2013

The Economics of College

I have a teenager who is finishing up high school this year. Needless to say I have been paying VERY close attention to the costs and news associated with enrollment at college. So when I read/hear statistics like: between 1982 and 2007 the average income for families in the United States rose 147% while college costs grew 440%, my ass puckers a little bit!

Do you realize that basically that means that the average cost of a four year degree from a state run school is nearly $14500 a year, and that's not going to include books, food, housing, computer, supplies and anything else that a college student is probably going to need! The worst part is that this is the bargain price!

What the hell is it that has made college prices skyrocket so much! Bare with me I have a theory, let me lay out some information and then I'll tie it together:

  • The US Government backs all college loans, meaning anyone can get one, regardless of credit history. Making college achievable is a great good, and I don't totally argue with the US Government doing it.
  • You can't get rid of a college loan... ever. Bankruptcy will not allow you to rid yourself of this debt burden.
  • You are constantly pitched the benefits of a college degree. The higher earnings potential, and stable job.
  • 4 Year colleges in 1982: 1957. 4 year colleges in 2009: 2774
  • Number of college students 1982: ~ 6 Million. Number of students 2013: ~21 million
So we have a ~40% more colleges, and ~250% more enrolled students between 1982 and 2013. Well from that statistic it certainly seems that demand may be outpacing supply, except I seriously doubt that any institution that was around in 1982 hasn't been growing. I mean Harvard has increased their undergraduate enrollment from 6000 students in 2000 to 7200 in 2013 or a 20% increase over the last 13 years, and that's one of the most prestigious schools in the country. I can only imagine that less prestigious schools with much smaller price tags and endowments have increased their enrollment sizes much more than that.

More importantly it seems that any student who wants to go to college seems to find a college to get into, thereby removing the argument that this whole cost increase is driven by supply and demand of students. But interestingly it does seem that there is a huge Supply of guaranteed money for colleges, and more importantly BANKS THAT SUPPLY LOANS!

We all know that when you get a loan for something the seller immediately gets the full amount of money they are asking for, and the buyer agrees to pay back the banker over time (with interest) in exchange for the lump sum. Financial Institutions are risk averse, they tend to want their money back. So they will only lend money if they feel they can reasonably get it back. The bigger the amount they lend the bigger the risk usually. This is why Jumbo Mortgage Loans (Loans over $500000) usually have a higher interest rate. They aren't guaranteed like smaller loans, and therefore lenders tend to err on the side of caution.

Well when you create a system that has NO UPPER LIMIT on the backing, and CAN NEVER BE DISCHARGED where's the risk for the lender? If there is no risk for the lender then why wouldn't they lend more money. That means that there is now a huge supply of money available to potential "customers of colleges" which means these colleges can charge more, because the market will bare it! 

It's not that education has gotten better, or that the facilities have improved that much its simply that the pockets have gotten deeper. I can't blame private colleges for trying to grab as much as possible, but it does seem to be an endless cycle. Couple that with the fact that Public colleges are receiving less government resources that would at least put some downward pressure on college prices, and we are just going to continue on this ever upward trajectory. At least, until it bursts. And it will burst. Prices for a good can only go up so much before it comes crashing down due to a backlash or something displacing it. I know its too late to hope for prices going down for me with my teen, but I certainly hope this fixes itself before my toddler is ready for college. I can only imagine what the cost will be for him if they don't.

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