Why Are College Costs Rising So Fast?

Exploding medical costs get most of the media attention, but over the last decade educational costs have risen almost twice as fast. It is natural to ask why.

Medicine has changed significantly over the last decade as new drugs and treatments became available. It is plausible that this can drive up costs. It makes more conditions treatable and more sophisticated treatments are likely to cost more.

But what has changed in education?

Nobody has found a way to teach previously unteachable students. Nobody has found a way to implant knowledge directly into student's minds by means of some technological wizardry. So why is the cost of education rising so fast? Gross mismanagement? Private islands for university presidents? Lavish union contracts for the employees? Let's take a look!

We will use the University of California as an example. It is a large public university in a state that is well known for poor management. Problems should be more apparent here than elsewhere. Our data comes from UC's Budget Office.

Cost per UC Student by Source (inflation adjusted)

The chart at right shows the cost of educating one UC student, broken down by the source of funds: state funding, funding from the university, and student fees.

According to the 2011-2012 budget summary, the cost in today's dollars has declined over the last decade. The rate of decline was about 2% per year.

This is reasonably close to the average annual productivity gains for the US economy as a whole. We conclude that UC is about as well run as an average business. Gross mismanagement is not the cause of rising education costs.

The reason why education has become more expensive for consumers is that state support for universities has evaporated.

From 1990 to 2000, state funding was cut in half, which translates to a decline of  about 7% per year. Over the same period, student fees almost tripled to cover the shortfall.

This shifts the cost of education from tax payers to the individual students and their families. In effect California has been de-socializing education even as more and more medical costs are getting socialized (see Bush's Medicare expansion and Obama's healthcare reform).

It is likely that similar forces drive the increases in education costs for consumer in other states too. Even though the cost of educating a person has declined, student fees may very well continue to outpace general inflation for a while. However as soon as the shift from public to private funding is complete, cost increases should slow down to tracking general inflation again.

Posted by: Martin Gremm

About the author

Marc Schindler, CFP®

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