Wall Street to ...'s  Instablog

College tuition prices have been rising without warrant.  Now that a bachelor’s degree has become commonplace, colleges and universities have students between a rock and a hard place. Enabled by the ease of credit, tuition costs have grown at a rate 2.3 times inflation.  Tuition prices of public four year colleges for 2008-2009 are 6.4% higher than the 2007-2008 prices.  However, during that same time period, the CPI only grew by 2.8%.  During weak economic period and high unemployment, other goods have decreased to meet consumers spending abilities.  Housing prices have decreased by 6%. 

How are students paying for the price increases?  The answer is financial aid and loans.  One set of data shows that average institutional grants increased by 3% while average student loans increased by 19.8%.  The increase in price is not being supplemented by increased aid from the schools. The young students are being forced to subject their perfect credit ratings to large loans with high interest rates. Students graduating in 2008 had an average debt of $23,200, which is up 24% from 2004.  This burden comes at an awful time considering unemployment is currently up 69.6% from May 2004.  In the current society, students who want to be “successful” and get a “good job” are pressured to take on large loans to pay for their education. Now with large amounts of debt students are required to pay off, it is growing increasingly hard for graduating students to find jobs at McDonald’s let alone a high caliber job they were hoping for.  In a Baltimore Sun survey, 80% percent of 2008 graduates admitted they would have to move home until they found a job, up from 63% in 2006.

This “bubble” is appearing eerily similar to the housing bubble that led to the recent financial crisis.  The government has made it much easier for student loans to be obtained, as over two-thirds of students now take out loans to go to school.  Much like sub-prime lending during the housing bubble, this has allowed colleges and universities to drive their prices up at an alarming rate.  You can see the connection between the two bubbles here:

What do we think needs to happen in the future?  In order to increase enrollment and give more people the opportunity for higher education, the costs will have to drop.  First of all, the dropout rate will probably continue to rise.  In the 90s, about one-third of students did not graduate.  During this decade, however, fifty percent of students did not graduate; thirty percent left in the first year.  This sharp rise in the dropout rate is largely attributed to the high costs of colleges and universities.  With this unattractive number rising, students may choose to not attend certain schools forcing these schools to lower their costs.  Also, with increased lending regulations, schools may have to lower prices to allow more students to attend.  In the next decade, we believe the tuition costs should significantly drop.  It may not be as dramatic a crash as real estate, but it will be significant nonetheless.  

Sources available upon request.