Perspectives on the elephant of college pricing

Several recent reports enable us to look at the elephant of college pricing from several different perspectives. I will focus on data regarding the four year private non-profit sector since that is the sector I know the best, although the data regarding other sectors is equally rich and interesting. 

Perhaps the most though-provoking information comes from the recent College Board report Trends in College Pricing . The College board finds that the average published 2009-2010 tuition and fees at private four year, non-profit colleges grew at the rather astounding rate of 6.6% in constant 2009 dollars (i.e. 6.6% above inflation!).  The average published tuition, fees, room, and board grew at a similar 6.5% above inflation.  These data are certainly striking, and deserve to be looked at from several perspectives.  First, it is important to view these results in the context of tuition- growth data and household income-growth data over the past 20 years. Then, it is interesting to look at these data from the standpoint of the student, and how much she is actually paying for a college education.  Finally, I want to look at the data from the perspective of the colleges, asking how their total income has been effected by the offsetting themes of tuition increases and tuition discounting.

THE PUBLIC'S VIEW OF THE ELEPHANT

Growth over the past 20 years in median real (inflation adjusted)  household income per quintile is show at the right.   Data comes from the US Census Bureau report Income, Poverty, and Health Insurance in the US:2008(Table A3).  I find the data striking for three reasons. First, the growth in real household income for the bottom 4 quintiles has been minimal over the past 20 years. Second, there is a particularly significant gap between the 4th quintile and the top quintile. Finally, there has been significant growth in the median real household income in the highest quintile.  These data seem to me to be particularly important as higher education leaders consider their future pricing options. 

The next figure, drawn from Trends in College Pricing (Table 5), shows the average real published price for tuition, fees, room and board at 4 year private, non-profit colleges. Growth in real published total prices over this most recent two decade period is significant: about 68% . This "full price" data is what is most often mentioned in discussions of college price. 

The final figure of this section puts the information from the first two figures on one slide with all data normalized to 1 in 1988.  It is clear from this figure that published real college cost has grown significantly faster than even the real median household income of the top quintile. Note that this curve does not include the significant price jump in 2009, as there is no income data for that period. One must imagine, however, that real income dropped noticeably in 2009.  This real price "outdistancing" of real income growth provides an easy target for unhappiness over college cost.

THE STUDENT AND PARENT VIEW OF THE ELEPHANT

From this perspective, the glass is half full-or, there is good news and bad news.  

First, the good news. Of course, there are a variety of grant and loan programs that help to lower the actual price of college below that shown above.  The figure shows data from table 7 of the College Board’s Trends in College Pricing 2009.  This shows that the net real price (published price less grants and loans) of tuition, fees, room and board has remained reasonably constant over the past 8 years or so, while the published real price has grown significantly.   Thus, from the viewpoint of the average student and parent, real net price has not grown so rapidly as might have been indicated in the data above, and are relatively constant in time.   

But, the bad news. Around ½ of the aid received by undergraduate students is in the form of Federal and nonfederal loans, as shown in this figure (from table 10a the College Boards Trends in Student Aid 2009).  Since the total real aid has been growing steadily over the period of this  figure, it means that the real value of loans taken out by students and parents has also grown steadily over time. Thus the reality is that real net price as seen by the students and parents have, in fact, grown rapidly over time - it is just that some of the payment of that price has been deferred into the future. 

The next figure shows how the Net Price figure above is changed if the loans are added in to reflect what the average student and family will ultimately be paying for a year of college (interest costs of loan are not included).  This figure shows that average annual real price (net plus loans) of a college education has actually grown by 32% over the 15 year period covered by  the figure - not constant at all.  Note also that the jump in price in the 2010 school year is not included due to lack of data on breakdown of aid for that year.  Whether future students and parents weigh the net total price curve or the net total price + loans curve more heavily depends in large part on how the great American love affair with debt shakes out after the current downturn.

Of course, there is no such thing as an “average student”insofar as financial aid goes, so these data actually vary significantly according to the economic class of the parents and the price of the institution. Trends in Student Aid has some very interesting data on the breakdown of aid as a function of parental income and institutional price. 

THE COLLEGE VIEW OF THE ELEPHANT

At the end of the day, the college is interested primarily in the net income it receives from tuition, fees, room and board from its students. That is how the budget gets balanced (or not!).  A portion of the financial aid that a student receives comes from the funds of the college itself.  Thus the net income that the college receives is the published price minus the college funds that went to financial aid.  The fraction of tuition and fees that is devoted to financial aid is known as the discount rate. 

Unfortunately, I find very little published data on historical discount rates.  The College Board published Tuition Discounting: Not Just a Private College Practice in 2006, and the National Association of College and University Business Officers (NACUBO) published the results of its 2007 Discounting Survey in March of this year.  The College Board draws its data from the College Board database of well over a thousand institutions of higher education, while the NACUBO studies are based on 135 institutions of various sizes. The next figure compares tuition discount rates for all undergraduates as published by the College Board and by NACUBO. Not surprisingly given the difference in the institutions studied, the two sets of discount rates are not the same. However, they both show the discount rate increasing with time.

NACUBO also reports on the discount rates for freshmen only, arguing that freshman data is a “leading indicator” of where discount rates are going.  The next figure shows NACUBO data broken down by the type of institution: SCLT (small colleges, lower tuition), SCHT (small colleges, higher tuition), and LCU (larger colleges and universities).  This figure shows that discounting has been growing on average over the time of the figure at the smaller colleges, but is relatively flat for the larger colleges and universities.  It appear that the SCLT institutions are having to increase discount rates relatively rapidly in response to market conditions.

The prime question, of course, is what the college keeps.  One can try to address that question by looking at real published tuition and fees, and folding in the discount rate.  In order to compare apples to apples, it seems reasonable to use only the College Board data for this calculation, since the NACUBO universe is quite different.  The next figure compares published real tuition and fees, and real tuition and fees decreased by the discount rate.  The net real tuition and fees collected by colleges was remarkably constant over the period 2001-2005 despite an increase of almost 14% in published real tuition and fees- discounting essentially negated the increases in tuition and fees.  The NACUBO data would suggest that this “average” result probably does not describe very well any of the three different groups of colleges- the SCLT probably did much worse over this period, the LCU, much better, and the SCHT were somewhere in between.

Of course, the most interesting information on discounting would relate to downturn of the past two years, and there we lack data.  Inside Higher Ed reports that Moody’s has surveyed 100 institutions, and finds that 30% report a drop in net tuition and fees this year - where a normal year would see less that 10% reporting such drops.  This, of course, probably indicates an increase in discount rate larger than the increase in published real tuition and fees for the unfortunate institutions. When the data finally are published for this period, it will be interesting to see if the reign of the “increase tuition and fees well above inflation” pricing strategy of higher education has begin to hit its limits, as it inevitably must.

Comments

[Michael Josefowicz]

Thank you for the work that went into this post.

Just as an FYI, while reading I tweeted the following:

The bubble burst in real estate. Going next is the cost of higher #education. MUST read at ChangingHigherEducation blog http://ilnk.me/a1b

Lloyd responds: Michael - thanks for the compliment - and the advertising!

[CV Satisfaction]

That's a really good post! I hadn't really look at it that way! Thanks a lot Keep up the good work!

Lloyd responds: Glad you found the post useful.