Yet, Students are Taking on Record Amounts of Debt
By Doug and Polly White, Contributors, US Daily Review.
We’ve all seen the headlines, “The Cost of College is Increasing at Twice the Rate of Inflation!” There have even been books written on the topic. Headlines decrying massive increases in the cost of college are sensational. They are attention grabbing. They are also unequivocally wrong!
Oh, it’s true that published tuition and fees have been going up significantly faster than inflation. According to The College Board, from 2005-06 to 2010-11 the sticker price at private, non-profit, four-year colleges has gone up 16.4% more than inflation. Over the same five-year period public, four-year schools have seen the sticker price increase 24.3% beyond inflation.
Statistics like these are fodder for the sensational headlines we are used to seeing. However, they are also an oversimplification that obscures the truth. The problem with such headlines is that the vast majority of students don’t pay the sticker price. Instead, they pay an amount that is reduced by grants and scholarships that are awarded by the school (also called institutional aid). The amount of money that schools actually receive from students is called net tuition and fees―the sticker price less institutional aid. Because institutional aid has been growing rapidly, net tuition revenue has not been increasing as much as sticker prices.
In fact, The College Board reports that, adjusted for inflation, net tuition and fees at private, non-profit, four-year colleges have fallen from $13,380 in 2005-06 to $13,120 in 2010-11, a 1.9% reduction. Over the same five-year period public, four-year schools have seen inflation adjusted net tuition and fees fall 6.4%. While real net tuition and fees have been up in some years and down in others, the truth is that the money collected by colleges and universities has grown at about the rate of inflation for many years. Think about it. All else equal, if net tuition and fees had been going up at twice the rate of inflation for decades, professors would be rich and schools would be awash in cash. Trust us, most aren’t.
At the same time, student loan debt has been increasing rapidly. According to The Project on Student Debt, the average debt for graduating seniors with loans in 1996 was $12,750. By 2008 that number swelled to $23,200. That’s an annual increase of just over 5%, or roughly twice the rate of inflation. Further, the percentage of graduating students that have debt is increasing as well, now eclipsing two-thirds of graduates.
If the real cost of college has been roughly flat, how can the average debt that students take on be increasing at twice the rate of inflation? There are a number of contributing factors.
More People are Going to College – According to the US Department of Education in 1972, 49% of high school graduates immediately enrolled in college. By 1997, the number had grown to 67%. The percentage has fluctuated in a tight range since then. The fact is that a lot more people are going to college these days. One of the reasons is that college loans have become much more available. In days gone by, if your family didn’t have the money to send you to school, you went to work. That’s not the case today. Many more people have access to higher education, but that access requires borrowing.
Mom is Already Working – When Doug graduated from high school in 1976, his mother went to work to pay his college expenses. These days most families don’t have that option. Mom is already working and her income is necessary to pay the family’s bills. In 1975, 47% of mothers worked outside of the home. Recently, this number peaked at 73%. Students like Doug are left to borrow.
Students Go to Their Stretch School – An extremely bright young woman we know was offered a very generous merit based scholarship from Washington & Lee University in Virginia. She was also admitted to Georgetown University―her stretch school. At Georgetown University she qualified for relatively little aid. Don’t misunderstand W&L is an extremely fine school, but lacks some of the prestige of Georgetown. By choosing to go to a school that was, perhaps, a notch below her stretch school, the bright young woman saved a considerable amount of money. Many students choose to go to their stretch school and make up the gap with debt.
Some Students Pay the Sticker Price – A man with one foot in a bucket of ice water and the other on a stove may be very comfortable on average. That will do little to increase the comfort of either foot. The fact is that students who do not qualify for need-based aid and who lack the academic qualifications to compete for merit-based aid are likely to pay nearly full sticker price unless they are elite athletes. For these unfortunate students and their families, the cost of college really has gone up at twice the rate of inflation. Borrowing may be necessary.
Instant Gratification – It used to be that young people who really wanted a college education, but couldn’t afford it would work their way through school. This might entail taking semesters off to work and save money. It might mean a stint in the military before enrolling in college. These days, few are willing to take that route. They want to go to college. They want to go now. They aren’t used to delaying gratification and they don’t think they should have to wait to get what they want. So, they borrow.
Why do today’s college graduates have so much debt? It’s not because college costs so much more than it used to. It’s because the loans are available and for a variety of reasons, people choose to take them.
Doug and Polly White are Principals at Whitestone Partners; a management-consulting firm that helps small businesses build the infrastructure they need to grow profitably. They are also coauthors of the groundbreaking new book, Let Go to GROW; why some businesses thrive and others fail to reach their potential (Palari Publishing 2011). The book explains how entrepreneurs can avoid the most common pitfalls as their businesses grow and is available at www.WhitestonePartnersInc.com