Are Tuition Hikes Taking A Hike?

In matters financial, people often believe that past is prologue. College costs are a case in point. For more than a decade, tuition at private and public colleges around the country rose an average of 9% a year--well above both the inflation rate and the growth in household family incomes. At that rate, four years' tuition at a private college in 2010 on average would cost nearly $220,000--so frightening a sum to many parents that they figure they can't possibly sock away enough money to pay for their kids' college education.

But there's no basis for believing that costs will continue to grow so rapidly. Indeed, the scary scenarios of unaffordable college bills will prove dead wrong, argues Richard F. Hokenson, economist at Donaldson, Lufkin & Jenrette Securities Corp. Demographic shifts will pull the growth rate in annual tuition costs way down--close to 2.25% over the next 15 years or so, he says. The number of 18- and 19-year-olds in the population, contracted sharply from 1980 to 1993 and reached a low of 6.9 million in 1992. Colleges raised tuition to prop up revenues. Now, the demographics are reversing: The number of 18- and 19-year-olds is growing and should hit its next peak in 2010, when there will be 9.26 million of them--a 33% increase in the eligible college population.

Economies of scale will work to hold down tuition increases. As enrollments climb, so will tuition revenues--but per-person tuition rates will grow at a markedly slower pace. "The cost of adding an extra student to a classroom which already has five open seats is minimal compared to the extra revenue received from an additional full-time tuition," says Hokenson.

If Hokenson is right, the tuition bill for four years of college at a private institution will reach about $66,000 in the year 2010--welcome news at a time when a college education is crucial for future earning power.

    Before it's here, it's on the Bloomberg Terminal.