Misconceptions 101: Why College Costs Aren’t Soaring

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By Evan Soltas

Conventional wisdom suggests that U.S. colleges and universities have become sharply more expensive in recent years.

"When kids do graduate, the most daunting challenge can be the cost of college," President Barack Obama said in his 2012 State of the Union address. "We can’t just keep subsidizing skyrocketing tuition; we’ll run out of money."

At first, the view that the cost of college is rising appears to have data on its side. Published tuition prices and fees at colleges have risen three times faster than the rate of Consumer Price Index inflation since 1978, according to the Bureau of Labor Statistics. (See the accompanying graph.) The most common fees come from health services, technology and course fees such as those for science labs and art studios. Room and board costs are counted separately.

Real tuition and fees have increased, to be sure, but hardly as significantly as the media often report or the data suggest at face value. The inflation-adjusted net price of college has risen only modestly over the last two decades, according to data from the College Board's Annual Survey of Colleges.

What has happened is a shift toward price discrimination -- offering multiple prices for the same product. Universities have offset the increase in sticker price for most families through an expansion of grant-based financial aid and scholarships. That has caused the BLS measure to rise without increasing the net cost.

Wealthier families now pay more than ever to send their children to college. But for much of the middle class, the real net cost of college has not changed significantly; for much of the poor, the expansion of aid has increased the accessibility and affordability of a college education.

Data from the College Board show effectively no change in real net tuition and fees for dependent students at four-year public or private universities whose families are in the lower-two income quartiles. There also have been some increases in the real cost of room and board, but for families with below-average income, the rise has been on the order of 20 percent over 20 years.

At four-year public universities, the average sticker price for tuition and fees has risen 127 percent in real terms, from $3,810 in 1992 to $8,660 in this academic year. But only $990 of this $4,850 increase in sticker price, or 20 percent, is due to increases in net cost. The remaining 80 percent is price discrimination.

At four-year private universities, the story is the same. From 1992 to 2012, their average sticker price rose $12,020, or 70 percent, after inflation. Only 28 percent of this increase, or $3,370, has come from net cost; 72 percent of the increase is in the sticker price only.

The nation's most selective institutions are leading the trend toward income-based price discrimination. For example, at Harvard University, the majority of students receive financial aid: In 2012, one year of undergraduate education had a sticker price of $54,496 and came with an average grant of roughly $41,000.

In other words, the cost burden of college has become significantly more progressive since the 1990s. Students from wealthier families not only now pay more for their own educations but also have come to heavily subsidize the costs of the less fortunate.

The misconception of rising college costs matters. We shouldn’t tie subsidies for public universities to their sticker prices, as Obama suggested in his State of the Union address. That’s asking them to undo decades’ worth of work to make postsecondary education accessible to more families, whatever their means. The right goal would be to focus on reducing the net cost of tuition and, more broadly, a college education.

(Evan Soltas is a contributor to the Ticker. Follow him on Twitter.)

Read more breaking commentary from Bloomberg View at the Ticker.

-0- Nov/27/2012 23:01 GMT