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The Growth in College Costs Is Slowing, Particularly for Poorer Families

In a recent Wall Street Journal interview, President Mitch Daniels of Purdue University said, “For decades college tuition has outpaced inflation, forcing students to increase their borrowing.” While this sort of hyperbole is rampant in the media, it’s disconcerting, to say the least, coming from a college president. Daniels claims “tuition has outpaced inflation” for decades. What tuition? Is it tuition at public or private colleges? Is it published tuition or net tuition? And what about the fact that most students pay different tuition rates based on family income?

A blanket statement that tuition increases exceed overall price changes has consequences. Growing regulatory pressure on higher education can be traced to the general view promulgated by the media that colleges pass out-of-control costs along to students in the form of rapidly increasing tuition. The resulting escalation in tuition, it is alleged, hits low-income students particularly hard, since they are least able to afford it.

There is, however, much more than meets the eye regarding tuition pricing. If one focuses attention on private higher education, for example, careful analysis of tuition should, at the very least, be adjusted to account for institutional grants, known as discounts. Since those discounts now represent more than 45 percent, on average, of the published tuition rate for private colleges, this adjustment is necessary to reflect a more accurate measure of the actual tuition being paid by students.

According to the National Association of College and University Business Officers’ annual Tuition Discounting Study, the published tuition rate for freshmen at a sample of 107 private colleges grew to $35,236 in 2013-14 from $17,838 in 2000-1, an average annual increase of 5.4 percent. During the same period, discounts per student climbed to $15,882 from $6,468, an average annual increase of 7.2 percent. Since discounts grew more rapidly than tuition, net tuition increased more slowly (4.2 percent) than the published tuition rate (5.4 percent). In spite of this, the 4.2 percent annual increase in net tuition was still significantly greater than the 2.3 percent increase in the all-item Consumer Price Index over the same period of time.

But tuition increases have nonetheless slowed significantly. A sample of published tuition rates at 187 colleges over this period increased at an average annual rate of 4.1 percent while discounts increased 6.2 percent. This led to an average annual increase in net tuition of 2.3 percent, slightly higher than the 2.1 percent annual increase in the CPI. No question, the rate of tuition increases has slowed significantly in recent years, so much so that it’s roughly in line with inflation.

But even this doesn’t tell the whole story. Unlike most other products or services sold in the United States that have published prices and discounts, private higher education discriminates by income. That is, lower-income families generally pay lower net tuition than higher-income families. This difference is important in analyzing price change in private higher education. Since discounts are increasing more rapidly than published tuition, lower-income families — who receive a larger share of discounts — have benefited disproportionately. They are not only paying lower net tuition than higher-income families, the rate of increase in net tuition to low-income families is slower as well.

To document this, I divided the average number of entering freshmen from my sample into four equal-sized groups, based on family income. Assume that private colleges, on average, grant 40 percent of their institutional aid budget to those families in the lowest income group; 30 percent to the next lowest; 20 percent to the next lowest; and 10 percent to those families in the highest income group.

Given these assumptions, net tuition for families in the lowest income bracket would increase at an average annual rate of 2.1 percent between 2000-1 and 2013-14, slightly less than the 2.3 percent increase in the Consumer Price Index. In the more recent 2009-10 to 2013-14 period, net tuition for these families actually declined at an average annual rate of 0.8 percent, as compared with a 2.1 percent increase in the Consumer Price Index.

It’s a different story for families in the highest income bracket. If those families receive only 10 percent of the institutional aid budget, their net tuition grew at an average annual rate of 5 percent between 2000-1 and 2003-14, more than double the rate of inflation (2.3 percent) and more than double the net tuition increases charged to low-income families (2.1 percent).

Over the more recent 2009-10 to 2013-14 period, net tuition for high-income families increased at an average annual rate of 3.7 percent per year, above the rate of inflation (2.1 percent) and in sharp contrast to the decline in net tuition for low-income families (0.8 percent).

In 2000-1, the high-income group paid net tuition of $15,251 versus $7,489 for the low income group — a difference of nearly $8,000. By 2013-14, the disparity widened considerably to more than $19,000, with high-income families paying net tuition of $28,883 versus $9,824 for low-income families.

Another factor to consider in analyzing tuition is the great diversity of college pricing. Those colleges in the highest quarter of tuition rates charge, on average, net tuition of $26,640 versus $11,810 for colleges charging the lowest. But after taking into account the fact that poorer families receive a disproportionately high share of the discount pie, the highest-income students will end up paying net tuition of $36,431 at the highest-priced colleges and $20,538 at the lowest. Students from low-income families, on the other hand, will pay net tuition of $17,678 at the highest-priced colleges and $1,728 at the lowest.

The higher net tuition being paid by wealthier families, of course, will represent a lower share of their family incomes. A family with an income of $200,000 per year, for example, would pay 18.2 percent of its income for the $36,431 average tuition at the highest-priced colleges. But a family making only $50,000 would pay a significantly higher 41 percent to meet the $20,538 tab.

The fact that net tuition is significantly dependent on family income will be seen by some as robbing the rich to pay for writing http://samedayessays.org/essay-writing/; for others, it will be viewed as an enlightened way to make private education affordable to all comers.
But no matter what view is taken, several trends emerge: Tuition growth is slowing; it’s slowing more when discounts are taken into account; and it’s slowing even more for low-income families.

One other point should be abundantly clear: Tuition pricing is a complicated business and one should take great care in commenting on it.

James L. Doti is president of Chapman University, where he is also a professor of economics and founder of the A. Gary Anderson Center for Economic Research.

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