Average Tuition Increase Rates: Why High Projections are WRONG

If you being responsible and saving for your child’s education years before he/she attends college, I bet you have taken a look at the average tuition increase in order to try and estimate the amount you need to save so that your child doesn’t have sell a body part in order to pay for school. As a person who has paid 3 different schools for tuition, I know how difficult it can be to pay for the high tuition costs.

While tuition costs are certainly high, it doesn’t mean that the predictions of high annual tuition increases are accurate. For those trying to estimate how much college will cost in the future, you need to read this!

Tuition Increase
It’s going to be more expensive to stand in this line next year, but how much more?

What People Claim About Average Tuition Increase

Recently, I’ve seen a number of other personal finance media outlets highlight the recent high increases in tuition. While I support their efforts to educate the public on the need to save, many are taking one statistic published by various agencies like the College Board, and exaggerating the future costs of tuition.

I noticed a recent article on US News about the increasing cost of education, and how to predict future costs of tuition. Here’s what he says:

According to the US Department of Education, the average annual cost of public school increased 6.5 percent each year over the last decade. That means that by 2030, annual public tuition will be $44,047. The total cost for a four-year degree will be more than $205,000. 

Again, why the statistic seems to be reputable, as he is quoting US Dept. of Education, it fails to take into consideration why schools increased 6.5% as well as the private institution. Assuming that tuition rates will continue to increase at 6.5% each and every year is about as naive as assuming you can get a 10% return on your investments each and every year for the next 30 years.

This article is just the tip of the iceberg. There have been several other writers who have taken a simple average over the past 10 years and inserted it into a compound interest calculator to figure out the future costs of tuition. While I like using compound interest calculators as much as the next personal finance author (especially to retirement or other savings goals), it is inappropriate to apply this approach to future tuition costs.

Why the Average Tuition Increase Numbers are WRONG

What the people who take one statistic and run with it to scare others fail to consider is the real life happenings. I have worked at two private universities within the past 4 years. I probably have more experience working at a higher education institution than 90 percent of the population. Most people don’t know what it is like behind the scenes of a university.

After working at a university, and being part of the conversations where tuition increases are discussed, I can tell you that many of these high annual tuition increases do not represent the whole. While there may be a small percentage of schools that are increasing tuition drastically to skew these averages, my experience has been tuition increases between 2-4%.

To be more specific, I currently work at a University in one of the most expensive areas of the country, which has one of the highest tuition rates. Our administration knows we are one of the most expensive. In a conversation with the CFO of the University, he told me that universities cannot continue to increase tuition to meet the increasing costs. In fact, he said that even a 4% tuition increase isn’t reasonable anymore.

When asked more about the subject by a colleague of mine, he clarified. There was a period where institutions would simply increase tuition rates high enough to cover the increasing costs of running a tuition. For those who don’t know, college universities suffered as much as any other investor during the economic downturn. Institutions rely on endowments to pay for a portion of their operating costs. When returns on investments decrease (or are negative), that affects the university’s budget. When revenue is low, one of the easiest ways to compensate was to increase tuition. I imagine that this is one of the reasons for the recent high rates of tuition increases. But, my university acknowledges that high increases in tuition is going to have negative consequences for them financially.

More Reasons why Tuition Rates/Projections are Exaggerated

You may be thinking that my experience is not a very wide reach. My experience could be that of a couple institutions that is ignoring the rest of the trends. In some sense that may be true, but I doubt it. In fact, there are several other reasons why you can expect lower tuition increases in the future, that are not dependent on my personal experience working in higher education:

  • Most Universities are not out to make a profit – What tends to happen when people hear these tuition increase figures is that universities are these evil institutions that are trying to take advantage of families and college students. This simply isn’t the case. Very few institutions are for-profit, meaning that most are classified as non-profits. This means they aren’t out there trying to takes as many dollars as they can in order to pad the wallets of a select few. Universities are simply trying to cover costs.

[Tweet “Most Universities are NOT out to make a profit @20sfinances #CostOfEducation”]

  • As economy improves and endowments stabilize, universities will rely less on tuition increases to cover expenses – As I mentioned before, many universities have endowments to pay for part of their operating costs. We all know that the market took a huge hit the last few years. This isn’t going to always happen. It was a rare occurrence. This means that universities won’t require large increases in tuition to cover costs.
  • The highest tuition schools know they are the most expensive and want to remain competitive – No university wants to be the most expensive in the country or region. It’s an accolade that only fools would try to obtain. When you have the highest tuition in the country, that decreases your pool of applicants. No matter how good your education and employment rates are, if a comparable school is $5,000 less than you, you are going to lose potential students. Universities will want to remain competitive so they will do everything they can to keep tuition increases low.
  • Higher education is struggling financially as much as anyone else, but it doesn’t mean they ignore supply/demand principles – It’s economics 101. Supply and demand. When supply increases, price drops. When demand decreases, prices drop. If you continue to increase tuition as a university, this affects the number of high school graduates who see value in attending your university. In other words, the demand for your “product” will decrease. If universities continue to raise prices that are out of reach of the majority of the population, I also think more institutions will be created. As the motto goes, with more supply (of higher education institution), the prices will drop.

Tuition increase rates have been extraordinarily high recently. But, it doesn’t and most likely won’t continue this way. While these high projections may be intended to scare you into saving more for your child’s education (which is a good result, if it doesn’t convince you that saving money is hopeless), these are inaccurate predictions. Tuition will undoubtedly increase, but not at the rates that have been projected in popular media and other financial blogs.

Readers, what’s your take on the projections of tuition increases?

15 Responses to Average Tuition Increase Rates: Why High Projections are WRONG

  1. One of the things you didn’t address is the decreasing funding of public universities at the state level. I know both PA and FL have decreased money going to their public university systems, and I assume many other states have as well. Are you operating under the assumption that state funding will increase again? I’m not sure, but I thought state funding had been decreasing for the last 30 years…

    • That’s a great point for public institutions – something I hadn’t considered. Thanks Mrs. Pop, insightful as always.

  2. Thanks for this discussion. I also don’t trust the high estimates of tuition growth but I didn’t know as much detail as you’ve provided here.

    The other big factor, aside from the price increase rate, is that very few students (esp. private school students) actually pay sticker price. I don’t know how you project 15 yrs in advance what your aid package will be, though!

    • Yeah, since I’m not an economist, it’s hard to say how future rates are created. Whether it is pure speculation or there is a science to it. I bet it’s a little of both.

  3. While I agree that not all schools are out to make a profit, I do believe more and more are out to make as much as they can. Schools want to stay competitive and in order to do that they need to continue to grow themselves and build new things. That all costs money, which they have to make up somehow. I too believe that funding at a state level will continue to dry up for some states, which will again cause them to look for sources of income elsewhere. All that said, I don’t know if 6.5% is right, but I do not believe it’s far off.

    • Hmm… yeah, state funding certainly seems to be the wild card, so to speak. But, regardless of the states’ future contributions to public institutions, it still doesn’t trump the fact that they have to stay in line with supply/demand.

  4. Interesting stuff here, Corey. I don’t have the background you do in this industry, but I do think that basic economics (as you pointed out) show that the increasing tuition rates are unsustainable. Student loan debt is arguably already an inflated bubble waiting to pop and when it does tuition rates will have to come down with it.

    • I’m certainly not the expert, but from my experience, it seems to be a bubble waiting to burst, as you accurately put it.

  5. Yeah, at 200k, I would start looking at creative ways to do internships (maybe while working another job) so that I can get the necessary experience.

  6. I hope you’re right! My fiance and I were just talking the other day about how if these projections we keep hearing do turn out to be true, our kids may have to go to community college. I wouldn’t let my future children take out huge loans that they’ll struggle to pay back for decades just so they can go to a prestigious university.

  7. I think you hit the nail on the head corey. The number that’s often cited is an average tuition increase. Meaning, some don’t raise their rates at all and some raise their rates just to raise them. With that said, I think the average will continue to be 6-7%. However, if a university hits that average is up to the specific circumstances surrounding that university.

  8. there seems to be some growing momentum around the “college degree bubble” movement that suggests that degrees are not worth their costs.. this may be a good thing, if it forces colleges to find a way to cut costs and get their costs down.. but it will be a bad thing if fewer and fewer people end up going to college, and our country’s workforce continues to fall behind the rest of the world.

  9. Tuition fees recently tripled in the UK and are set to rise again next year. Student debt is clearly going to be a major problem for many graduates in the coming years, but few seem to have realised the implications so far.