Home > data science, education > Will Demographics Solve the College Tuition Problem? (A: I Don’t Know)

Will Demographics Solve the College Tuition Problem? (A: I Don’t Know)

November 14, 2014

I’ve got two girls in middle school. They are lovely and (in my opinion as a proud dad) smart. I wonder, on occasion, what college will they go to and what their higher education experience will be like? No matter how lovely or smart my daughters are, though, it will be hard to fork over all of that tuition money.  It sure would be nice if college somehow got cheaper by the time my daughters are ready in 6 or 8 years!

How likely is this? There has been plenty of coverage about how the cost of college has risen so dramatically over the past decades. A number of smart people have argued that the reason tuition has increased so much is because of all of the amenities that schools have built in recent years. Others are unconvinced that’s the reason, pointing out that increased spending by universities grew at a lower than the rate of tuition increases.  Perhaps schools have been buoyed by a rising demographic trend – but it’s clear tuition increases have had a great run.

One way colleges have been able to keep increasing tuitions is by competing aggressively for wealthy students who can pay the full price of tuition (which also enables the schools to offer more aid to less than wealthy students).  The children of the wealthy overseas are particularly desirable targets, apparently.  I heard a great quote yesterday about this by Brad Delong – that his school, Berkeley, and other top universities presumably had become “finishing school[s] for the superrich of Asia.”  It’s an odd sort of competition, though, where schools are competing for a particular customer (wealthy students) by raising prices.  Presumably, this suggests that colleges have had pricing power to raise tuition due to increased demand (perhaps aided by increase in student loans, but that’s an argument for another day).

Will colleges continue to have this pricing power?  For the optimistic future tuition payer, there are some signs that university pricing power may be eroding.   Tuition increased at a slower rate this year (a bit more than 3%) but still at a rate that well exceeds inflation.   And law schools are already resorting to price cutting after precipitous declines in applications – down 37% in 2014 compared to 2010!

College enrollment trends are a mixed bag and frequently obscured by studies from in-industry sources.  Clearly, the 1990s and 2000s were a time a great growth for colleges – college enrollment grew by 48% from 1990 (12 million students) to 2012 (17.7 million).  But 2010 appears to be the recent peak and enrollment fell by 2% from 2010 to 2012. In addition, overall college enrollment declined by 2.3% in 2014, although this decline is attributed to the 9.6% decline in two-year colleges while 4-year college enrollment actually increased by 1.2%.

It makes sense that the recent college enrollment trend would be down – the number of high school graduates appears to have peaked in 2010 at 3.3 million or so and is projected to decline to about 3.1 million in 2016 and stay lowish for the next few years. The US Census reports that there was a bulge of kids that are college age now (i.e. there were 22.04 million 14-19 year olds at the 2010 Census), but there are about 1.7 million fewer kids that are my daughters’ age (i.e., 5-9 year olds in the 2010 Census).  That’s a pretty steep drop off (about 8%) in this pool of potential college students.  These demographic trends have got some people worried.  Moody’s, which rates the debt of a lot of colleges, has been downgrading a lot of smaller schools and says that this type of school has already been hit by declining enrollment and revenue. One analyst went so far as to warn of a “death spiral” at some schools due to declining enrollment.  Moody’s analysis of declining revenue is an interesting factor, in light of reports of ever-increasing tuition. Last year Moody’s reported that 40% of colleges or universities (that were rated) faced stagnant or declining net tuition revenue.

Speaking strictly, again, as a future payer of my daughters’ college tuition, falling college age population and falling enrollment would seem to point to the possibility that tuition will be lower for my kids when the time comes. Plus there are a lot of other factors that seem to be lining up against the prospects for college tuition –  like continued flat or declining wages, the enormous student loan bubble (it can’t keep growing, right?), the rise of online education…

And yet, I’m not feeling that confident.  Elite universities (and it certainly would be nice if my girls could get into such a school) seem to have found a way to collect a lot of tuition from foreign students (it’s hard to find a good data source for that though) which protects them from the adverse demographic and economic trends.  I’ve wondered if US students could get turned off by the perception that top US schools have too many foreign students and are too much, as Delong says, elite finishing schools.  But that’s hard to predict and may take many years to reach a tipping point.  Plus if tuition and enrollment drop a lot, that may cripple the schools that have taken out a lot of debt to build all of those nice amenities. A Harvard Business School professor rather bearishly projects that as many as half of the 4,000 US colleges and universities may fail in the next 15 years.  Would a sharp decrease in the number of colleges due to falling enrollment have the effect of reducing competition at the remaining schools?  If so, what impact would that have on tuition?

Both college tuition and student loans have been described as bubbles thanks to their recent rate of growth.  At some point, bubbles burst (in theory).  As someone who watched, first hand and with great discomfort, the growth of the subprime and housing bubbles before the crisis, I’ve painfully learned that bubbles can last much longer than you would rationally expect.  And despite all sorts of analysis and calculation about what should happen, the thing that triggers the bursting of the bubble is really hard to predict. As is when it will happen.  To the extent I’ve learned a lesson from mortgage land, it’s that you shouldn’t do anything stupid in anticipation of the bubble either bursting or continuing.  So, as much as I hope and even expect that the trend for increased college tuition will reverse in the coming years, I guess I’ll have to keep on trying to save for when my daughters will be heading off to college.

Categories: data science, education
  1. November 14, 2014 at 8:39 pm

    You don’t mention government funding at all, and yet one of the reasons public university tuition has risen is that public support has fallen sharply.

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    • November 16, 2014 at 12:02 am

      There are lots of reasons why tuition has increased. No doubt cuts in state funding have caused an increase in state university tuition. But I don’t think that has been a factor in the increase in private school tuitions (though obviously it contributes to the increase in average tuition figures).

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  2. November 15, 2014 at 5:05 am

    What Ursula said.

    I don’t expect any windfalls for tuition-payers. In addition to supply and demand, there is the cost disease, and the fact that education is both a public good and a merit good. The only solution is to reverse the grants->loans trend, subsidize public universities more not less, clarify that public research grants buy public (i.e. nonproprietary) knowledge. Funding scholarships out of the tuition payments of the super-rich is at best trickle-down economics. Our survival is contingent on their success, starting with college admissions. What the schools need to do will trump what the schools want to do every time.

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  3. November 15, 2014 at 8:52 am

    The US-centric demographics are interesting, but you also need to consider international demand, as strongly implied by other parts of this post. Anecdotes from Asia continue to suggest that there is still a growing pool of students to compete with the author’s daughters (this is based on applications to good US summer academic programs for middle and high school students).

    For the individual situation, how much should parents and students be willing to pay? You are paying for 4 things:
    (1) education
    (2) networking/becoming part of the alumni club
    (3) signalling (based on the schools’ reputation for selection)
    (4) non-education experience while at the school

    I guess I still feel like (1) should be the ovewhelming focus and am irritated to pay much for the other things. However, spending a lot of time on the education corners of the web has made it really clear that traditional school is not (theoretically) necessary for a good education. So much amazing material and supportive communities are available, anyone with available time and motivation can learn what they want. Does attending a college help or hurt with that time and motivation?

    So, how much should I be willing to pay for the other bits?

    Oh, and the other side: should we look at this as a hard-headed return on investment, which also can push the students to certain majors or certain career choices?

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    • November 17, 2014 at 8:52 pm

      Are you with the Praxis organization? I ask because your talking points seem to follow their script.

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  4. Aaron
    November 15, 2014 at 10:37 am

    I think there are several factors contributing to the huge rises in tuition. One is certainly the fact that rich people will pay (and the rest will get financial aid).

    Another is eroding public support, which has already been mentioned. This forces the public schools to raise tuition and allows the private ones to rise with the tide.

    A third thing, very substantial in my opinion, is administrative bloat. Growth of university administrations has far (very far) outpaced growth of university faculties in the last few decades. University administration is now a degree option. For example here is the opening sentence of this article:

    “As many students went deeper into debt to pay for their education, administrative costs at Pennsylvania’s state-owned universities rose about $40 million from 2001 to 2010, an increase almost equal to the 53 percent jump in tuition.”

    http://triblive.com/state/pennsylvania/4378049-74/state-administrative-faculty#axzz3J9Rcej00

    To me, administration of anything is a necessary cost that should be kept to a minimum so that the actual thing can be the focus. Universities do not operate this way, and it’s not a mystery why: there is very little accountability for the administrators’ decisions about the priorities of the institution, which often have raising revenue as either an explicit goal or a convenient byproduct. The arms race for dorm amenities is one example.

    With well-justified public outrage about the cost of college, the tuition raises can’t continue unchecked. The challenge, it seems to me as a faculty member, is to figure out how to trim the administrations and not, say, the faculty.

    (Don’t get me wrong, there are lots of useless faculty out there too, and I am not opposed to doing something about it.)

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    • November 16, 2014 at 12:07 am

      There are various contributing factors to the increase in tuition. My question with respect administrative bloat, which I don’t doubt is a factor, is why? The short answer, presumably, is because they (the colleges/universities) can. What will be the factor, if any, which will change that answer to: they can’t?

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  5. November 15, 2014 at 8:58 pm

    As Aaron above commented, administrative bloat has been the major factor in tuition increase. Part of that is due to increased regulatory demands, but that is just a small part.

    My experience with Cal (Berkeley) started in 1978 when my wife and I arrived after driving cross country, she as a transfer student and I as a grad student, and culminated (for now) in 2012 when my older daughter earned her PhD. In total we earned five degrees from Cal. Fortunately, fellowships paid for three of those degrees, and an employer paid for one.

    There have always been foreign students at Cal. Specifically, that’s why the I-House (International House) exists. Cal has educated many foreign heads of state and ministers. Professor DeLong is wrong to overemphasize their presence. If one is to believe in the need for diversity, one cannot object to the presence of foreign students who add to that diversity. Not that I was ever pleased to have graduate TAs who could barely be understood, but that’s another story.

    The other great Bay Area university (from which I also earned a graduate degree) has had many foreign heads of state and ministers attend.

    To put things in perspective, Cooper Union, which was once tuition free, now charges tuition. So it’s not always the big bad people who don’t want to pay more in taxes.

    I do wish the guest author luck in getting his daughters admitted to the schools of their choice (as social engineering has turned that into a crap shoot) and in finding ways to afford tuition.

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  6. November 16, 2014 at 9:03 am

    Several disconnected thoughts:

    * One of the most frightening articles I’ve seen in the last few decades (NYTimes, somewhere) pointed out that 2nd and 3rd-tier schools could improve their applicant pool by doing nothing more than raising their tuition to match the top-tier schools. No changes in curriculum, faculty, anything. The higher price tag created the impression of being a better school. It should be possible to get data on that. Of course, top tier schools have raised tuition, too. It’s certainly a market of conspicuous educational consumption.

    * Another more recent scary article tied the increase in tuition to the increase in administrative costs: the ratio of administrators to faculty has gone from 1:2 to 2:1 in the past couple of decades. That’s got to have a huge effect, and it should be possible to get relevant data. (A previous commenter has made the same point.) Faculty may train faculty, but they don’t breed faculty. Administrators breed administrators.

    * I believe that intercollegiate sports are a huge drain on all but a few schools at the top.

    * And I’ve certainly heard (from a parent) of at least one student who said “I don’t want to go to Stanford, it’s all Asians.” Sample size of one department, and a sentiment that I find reprehensible, but I’m sure that it’s out there. Jingoism of all sorts is on the rise. Whether or not that will have a bearing on the tuition issue–I think probably now, but who knows.

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    • November 16, 2014 at 9:27 am

      On your first point, Gruber would seem to agree with you. Playing on the “dumbness” of Americans worked for Obamacare, why wouldn’t it work for lower tiered schools?

      On your second and third points I couldn’t agree more.

      On your last point, perhaps the child of a bigoted parent is better off somewhere else besides Stanford and Cal – which is a lot more Asian than Stanford is – with both schools being heavily progressive and into “diversity.”

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    • November 17, 2014 at 5:58 pm

      I know it wasn’t you, but a parent, but what if the parent had said “I don’t want to go to X University, it has to many Blacks?”

      Why is it OK for some parents to carry a bias against industrious Asian students?

      Why is it OK to spend 10,000 hours honing your game of basketball and thus excelling, but not OK to spend 10,000 hours mastering math and/or science and then get into elite schools on academic excellence?

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      • November 17, 2014 at 9:17 pm

        Abekohen is right. Not wanting to go to school with Asians is every bit as bigoted as not wanting industrious Black classmates for your kids.

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  7. Guest2
    November 17, 2014 at 11:19 am

    Your obsession with higher education is noticeable. Think outside the box.

    Higher education in this country is a house of cards that is collapsing in slow motion — this is what you are seeing.

    What happens when the credentialing system becomes permanently decoupled from occupational sorting? Isn’t that what is happening now? Isn’t this exactly what happened when the apprenticeship system collapsed in this country?

    The question we need to be asking is, what will replace the system that we now have?

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    • November 17, 2014 at 8:59 pm

      Hopefully not something 100% employer-controlled, and other stakeholders will have a say. Personally, I’d like to see the (trade union) apprenticeship system make a comeback. Or the nightmare scenario: #DataDarwinism

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