Why is a college education so expensive?

The cost of college has been increasing over the inflation rate for years. (From 2002, 2007, but my favorite is the graph below from Wikipedia.)

The college education of today is more expensive in real dollars than the college education of thirty years ago. What’s changed? Students loans for one thing. As one clever commenter reminded us yesterday:

As soon as you insulate people from the true cost of something, the costs increase.

Taking a loan for college became more the norm than the exception. As lending loosened in the 90’s and 00’s the cost of college increased because the money was available to provide the students. Colleges built more facilities to accommodate the new wave of students. The economy was good, but then, it wasn’t. If you look at the graph you can see the bend at around 2000. States no longer had the revenue to sponsor the institutions, and tuition had to increase even more. The last few years have seen students heading to graduate programs instead of finding jobs. The demand for more education drove the cost of that education even higher, and the students can afford it because the loans are easily obtained.

Just like easy money created the bubble for housing, I suspect we’ll look back in a few years and understand that easy money available for education created this bubble, too.

Should you pay for a higher education right now even though you know the value is overstated? That’s a really hard question. Obviously, our family is doing it, but with eyes wide open. I’d love to talk my current college student into a year or two break, but you should see the eye rolling that takes place when I mention it.

The question I can’t resolve: Will the market correct for education as long as the loans are available?

Although we joke about it, no one takes out a loan to fill the gas tank. As soon as prices increase to the point where consumers consider the commodity too expensive, they change their ways and consume less gas. The market corrects to the real value of that commodity. For education it’s different. Students might as well be using Monopoly money. Yesterdays infographic showed us that 25% of loans for four-year institutions default. Yet, our government is still pushing for them. Higher education remains a political talking point. Post-secondary education is sliding into the entitlement category instead of being known as a privilege.

And that’s probably the better answer in my mind as to why the increases in costs. Whether it’s healthcare, home ownership, or education, moving a commodity from privilege to right is expensive for everyone.

Just remember, owning a home went from a privilege to a right with disastrous results.


  1. “Will the market correct for education as long as the loans are available?”

    The market will correct the same way it did in the mortgage market. What is the difference between Fred taking out a loan to move into his dream house he will never be able to afford and Sally taking out a loan to attend the private college that will she will never be able to pay back?

    Eventually, such a high % of these loans will be subprime that will default. And when that is the case, the whole ship will sink.

  2. I think student loans are really different from home loans. For one, the money is still available even though credit tightened otherwise. Next, the loans can’t be discharged through bankruptcy as in home loans. The government is propping up this lending more than housing.

  3. But I thought you said that the default rate on these loans is 25% and rising. Assuming that pattern continues, isn’t there a default rate of X% where the the student loan industry melts down like the subprime mortgage industry did? And isn’t it just a matter of time before we hit that number?

    I recognize they are not exactly the same thing, but unless the government actually reimburses the loan companies when the defaults occur, I don’t see mortgage loans and student loans as all too different. This bubble will take longer to pop, but pop it will eventually.

  4. I guess that was my point – this is going to take longer to pop.

  5. Do you think that if it takes longer to pop that the pop will be bigger?

  6. Oh. Good question. To be honest, I’ve been rethinking this. Maybe the government will continue to artificially value education. I’d suspect the pop will actually be smaller than what would happen under a pure market situation.

    My fear is that it won’t pop at all. That wouldn’t be good in the long run if you ask me.

  7. We should know first and foremost that education is extremely important for the betterment of mankind and ought to be a “right”. That is a sharp difference from considering a private (or public) university education a right. That’s like saying “Everyone should have cars. Here, let’s give them Lambourghinis”. No. A lot of the cost associated with “higher” education is wasted on shit that doesn’t matter, or as you have concluded is simply overinflated due to families’ willingness to pay, and the political system’s influences on loan practices.

    Why can’t students obtain accredited degrees without forking over $100k+? The opposite extreme is to, say, go to the library and read every book on a particular subject. You’d no doubt be well versed, but nobody would give a damn. You’d be rejected at the outset. Some employers are so dead set on that degree that nothing else the job-seeker would have to say in his or her own defense would make any difference. What kind of system is this? Standardized, sure, but isn’t that lazy? That’s like an employer scoffing because you obtained a $12,000 certificate instead of a $80,000 master’s degree.

    The value of widespread education, while it could mean that there are more skilled or qualified people than there are jobs at first, is so tremendously high that I believe it would ultimately solve those problems and allow people to make more informed social and political decisions. But instead, we are experiencing a tsunami of stupidity, poverity, entitlement, middle-class dissolution, inflation, deflation, fluctuation, instability, energy dependence, corruption, pollution… I can’t believe that people think it’s worse to have too many educated people and not enough jobs, than to have a stifled environment where people are kept stupid and frustrated. How does a system like that survive? We are in for some serious trouble as a society and I have no idea how we’re going to get through it… Let’s hope enough of us are imaginative and smart enough to keep the spark of hope alive and see us through to the next century.

    If you want an example of widespread education, see the Khan Academy website. To call what that man is doing ‘revolutionary’ I think is a severe understatement. His website hosts thousands of short lectures on math and science subjects, allows teachers to view data on their student’s difficulties, and is being used in the entire Los Altos school system. It started as an experiment, and grew until it enveloped their own system. It allows teachers more time to get creative and social with their students and less oriented toward the one-size-fits-all classroom lecture model. Kids who would otherwise be deemed as slow idiots are now realizing their intellectual potential with this system. It empowers the student to smooth their own rough intellectual bumps, by using a combination of YouTube videos and an intelligent exercise and tracking system. Not only is Khan doing short videos himself on subject he knows, but he’s also inviting extremely intelligent, reputable individuals from various fields (particularly medical, biology, chemistry) to aid in the delivery of the material, and provide more in-depth explanation of the material.

    Another good example of technology enabling a new wave of widespread education: Some of the best recorded lectures in the world are available at the Academic Earth website.

    This is all very new. What’s amazing to me is that Academic Earth links to universities’ online degree and certification programs which are still exorbitantly expensive. So on one hand you have all of this AMAZING education available to you on the internet coupled with zero accreditation or testing, and on the other you have a financial pressure cooker obstacle course with a piece of paper sitting on a pedestal at the end. These two things HAVE to be reconciled. I absolutely love these websites but am hesitant to dive in knowing that despite the knowledge I gain I will not have anything to show for it to anyone.

  8. Can we revisit this topic now that our glorious “Slow Jammer in Chief” is touting this as a campaign issue?

  9. Sure. You buried under your mounds of education debt yet?

  10. Ha – I have spent the morning reading comments of people signing the ‘loan forgiveness petition’ floating around facebook and I want to punch through the screen – they have no idea what student debt looks like. Yes I have a MOUNTAIN compared to the national average for student debt, but Im on par with the rest of the class at MCW that borrowed.

    It just really really chaps my behind that people are asking to have their undergrad loans forgiven. Its not that hard to pay for undergrad if you are smart about it – and I went to a private school! No undergrad debt!