College Costs: Rising, Yet Often Exaggerated

“Soaring college costs” is one of those phrases for which journalists and speechwriters seem to have a save-get key. It’s become conventional wisdom that the cost of attending college has risen far more than the cost of just about any other major item in family budgets. Expect to hear more such talk in the commentary about President Obama’s speech on higher education on Thursday – and perhaps even in the speech itself.

But the conventional wisdom is at least partly wrong.

The cost of attending college has indeed increased more quickly than inflation in recent years, but it has not risen as fast as many people imagine. The main reason for the misunderstanding is the fact that the list price of college – especially the list price of elite private colleges – receives far more attention than the actual price. The list price is the one that colleges highlight in their brochures and that media accounts often mention; the actual price, which takes financial aid into account, reflects what families truly pay and, by any imaginable definition, matters more.

Source: College BoardExpressed in 2012 dollars.

Over the last 20 years, the actual price of a year at a private college, including tuition, fees, room and board, has risen at an annual average of 1.6 percent on top of inflation, according to the College Board. In nominal terms – that is, not controlling for inflation – the increase has been about 4 percent a year.

At public four-year colleges, the inflation-adjusted average annual increase has been somewhat higher, thanks mostly to state budget cuts: 2.3 percent (which translates into almost 5 percent a year in nominal terms). At public two-year colleges, also known as community colleges, costs have fallenrelative to inflation, at an annual rate of 0.3 percent over the last 20 years.

These numbers are, of course, averages that hide some variation. For many high-income families, the costs have risen more rapidly than the averages suggest, because those families have not received as much financial aid. For many low-income families, costs have increased less than the averages show. Looking at public colleges, Dylan Matthews of The Washington Post wrote this week“(citing an analysis by Demos) that the tuition increases were “concentrated on students in the upper middle and upper classes, with students from families making under $32,500 a year largely spared.”

Again, college has become more expensive in recent years. And prices have increased somewhat faster over the last decade than they did over the previous decade, the College Board data show. These cost increases stem from a combination of factors, some of which are probably unavoidable and some of which different government policies have the potential to change. For years, many university officials have resisted efforts to hold down costs and resisted government efforts to impose more accountability on higher education.

But the cost increases in higher education are not as large as they are often made out to be. Higher education, in truth, has similarities with many other service industries where costs have also risen. Health care is the most obvious example. Prices have also increased fairly rapidly, according to the Labor Department, for funeral services, sports tickets, day care, legal advice and tax preparation. Over time, the costs of items that depend on skilled human labor typically go up.

Update: In the comments, Heather of Miami Beach asks whether the actual-price tuition figures take loans into account. That is, if a students receives a $5,000 loan, is that $5,000 removed from the calculation of tuition? No, it is not. In the definition of financial aid in the College Board data, borrowed money is not counted as aid; it’s treated the same as money a family pays out of its pocket — which is entirely appropriate, given that the family still has to pay the money eventually. Grant money, on the other hand, counts as financial aid, because families never need to pay it.