For years now, private college tuition has risen significantly faster than inflation, a fact that colleges have used a fancy economics theory called Baumol's Law to explain away. Unfortunately for the families who pay over $200,000 for the privilege of sending a child to one of those private institutions, the value of the education is hard to justify when comparing its costs and benefits to those of a state school.
The lack of difference in value between state schools and the more prestigious private colleges is compelling. A private college -- including tuition, room and board -- costs about $50,000 a year, compared to half that price for a state school. But according to a study cited by The New York Times, the average lifetime incomes of comparably talented graduates of public and private institutions are about the same for most students -- in terms of financial value, it's hard to justify the tuition difference.
But those rising private college tuition payments haven't kept pace with the rise in pay for full professors. For example, since 1970, Harvard's tuition has risen at a 5.4% annual rate from $4,070 to $33,696, while the consumer price index has risen at an average annual rate of 4.4% from 39.6 to 218.8. The salaries of full professors during that time rose at an even greater rate of 5.8% a year, from about $20,000 to $191,200.
Why Has Tuition Risen So Much?
When asked about why tuition has gone up so much, academics such as those at William & Mary cite Baumol's Law. This states that when it comes to offering services, the large productivity boosts common in goods-producing sectors are not possible. That claim is certainly questionable as applied to education, given the dramatic increase in the use of technology to prepare syllabuses, communicate with students and calculate grades, among many other education-related tasks. But regardless, as my DailyFinance colleague Charles Hugh Smith explained in a recent column, "salary increases in those service sectors -- education, health care, government, to name a few -- keep pace with those in industries where raises are justified by greater productivity."
A theoretical cause for the tuition increase that seems more plausible to me is the Chivas Regal effect -- the idea that universities will charge what the market will bear. As Time explained almost a decade ago, during the 1980s, parents increasingly came to feel that "college education was a necessity, a direct conduit to a high-paying job. Easy financial credit, moreover, made it possible for parents to borrow large sums of money; doing so for college became more socially acceptable."
CNBC's Scott Cohn, who produced its piece Price of Admission: America's College Debt Crisis, told me recently that he had a different theory: The real reason for the rise in tuition is the competition among schools to construct new buildings that they can't finance.
Who's Really Paying?
For example, consider the announcement on Dec. 17 that Yale's School of Management is building a $189 million addition to its campus. Ned Evans, former chairman of publishing house Macmillan, is contributing $50 million for the project, but it's not clear who's kicking in the additional $139 million or who'll pay to maintain the new complex.
There's a good chance that some of that expense will be covered by tuition increases -- especially when you consider that so many university endowments took enormous hits during the financial crisis. How can students afford to pay for those increases? Thanks to what Cohn calls the student loan entitlement, most students can get college loans from the government.
Whatever the reasons for the rise in tuition prices, however, articles by DailyFinance's college finance reporter, Zac Bissonnette (author of Debt-Free U: How I Paid For An Outstanding College Education Without Loans, Scholarships, or Mooching Off My Parents) have repeatedly hammered home these key points: In general, private colleges aren't worth the higher tuition they charge, and students at public universities graduate with far less debt.
Rich Tuition, Poor Job Market
That student debt can be a big deal. Given the weak job market, many students are finishing their educations and discovering they are unable to get jobs that recover their costs. Cohn cited the example of a couple who took on $250,000 in debt to cover paralegal training for the wife and an MBA for her accountant husband. After completing their respective programs, she got a job as a paralegal, but got paid the same as a colleague without her education, while her husband ended up in an accounting job that did not require an MBA.
Some students who attend prestigious private schools will win the employment lottery by getting jobs at hedge funds or investment banks. Others will start successful companies like Facebook. But these economic winners are far outnumbered by those who end up just part of the crowd, at the mercy of companies squeezing their employees and outsourcing professional work to countries with lower labor rates. Regrettably for them, the idea that their pricey educations might pay off in the future -- should the job market recover -- won't help repay their student debts.
But is the $200,000 investment in a top private college education worth the extra $100,000? If you measure the return on investment based on how much money students make, the answer is a resounding maybe. According to Robert Zemsky, director of the University of Pennsylvania's Institute for Research on Higher Education, as quoted by Time, a student who graduates from Penn will earn 56.6% more than if he graduates just from high school, compared to just 31.7% more if he graduates from a "flagship public university." Those figures are 10 years old, of course, but let's use them for argument's sake anyway.
If the Penn grad makes $100,000 a year, it will take 6.3 years for her parents to break even on the additional $100,000 in tuition. (That amount was calculated by assuming that the difference in annual salaries for Penn and state school graduates remains constant at $15,900 -- a figure calculated based on Penn research showing state college grads would make $84,100 annually.)
Parents need to decide for themselves whether that's a short enough payback period to justify the additional investment -- or whether the IRHE study is more convincing than the ones that deny the salary differential exists. But money isn't everything. And some parents may consider the bragging rights of sending a child to an elite private school worth the extra $100,000 is, as they say in the Visa ads, priceless.