The cost of a good education

The topic of student loans is no stranger to the average American.

In 2013, 69% of that year’s graduating class left their respective college, holding an average of $28,400 on the books. The average cost of a 4 year degree from a public university with room, board and books in the same year? $67,156! NPR states “After adjusting for inflation, the cost of tuition more than tripled between 1973 and 2013.” A clip from CNN describes the rising cost well:

Students now relish in the stories of how their parents could pay as they went to school with a part time job.

Why does the the cost of education continue to rise?

This is a great question which has many explanations.

1.)Basic consumer choice theory states (stay with me non econ people), that if a certain good or service (college education) provides more utility (happiness or other wise benefit in this case) than its respective cost, the consumer will select to purchase or consume the good or service, if the consumer has means to do so.

The returns to education are immense.

According to the Federal Reserve Bank of San Francisco, “In 2011, the latest data available in our sample, college graduates earned on average about $20,050 (61%) more per year than high school graduates.”

If one plans to commit 30 years of his/her life to work beginning at an age of 23, retiring at the average of 62, that individual would on average earn $781,950 more than by not completing a 4 year degree at all.

It is really tough to justify not going to college staring down the barrel of missed opportunities and self-betterment. With these returns, the cost of education could foreseeably continue to rise and the profitable choice would in general and on average still be to attend college.

2.)The need for expansion!

Having few public universities or communities colleges near you is a thing of the past. Many newer colleges have established over the last three decades, giving rise to the number of degree granting secondary education institutions.

In 1980, the total number of institutions hovered around 3,200. As of 2011, that number has grown to 4,706. Some people may argue “Hey, wouldn’t introducing more institutions bring about more competition and drive the prices down?” and normally that would be correct, however, colleges have been around for many years and are really good at branding themselves.

Chances are if you are from Michigan you likely swear fealty to either The University of Michigan (UofM) or Michigan State University (P.O.S.) FOR NO APPARENT REASON other than that’s the setting in which you are raised (which could bring about another interesting topic of nature verses nurture), but I digress.

These universities have huge followings naturally and some dream of one day joining fellow alumni on the pearly gates of their class reunion, reminiscing of times in which UofM stomped on that POS in East Lansing (sorry Wyatt).

Regardless, some students are not so easily swayed into attending one university over another after they have made the decision to go to college. In order to convince prospective students into committing to one university over another, universities will construct huge structures including dorms that stretch 10’s of stories above ground with land developed so richly that one could mistake it for a sandals commercial to the Bahamas.

This is an actual photo from the campus of Arizona State University.

This is but one example of many that exist. The cost of these projects are huge, ranging from just a few million to hundreds of millions, especially when you consider the college football stadium.

These costs must be paid by someone and when considering where to go, chances are, a few thousand dollars difference between universities will likely not factor much into your decision. With more and more public universities now competing for funding, these costs eventually are passed onto the student in the form of tuition and room and board fees.

3.) No Substitutes!

College is irreplaceable. Many, many, many entry level jobs require, at a minimum, a bachelor’s degree in a related field. This makes using work experience as a replacement for a degree extremely tedious when you can’t even get your foot in the door to get the required work experience that may even be considered substitutable.

Places like Khan academy are working to revolutionize this market, by providing free education for all. This however could only be used as a substituted if that is the way our society perceived it.

Once companies recognize the value in a degree (if Khan Academy even offered one like it), from a free educational source, then there is a chance for the post high school education market to be flipped upside down as we know it.

It is my opinion companies and society will not follow this path, at least not in the near future; especially when even virtual degrees from virtual colleges are looked down upon in comparison to brick and mortar degree issuing institutions.

4) The easy of getting student loans.

Whether it be via federally insured subsidized or unsubsidized loans, the parent loan, or even from private lenders, there is a plethora of people looking to hand any 18 year old who wants to go to college money for just that.

This is because students can not default on student debt, at least not easily, which provides a safe guard for the lender to make a return on that money. Because of the availability of student loans, to the consumer, it is often not apparent, at least immediately, what the real burden is going to be on paying back those loans. This lack or foresight often exists in an 18 year old just focused on “Turning Up” as they say it now (previously synonymous with “getting wasted, hammered, or  any other term which results in the consumption of alcoholic beverages or drinking debauchery).

Arguably, they should be focused on having some fun as choices they make will often change at the drop of a hat and college provides opportunities to experience things that are better left in your young adult and teenage years of life , but this is beside the point.

This lack of foresight into the future on top of lacking awareness of the profitability of the major that you select, play huge roles in the desire to attend college.

Because of this excessive demand, universities are able run rampant with tuition and gobble up consumer surplus for time to come.