College Funding Options I
by Richard
There are two massive markets almost impervious to free market discipline: Health Care and College Expenses.
Both are increasing at rates much higher than core inflation would indicate. Both owe their inefficiency to the stealth factor of third party payment, which obscures and prevents marketplace clearing and pricing.
Expect both to be major campaign issues in the upcoming election. Today, in part I, we will explore causation, In part II, we will look at some out of the box solutions.
I don’t claim to be an authority on the issue, other than the two years I served on the adjunct faculty of a major state university. But you just have to follow the money.
The primary cause of out of control college expense is that we have convinced ourselves as a nation that such education is a virtual universal entitlement, much like Social Security or Medicare.
Once any vendor learns that the demand for their product approaches infinity, they can price with abandon. Check out the website finaid.org which highlights the dilemma with tuition inflation:
Tuition Inflation
A good rule of thumb is that tuition rates will increase at about twice the general inflation rate. During any 17-year period from 1958 to 2001, the average annual tuition inflation rate was between 6% and 9%, ranging from 1.2 times general inflation to 2.1 times general inflation. On average, tuition tends to increase about 8% per year. An 8% college inflation rate means that the cost of college doubles every nine years. For a baby born today, this means that college costs will be more than three times current rates when the child matriculates in college…
In any market other than health or education, buyers would force pricing down by diverting their purchasing power to more economical venues.
Even the recent housing bubble was burst when pricing became untethered to incomes.
Since tuition inflation far exceeds the rate of wage increases, there needs to be massive accommodation from an enabling source with unlimited resources. There are several:
1. College endowments are able to compound their funds tax free like any other non profit qualified charity.
But unlike the other 501-C-3 organizations, they are not burdened with the requirement to disburse 5% of their assets annually. Lately, their gains have been so out-sized and extravagant that they have engaged in a very public display of largess, often waiving all costs for low and moderate income families.
The goal is not to reduce costs overall, but to respond to growing , widespread, and well deserved criticism.
It would never occur to them to actually lower tuition across the board, as that might falsely encourage wealthier families. But at the margin, anything helps.
2. The definition of Financial Aid has shifted almost entirely into the category of student loans.
There is no remorse about crushing students under a mountain of debt, and there is absolutely no incentive for any concessions from the colleges. They know that the government will keep the spigots open, so they can continue to price their product at twice the inflation rate.
3. Parents have been pummeled into submission.
They are made to feel that there is no possible option to the lockstep progression of the their children from high school to the most prestigious possible four year college…then graduate and professional school.
Anything less would constitute full scale child abuse. Worse, it would be a conspicuous display of restraint and logic, in a society that absolutely worships at the altar of conspicuous consumption.
And…
Add to this witches brew the manner in which colleges are managed. Their core teaching staff have a guarantee of lifetime employment. Their administrative staff is growing at an even faster rate than the teaching staff.
They have adopted the standard government pricing model of “cost plus”. There is no spending restraint, when you can pass on any increase to a third party payor.
And if you look into the shadowy world of the “for profit” institutions, you will find an unsavory mixture of low standards, and sales commissioned admittance “counselors”.
Their business model is simplicity itself. Admission is open to anyone who can fog a mirror. Bonuses are tailored to quantity of students admitted. Teaching is sporadic, learning is accidental and graduation is entirely optional and beside the point.
Provided that the guaranteed student loan machine has delivered as promised.
This is an epic scandal, and an offense against the hopes and idealism of families and students.
In part II, we will explore options on how to cope.
