The next bubble, college tuition edition

David Brooks makes several good points while asking the basic question of whether the cost of college is worth it. Money quote:

This is an unstable situation. At some point, parents are going to decide that $160,000 is too high a price if all you get is an empty credential and a fancy car-window sticker.

Of course, if you are pricing Duke University for little Johnny, you recognize $160,000 as a bargain (the cost of attendance for Duke is $59,343 for 2012-13; our expansive financial aid policies are contained in the link).

I think the practical definition of a bubble is people are rushing to desperately spend their money on something up until the moment where almost no one is willing (or able) to do so. You don’t really know it was a bubble until it pops, but you can likely get some hints. This chart from mymoneyblog may be a hint of sorts.

I have an 11th grader and now view college tuition from a slightly less theoretical perspective, and a month ago we went to New York City visiting colleges, and have since visited more, with more to come.  At the first visit, a parent said her kids’ first choice was Duke, so I wasn’t about to identify myself as a professor at Duke, and I have discovered that answering the question, “what do you do?” by saying “I am a teacher” is a good neutral way to engage the other parents on college tours without being asked to write a letter of recommendation for a kid you have never met. Under this guise, it has been fascinating listening to the parents talk about what they expect in terms of student/faculty interaction. (The list of possible schools constructed by my daughter is nearly schizophrenic in terms of how different they are as institutions, but I have mostly been shutting up and trying to listen to her, with lots of encouragement along these lines from my wife).

We have visited small liberal arts schools and major research Universities. The oddest thing has been my general take that parents seem to expect the same type of interaction between students at professors at both types of institutions. I can see upsides of both types of schools, but both the amount and type of interaction between students and professors differs; they aren’t offering the same thing. When figuring out if something is “worth it” you need to understand what it is that you are about to purchase.

Author: Don Taylor

Don Taylor is an Associate Professor of Public Policy at Duke University, where his teaching and research focuses on health policy, with a focus on Medicare generally, and on hospice and palliative care, specifically. He increasingly works at the intersection of health policy and the federal budget. Past research topics have included health workforce and the economics of smoking. He began blogging in June 2009 and wrote columns on health reform for the Raleigh, (N.C.) News and Observer. He blogged at The Incidental Economist from March 2011 to March 2012. He is the author of a book, Balancing the Budget is a Progressive Priority that will be published by Springer in May 2012.

20 thoughts on “The next bubble, college tuition edition”

  1. College tuition prices, like health care prices, are in in some part mythical because only a minority pay the sticker price. Stanford’s tuition, on paper, is something like $40k a year. But if your family income is less than 100k, it’s free. That’s why simply charting reported tuition can be deceptive.

    1. This is true. It would be interesting to see a chart of the actual price. The practical reality of Duke is that <$40k family income it is roughly free (full cost attendance); from about $40k up to (between 40k and 60k, no loans)...~$125k there is essentially a sliding scale. Plenty of families in the ~$150k range are very unsure they can or should swing $250k on undergrad. The worry is that a place like Duke over time will only have low income and very high income families and the middle will be crowded out (though this 'middle' is quite high income as compared to something like median family income). About half of Duke students get no financial aid so are paying full freight. http://www.finaid.duke.edu/undergraduate/stats/index.html

    2. That’s true at the marquee private schools, but the divergence is a lot smaller at state schools, isn’t it?

    3. I have not yet had the opportunity to pontificate about higher education, its benefits, and its consts on my completely unreadable blog, but very few universities have the endowments of Stanford or Duke. Using statistics compiled by the Department of Education, the net price at Stanford 2009-2010 for students who received federal financial aid with incomes 30k-50k was 4736 (and no, loans are not trated as grants according to the formula used. And yes, private grants and included in the calculation. But no, people who only receive private grants are not included in this calculation). At Duke the net price for the same income group was 5304. At what I assume is a more middle-class university, say San Jose State, the number for that same income group was 9937. You are paying more than 200% compared to Stanford for a product that is less respected (although I am not convinced that that is either fair or relevant to anything)!
      Anyway, these numbers still seem big enough to discourage people from going to college. If Obama called me up and said “Wido, you are now dictator of the US,” I would have a pilot program where I somehow capped student loans to what prices were, adjusted for inflation of course, back in the 1960s. Maybe this would only have the effect of crowding out the subsidization of poor students by rich students that has been discussed in this thread, but it would also have the effect of getting costs under control for people near the top of the distribution and also near the middle of the distribution who are most likely to get stuck with student debt. This would, in turn, have the effect of averting a popping of the bubble as people decide that it is not worth it. Of course, this assumes that higher education is worth it in the first place. Be sure to read my blog later for my self-indulgent musings on these topics!

      1. @Wido Incognitus
        interesting data. Duke worries about its “small” endowment which is over $5 Billion as it struggles to yield kids v. places like Stanford so the graph I showed is obviously quite different for Univ with very large endowments v. others. Need a graph with a concept like purchasing parity….or something. I think your intuition that the reputational difference is larger than the actual difference between many schools is correct.

      2. Do I understand that you – as dictator – would propose to cap the amount of loans, but not the tuition? Wouldn’t schools just keep doing what they do now — jack up tuition but try to subsidize the poorer students? How does capping the loans make the schools change their pricing? There would be no shortage of applicants, assuming they kept up their reputation. Our winner-take-all society is making people *more* desperate, not less.

    1. OK, but the estimated annual cost of attendance for an in-state student before aid at the flagship institution in my home state is fast approaching $30,000, and they are not known for being particularly generous with the aid. And I’m not from a state where the flagship institution is a Top 5, or even Top 10 public university. $120k strikes me as a lot of money for what is supposed to be one of the cheaper alternatives to obtain a four-year degree.

      [FWIW, I did not go to said institution, but many I grew up with did, including my brother. I was offered scholarships at the flagship institutions of two neighboring states that cut my tuition to their lower in-state rates, and took one of them.]

  2. With my son picking among the colleges to which he’s been accepted, including two UCs, I share the concern over the tuition/room/board bubble. We’re not paying retail, but we’re still going to be paying more than another house payment (on top of our actual house payment). Frankly, I’m really sad about that. We will simply eat away at our 401k/IRA or else go into debt. Our goal has been to make sure our son does not go more than $15K in debt over the entire four years or so. Meanwhile, the UCs are either not competitive (cough, cough, UC Davis) or working hard just to stay competitive with the private school charges (smile at UC Riverside).

    Mike Hiltzik’s op-ed in last week’s LA Times was required reading. He said (1) the State of CA only pays 11% of the UC budget right now and (2) if the taxpayers of CA paid the tuition for all UC students, it would cost $3 billion–while Meg Whitman ran for governor in 2010 wanting to abolish the capital gains tax in the State, which brings in $11 billion in revenues. Can you say…priorities?

  3. You can call it a bubble (it might even be a bubble) but in doing so you are steering attention away from what I think is the real story, which is we used to subsidized public higher education much, much, much more than we do now — in some places, we subsidzed it so much, it was even free. We used to understand that having an educated populace was to the benefit of all. Now we are all libertarians, it seems.

    1. Perhaps I’m missing something, but it seems to me a major problem in tuition inflation is the subsidization of students rather than institutions.

      As Pell grants and the various loan programs pay larger amounts to students, the institutions have the ability to keep raising tuition. The institutions then get a lot of discretion on how they use the money.

      For instance, every university of any size in my state spends (how much? Good question. I don’t know) money on advertising and marketing in each others back yards, which strikes me as ridiculous. Universities now have a “customer service” model, which also strikes me as a bad idea. I’m not for spartan conditions, but neither am I interested in providing “apartment-style living” in place of the dormitory model. I’m also uncomfortable with bringing in food vendors providing higher-cost food in place of simple cafeteria meals.

      It could be that I’m fundamentally wrong in theory here, or it could be that I don’t have a good grasp on the monies involved. I’d happily accept instruction on either of those points.

      In addition, the loan programs increasingly shift the costs of education from society to the individual student. Here I’m echoing Ohio Mom. The loan system provides money to subsidize unneeded services for which the student eventually pays, at a nice rate of interest.

      I do know that I have exactly zero interest in sending my daughter to college so she can get a job. If that’s the aspiration she has at the end of high school, we’ll look for a trade school or maybe a two-year program.

      What I do want her to get, and what I hope she wants to get, is what I got: An education that makes her a better citizen and a better human being. For that, I’ll pay. What exactly has made the cost of providing that sort of instruction skyrocket? That’s what I’d like to understand.

    2. “We” aren’t all libertarians — but we are RULED by kleptocrats who employ libertarians the way the USSR employed dialecticians.

      1. I know we aren’t all libertarians. I meant libertarian ways of seeing have so permeated the culture that sometimes those of us who arent’ libertarians inadvertently end up sounding like them. That is, why are we talking about education bubbles, which implies education is a commodity individuals purchase (or don’t), instead of education as a type of public good? We’re letting them establish the vocabulary.

        1. I think I can answer that: Because there are a lot of internet entrepreneurs who see education as the next big market to exploit. There is where I first saw the phrase “education bubble”. If that isn’t where it originated, I’d be surprised.

    3. I thought the “real story” was the huge increase in staff to student ratios. Gold plated facilities don’t help much, either.

      I honestly think it’s a result of a smaller and smaller fraction of the tuition actually going to pay for instruction. Why this happened is, of course, an interesting topic.

      Looks to me like online learning is going to disentangle instruction and the universities, enabling people to get educated without having to give huge sums to entrenched institutions. That should be the ultimate solution.

      1. Looks to me like narrowly-focused online training is going to enrich a few entrepreneurs and destroy the benefits to society of the universities, enabling people to get job training without getting an education. That should be the final solution.

        Fixed that for you.

        1. This is exactly how I see it. Great universities provide many benefits to society that extend far beyond just teaching students.

          With the tuition inflation, though, they are cutting their own throats. I went to a small liberal arts college that was a life-changing experience for me; I doubt I’ll be able to afford to send my son there.

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