When the other bubble bursts

Zach Davis

Part I of II
A few days ago, The Washington
ran an article on the College
Board’s Annual Survey of Colleges.
This survey collects information
about tuition and financial aid and
compares it to inflation-adjusted
data from years past. The Post
focused, unsurprisingly, on tuition
increases for both public four-year
colleges and private four-year colleges.
However, I think there’s a
slightly more subtle – and far more
worrisome – angle the Post missed.
The Annual Survey of Colleges
gave me 25 years of data on the average
tuition price for private four-year
colleges – such as Lawrence, schools
that receive no public funding; public
four-year colleges – state schools
that receive government funding; and
public two-year colleges – technical
and community colleges. Looking at
the graph, one can see an inexorable
increase in tuition across the board.
But tuition increase by itself is
not problematic; things get dicey
only if tuition increases faster
than the means of paying tuition.
I checked out the U.S. Census
Bureau’s “Income, Poverty and Health
Insurance Coverage in the United
States: 2008″ report, which gave me
Americans’ inflation-adjusted median
household income over the same
25-year span.
Unfortunately, the 2009 report
hasn’t been published yet, so most of
my data is two years old. Just to be
clear: Household income represents
the amount of money everyone who
lives in any given house makes in a
year – this includes salaries, investment
returns, interest from savings
accounts, everything. Over the past
25 years, median household income
has trended upwards, but not nearly
as steeply or steadily as college
tuition. Uh-oh.
I looked at college tuition as
a percentage of median household
income – in other words, what percent
of a household’s yearly earnings
go to paying for college. Public twoand
four-year college tuitions look
fairly reasonable: for the 2007-08
school year, public four-year college
cost the average family about 13
percent of their household income,
while public two-year college cost
about five percent. For the 1985-86
school year, the respective percentages
were six and three; while there
has clearly been an increase, it’s
nothing insane.
Private four-year colleges are a
different story. In 1985-86, private
school tuition cost the average family
about 27 percent of household
income. Stiff, right? In 2007-08, private
school tuition cost the average
family 49 percent of their household
income. You read that right – in
2008, the average family would need
to spend half of their income for the
year to send one child to an average
private school.
Of course, that’s not the whole
story. The federal government and
most colleges offer financial aid
grants – the kind you don’t have to
pay back. In 2008, private schools
offered an average of $9,300 per student.
Factoring this in, our average
family would still need to spend 30
percent of its yearly income for one
year of private school tuition.
That’s not quite as heinous –
always assuming the student is
awarded financial aid, which is far
from guaranteed. But remember that
many families have more than one
child to put through college, and
myriad expenses completely unrelated
to school.
A quick caveat: The median
household income figure is of course
far from representative of every
American family – there are households
that make 10 times more than
the median, and households that
would be lucky to make a 10th.
Similarly, average college tuition is
far from a perfect statistical measure.
I can’t use this data to make
many concrete statements. What I
can do, though, is look at the trends,
and think about what they may signify
and where they might lead.
Here’s what the Post left unsaid:
Private college prices are increasing
faster than median household
income increases. We can tell this
because the ratio of college tuition to
median household income isn’t staying
steady, but rather is increasing.
Of course, public college tuition
is increasing at just as steep a rate,
but because it started so much
cheaper, it is still quite affordable,
and will be for a while. However,
every year, students who decide to
go to private colleges must pay a
ridiculous percentage of their family’s
yearly income.
The private college market is
in something of an economic bubble.
Sooner or later, a majority of
potential private school students will
decide that a private school education
is not worth the price tag. This
might take years, but as long as
tuition increases at this disproportionately
high rate, private colleges
are in trouble.