Paying for College

College Costs Are Up Again


Students and families already struggling in a tough U.S. economy got little relief from swelling college costs this year, with the published prices of tuition and fees continuing their upward climb, according to a College Board report released today. The news isn't all bad, though, with the financial blow to families somewhat softened this year by record increases in federal grant aid, said the College Board, a nonprofit membership association of colleges and high schools.

At four-year private colleges in the U.S. , the average tuition rose to $27,293, a 4.5 percent increase over last year. The annual tuition hike was the highest at four-year public colleges, which continued to be slammed by state budget cuts. Nearly 20 percent of students at public four-year colleges and universities attended schools that increased their sticker prices this fall by 12 percent or more, the College Board said. Annual tuition and fees for in-state students at public universities grew 7.9 percent for the 2010-11 academic year, raising the average cost of attendance $555 to $7,605.

This year's tuition increase for U.S. public colleges is more than a full percentage point higher than last year's increase (6.5 percent). That's a trend that is worrisome to Richard Vedder, director of the Center for College Affordability & Productivity, a Washington-based nonprofit.

"The report may tell you that the costs are not rising quite as much as those statistics indicate because of increased financial aid, but the reality is that the colleges are doing relatively little to adjust to the economic realities of the recession," said Vedder in a telephone interview. "They have been too modest in their attempts to make cuts so far and, in my opinion, are doing too little too late."

Decade of Steep Increases

The cost of college has been going up steadily for years, with a four-year degree from the nation's most expensive institutions now carrying a price tag of more than $200,000, excluding aid. But the rise in prices has been the most brutal over the last decade. Published tuition and fees at public four-year colleges and universities over the last decade have increased at an average rate of 5.6 percent per year beyond the rate of general inflation, the highest increase of the last three decades, according to the College Board. This year was no different, with published tuition and fees at private and public colleges and universities continuing to outpace inflation. Between July 2009 and July 2010, the Consumer Price Index increased by 1.2 percent, according to the College Board.

At the same time, college costs are far outpacing the average U.S. family's ability to pay. In 2009, the average family income was 11 percent lower than it had been a decade earlier for families with incomes in the bottom 20 percent of incomes in the U.S. , and 5 percent lower for those in the middle 20 percent of incomes , the College Board said.

There has been a significant shift in the way public higher education is being financed as a result of state budget cuts, said Terry Hartle, a senior vice-president of the American Council on Education, in a telephone interview. There are 19.5 million students currently enrolled in higher education, about 80 percent of whom attend public institutions, he said. In the last two years, almost every state has cut funding for higher education, while at the same time enrollment in higher education has ticked up steadily, he said. This year, the federal government provided $150 billion to colleges and universities, while the states provided only $75 billion, a funding model that is different from years past, he added.

"The general approach to public higher education in the U.S. for more than a century has been low tuition to encourage all students to enroll, but what we are now starting to see is a shift to high tuition with moderate amounts of student aid to offset high tuition for low-income students," Hartle said. "It's a fundamental change in the pricing strategy for public higher education and is almost entirely driven by uncertain funding levels from state governments for higher education."

Lower Net Prices

This year's substantial infusion of grant aid along with tax credits from the federal government did manage to soften the blow for many families when it came to paying tuition bills, effectively lowering the net price of a student's education, said Sandy Baum, an independent policy analyst for the College Board and professor of economics at Skidmore College, in a telephone interview. The net price is what the average student pays after grants, student aid, and tax benefits are factored into her college bill, at both public and private colleges, Baum said.

Grants and tax breaks managed to lower the average net price at four-year private institutions by $16,000, bringing the average actual cost to $11,293 at private four-year institutions, the College Board said. At four-year public colleges and universities, students on average receive about $6,100 in aid, lowering the average annual tuition to about $1,505 a year.

"Grant aid and tax benefits on average have gone up fast enough to mean that what students are really paying is going up about the rate of overall inflation," said Baum. "Once you adjust for inflation, in all of the sectors, students are paying something less than they were paying five, 10, or even 15 years ago."

A new federal tax credit, the American Opportunity Tax Credit, part of President Obama's stimulus legislation, has also helped make a dent in tuition bills. Families are eligible to receive a tax credit of up to $2,500. This made college more affordable for 8 million families, who on average claimed $1,700 in college tax credits in 2009, according to a report from the Treasury Dept. released earlier this month.

Pell Grant Impact

Changes to the Pell Grant program, one of the most popular need-based grant aid programs for low- and moderate-income students, have perhaps made the biggest difference for students this year, said Lauren Asher, president of the Institute for College Access & Success, an Oakland (Calif.)-based nonprofit that works to raise awareness about financial aid.

"These findings do really reinforce the crucial importance of recent and substantial Pell Grant increases for students and families who are struggling to figure out how to pay for college," said Asher in a telephone interview. "Given the challenging economic situation, Pell Grants are going to be even more important this coming year."

More families are eligible for the Pell Grant this fall because of an increase in the minimum amount a family is expected to pay toward the cost of college. At the same time, the maximum federal Pell Grant students can receive increased by 16 percent, the largest one-year rise in its history, But even the maximum award only covers 34 percent of the average published tuition, fees, and room and board at public four-year colleges, and 15 percent of charges at private four-year institutions, Asher said.

"The Pell Grant makes a huge and important contribution, but it doesn't come anywhere near to covering the full cost of going to a public four-year institution," she said.

Schools Under Aid Pressure

Students and families are not the only ones struggling to make ends meet. With the price of college on the rise, schools hiking their tuition are under pressure to increase the financial aid packages they dole out to students. Private colleges increased institutional student aid by an average of 6.8 percent for the 2010-11 academic year, according to the National Association of Independent Colleges & Universities, a trade group in Washington. In 2009-10, private four-year colleges awarded an average of $6,440 in grant aid to full-time enrolled students, also awarding $2,060 in aid that exceeded financial need, according to the College Board.

In some cases, the tuition increases at private colleges are not bringing the school any additional revenue, but are being siphoned directly into the school's institutional aid budget, Baum said.

"It is really becoming a problem because schools are spending so much more on their financial aid budget, but they are not gaining extra revenue by increasing their sticker prices," Baum said.

With prices on the rise, enrollment patterns are shifting, with a growing number of students considering two-year colleges and for-profit institutions as alternatives to four-year public and private schools, the College Board said. From fall 2000 to fall 2009, the percentage of all full-time students enrolled in for-profit institutions increased from 4 percent to 10 percent.

But even these schools are not immune to tuition increases. The College Board estimates that tuition and fees at private for-profit institutions now average $13,935, a $679 (or 5.1 percent) increase over 2009-10. At public two-year colleges, the sticker price is on average $2,713, $155 (or 6 percent) higher than last year.

Students considering for-profit colleges over private colleges shouldn't just look at the sticker price when they are making a decision on where to attend school, Baum said. When a student factors in grant aid, the net tuition and fee prices are lower for many students attending private nonprofit colleges than for those attending for-profit institutions, the College Board said.

The majority of students heading to college today are becoming increasingly sensitive to rising college prices, forcing them to look for alternatives, whether it is community colleges or for-profit schools, said the Center for College Affordability & Productivity's Vedder, who is also an economics professor at Ohio University.

"As the price of the traditional product gets more expensive, students are looking for something cheaper," Vedder said. "The people are starting to speak and we're seeing it now in the growth of students attending lower-cost alternatives to four-year schools."

Damast is a staff writer for Bloomberg Businessweek.

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