Friday, September 7, 2012

The Price of College Tuition is Up More Than 1,000% since 1978... What Gives?

As college students across the state settle in to their new dorm rooms and lecture halls this month, we thought it would be interesting to share a not-so-short post about how the costs of college education have changed over time. Unfortunately, detailed Oregon-specific data about college enrollment and costs are not as easily available as national data, so this post will focus on the national picture.

In a recent post over at MarginalRevolution, renowned economist Tyler Cowen shared a graph that showed the price of college tuition and textbooks has been rising faster over the past 30 years than most items consumers use - much faster.

Graph 1 shows the price index for college tuition and fees, medical care, motor fuel, and "all items" included in the Consumer Price Index published by the Bureau of Labor Statistics (BLS). As you can see, the average price of college tuition and fees has increased to more than 1,200 percent of the 1978 price level... much more than the 700% seen in medical care costs. Motor fuel - which is often talked about as being very costly these days - has increased in price to about 600% of 1978 levels over the same period. Meanwhile the "all items" line, which is generally used as the headline index of inflation, has increased to about 365 percent of January 1978 levels.

So what gives? Well, one theory is that demand for a college education has grown faster than the ability of the nation's universities to supply that education. When demand increases faster than supply, prices tend to rise. So... if prices are going up, it stands to reason that an increase in demand could be the cause. However, data from the National Center for Education Statistics calls this theory into question. Fall-term enrollment levels for all U.S. degree-granting institutions shows that college enrollment increased by about 77 percent between the falls of 1978 and 2008 (the latest year for which data is available). During the same period, the price of tuition and fees (measured in September) increased by 857 percent.

Another way to look at this issue is to focus on the year-over-year change in prices to see if any patterns emerge. Graph 2 shows the year-over-year change in prices for "all items", medical care, and college tuition and fees. Periods of U.S. recession are shown in gray. Headline inflation - shown by the blue line - was above 10 percent during the late '70s and early '80s, but quickly fell off to "normal levels" between 2 and 4 percent by 1983. There have only been a few periods since when general inflation has strayed from its trend - most notably during the end of the most recent recession when price levels actually declined slightly for a short period. Annual increases in the costs of college tuition and medical care both seem to peak during, or shortly after, recessions until early in the last decade when the pace of college tuition price increases spiked a little later than might be expected, and the year-over-year change in medical care prices remained relatively flat around 4 percent annually.

This leads to a second theory about what could be driving the price of college tuition and fees. If the price of education tends to go up more rapidly during or shortly after recessionary periods, it might be in response to sudden increases in demand for education. The theory is that workers of all ages - but especially young people - find their job prospects particularly unappealing during a recession and so many of them go to college (or go back to college) to increase their skills in hopes of finding a better job once the economy recovers. If colleges are faced with a sudden influx of students during recessions, then it makes sense that they may increase their tuition prices faster during those periods to try to re-coup the additional costs of educating more people.

Again, enrollment data throws a wrench in this theory. Graph 3 shows the year-over-year change in fall-term enrollment figures and college tuition and fees (measured in September). This graph shows that growth in college enrollment actually tends to occur in the period of economic expansion proceeding a recession, and then slows - and sometimes declines - during the periods that have rapidly increasing tuition costs. Either the two trends aren't related, happen to be counter-cyclical by chance, or perhaps some potential students react to rapidly increasing prices by not enrolling in college.
A third and final theory is that even if the number of students isn't increasing very rapidly, the average student may be more willing to pay higher tuition costs today because they expect to receive larger gains later (in the form of increased wages, better job prospects, etc.). In other words, if the return on investment in a college education has increased significantly for the average student over the past 30 years that would explain why students are paying higher prices for their education today. Unfortunately we couldn't find a good data set that would answer this question. Data from the BLS shows that the average full-time worker, aged 25 or older, with a bachelor's degree or higher education, could expect to earn about $59,800 in 2011. Indeed, that's 29 percent more than the same worker could have expected to earn in the year 2000 (the earliest year for which data is available). Meanwhile, the cost of college tuition and fees more than doubled (+102%) over the same period. So, for at least the last decade this theory seems to be wrong... college students in 2000 likely had a higher "return on investment" from their degree than today's students will have, which doesn't help explain the increase in tuition and fee costs over the past decade.

So what gives? While we couldn't pin down a solid explanation of the trend, we would love to hear your thoughts about why the cost of a college education has gone up more than 1,000 percent since 1978.

Post your thoughts here, or share your comments with us on Twitter @ORemployment!

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