Why Does College Cost So Much Money? Small Ivy’s Big Idea #1

OLYMPUS DIGITAL CAMERACollege tuition costs have been rising at greater than the cost of inflation for some time now.  At state universities, some of the reason for this is that states are paying a lower percentage of the costs, shifting costs to students (or more often, their parents).  Still, at some point all of the costs have been shifted and yet tuition prices are still climbing.

There are various things at which you can point.  There are lavish new dorms and student recreation facilities.  There is a water park at Texas Tech, a new $400 M student center at the University of Arizona, and all sorts of expensive workout centers abound.  There are certainly a lot of professors who burn the midnight oil, but there are also a lot of faculty who are essentially retired who only show up periodically to use the copy machine who are still paid a huge salary because of tenure.  Technology is also a big factor, where every student can watch TV shows streamed to their laptops, send out random videos to their friends and surf the web for new games and pornography.

A final factor is there are a lot of people who have no business being in college who are accepted and spend a couple of years skipping classes and making it difficult for the serious students to study before they finally drop out.  For example, in my state students who have a 2.75 GPA can actually get a lottery scholarship to attend college.  That means that a student who does not even have an average of a B in high school, and therefore has not really mastered the material on which their college courses are based, not only gets into college but gets paid to go.  I realize that some students blossom late, but it seems like a better path for them would be to go to a community college and prove themselves there before going to a full university away from parental influence.  What ends up happening is that the colleges need to build new dorms, classrooms, and dining facilities for students who drop out after a couple of years.  There are also a lot of remedial classes offered in English and mathematics to teach things to these students they should have learned in high school.

Really, however, these are not the cause of college costing so much; they are a symptom of the colleges having too much money because they do charge so much.  The reason colleges cost so much is that their payment structure is set up in the same way that the healthcare system is.  They have a huge sticker price, but no one actually pays the full price.  This allows them to basically charge as much as people can pay while also getting a lot of taxpayer money thrown in as well.

A student going to a college from a middle class family will first see if they get any state-sponsored scholarships.  They will then find out what sort of financial assistance (taxpayer money) for which they qualify.  They then determine how much their parents can pay and how much they can get in student loans, forgetting that those loans will need to be repaid at some point.  The more expensive schools will then discount their rates, or pool money from alumni donors, to allow the students to attend even though they don’t actually pay the full tuition.

Because of this, you don’t see the factors that keep costs down and quality up in typical free enterprise systems.  If a business needs more money to operate they need to find a way to draw in more customers or they need to find a way to cut costs elsewhere and operate more efficiently.  If there were no financial aid except for a small percentage of the students who come from poverty, colleges would lose students if they raised tuition too high because the students would decide that it was not worth the money or that they simply couldn’t afford it.  They would also find ways to get through college faster (many students now take 5 or 6 years) or ways to get through more cheaply, such as taking online courses or transferring in from a community college and living at home a couple of more years.  Because they can raise tuition to whatever they wish and the students who can’t afford it simply get bigger loans or more financial aid while those that can pay more, there is no incentive to keep costs down, so you get the high faculty salaries and lavish student centers.

So the solution is really quite simple:  Eliminate financial aid for those who are not from families who make less than $30,000 per year and eliminate student loans entirely.  (Note I am talking about state schools. Private schools can do whatever they want so long as taxpayers aren’t footing part of the bill through student loans or other means.)  Scholarships could be given, but these should only go to the stellar students who you want in your college.  This would force colleges to limit their tuition to the point that middle-class families could afford.  It would also entice those families to save up for college rather than putting other things like kitchen upgrades, vacations, and electronic gadgets first.

If you really think about it, the necessities for a good college are fairly basic.  You need buildings in which the students can learn and the classes can actually be fairly large (50-100 students) without the quality of the education declining.  You need faculty to teach them, and you can get by with fewer professors through broadcasts of the lectures and the use of graduate students for the more basic subjects.  Students should also be able to teach themselves a lot through books and online resources.  You need dorms to house the students and dining halls, but these need not be lavish since individuals don’t need a lot of fancy entertainment and lush surroundings if they are truly there to study.  You need some level of technology for students to do research for their classes, but you don’t need to allow the students to use the technology for play and entertainment.

What if tuition were $3000 per semester?  Students could get by with $100 per month for food, $200 per month for rent and utilities (renting rooms or a few roommates sharing an apartment), and maybe $200 per month for other expenses.  That would be $10,000 per year, or $40,000 for a four-year degree.  A student could earn maybe $4000 – $5000 during the summer at summer jobs, working a lot of overtime rather than hanging out at home or going to the beach.  That would leave just $5000-$6000 per year for the family to provide.  Families who didn’t want their children to work summers of find $5000 per year while they were in college could easily save up enough from the time the children were born until they were 18 by putting away $1000-$2000 per year in an educational IRA.  Students who didn’t have families supporting them could work part-time jobs during the school year or do work-study programs with the colleges.  Note this would cut the college’s costs since they would not need to provide retirement benefits, vacation, and sick days to the students like they would need to do for regular employees.

So long as colleges can charge as much as they want, the situation will not change.  College costs will continue to climb to the point that they are no longer worth the cost (if they are now).  Universities will continue to have lavish amenities for students and faculty.  Families will continue to be forced into student loans and college will continue to be a large burden.  It is time to put the free enterprise system to work.

Follow on Twitter to get news about new articles. @SmallIvy_SI. Email me at VTSIOriginal@yahoo.com or leave a comment.

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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