When you think about public college versus private institutions, you’d assume that the public option should be more affordable. But often this is not the case. Since 2001, college rate hikes at public institutions have been on the rise with no signs of it getting more reasonable. According to statistics by the College Board, tuition and fees have been rising 5.4% higher than the rate of inflation.
In fact, hikes in tuition, fees, room and board at private schools have been drastically lower at private schools versus public. So what’s driving the college rate hikes in public schools? According to analysis by the Federal Reserve Bank, it’s a cut in public funding.
The Federal Reserve analyzed data from the State Higher Education Executive Officers (SHEEO) and found that over the last decade, from 2000 to 2010, public funding on a per pupil basis dropped 21%. This is an average across the country, but varies greatly by region. In 2010, for instance, New York decreased public funding by 7.5% and California by 11.6% while Texas increased public funding for college education by 6.6% and North Dakota, a whopping 16.7%.
With each public funding cut, universities turned to tuition hikes to cover the shortfall. Students, in turn, looked to increased borrowings from student loans to cover the rate hikes. In short, based on this data, it is governments – both Federal and states – that are a primary driver in increased tuition costs and, by extension, in the trillion dollar student loan bubble that many are predicting will burst soon.
It’s also important to look beyond the simple price tag of an institution to understand the actual cost of matriculating. “Real net average tuition” is the cost of tuition after grants (free educational money) is deducted. Over the last decade, real net average tuition at public universities rose 33.1% while at private schools during the same period, it rose 21.2%.
You’ve no doubt heard of new car sales promotions where the dealership gives you a cash rebate for buying the car – sometimes several thousand dollars. Is the dealership taking a loss to put cash in your hand? Certainly not. Instead, they will recover the rebate by increasing the sticker price of the car. If a car that typically costs $15,000 is offering a rebate of $2,000, you can expect to pay a sticker price of $17,000. You’ll get cash in hand, but will be financing $2,000 more, so the car dealer will be profiting off of the additional interest.
It is much the same with college tuition. The sticker price shown is, for instance, $25,000, but then they offer grants and scholarships of $7,000 annually, bringing the real net average tuition down to $18,000. So why not just price the tuition at the correct price and dismiss the shenanigans? One reason is that a higher price tag supports an assumption of prestige. If it costs more, it must be worth more, right? Less costly schools surely can’t be as good as those with shockingly high price tags… That’s certainly not true, but that’s the mindset of those who set the price levels at universities.
Between cuts in state funding to senseless vanity tuition increases, it’s students and their families paying the price – quite literally. So what’s a savvy student to do? Look beyond the price tag when you are considering which schools you want to put on your short list. You have to look instead at the real net average tuition cost. Fewer than 15% of students at colleges pay the “list price” – most are eligible for the “free money” – think of it as the car dealer rebate – that lowers the price to what it really should be.
Once you have the real price, look at what your parents can contribute and factor in any college savings accounts you have access to. The difference will be what you’ll likely have to borrow to attend the school. Multiply by four years of school and then use a student loan repayment calculator to predict an estimate of what your monthly debt payments will be.
Then you need to look at projected salaries for your major of choice and see if the debt load will be manageable. If it’s not a fit and you’ll likely be eating up 50% of your pay with student loan payments, you should keep school shopping. If you’re planning on being a physician – fighting diseases such as Alzheimer’s and diabetes – you’ll likely be able to foot a higher student loan bill. But if you aspire to be an English teacher, the same student loans may be crippling.
Like with anything in life, there are things we want and things we can afford. The trick is to find the cross section of these two to ensure you don’t sacrifice your future by focusing too much on what you think you want right now… Whether you are in school and just starting to borrow or have graduated and want to better manage your student loan debt, try Tuition.io’s free student loan optimization tool!