Why does college cost so much? 6 reasons college is expensive

By Joe Messinger, CFP®

May 29, 2020

5 min READ

College is expensive. We know you aren’t shocked by that statement. We all hear the news. It is easy to feel outrage at the skyrocketing price tag for college, and you can understand why. According to the Department of Education, the average annual increase in college tuition from 1980-2014 grew by nearly 260% compared to only 120% increase in all consumer items. In 1980, the average cost of tuition, room and board, and fees at a four-year post-secondary institution was $9,438. For 2019/20, that number has climbed to $21,950 for in-state public non-profit and $49,870 private non-profit colleges.

Now during a time of pandemic crisis, we are all taking a closer look at why college is expensive. The answer provides a glimpse into why colleges are appearing to suddenly be struggling financially. A simple answer eludes us because there is no simple answer. However, most experts will point to one or more of these primary reasons for the rising cost of college (although many “experts” can’t agree):

1)  State governments across the nation have cut funding to colleges and universities.

When we originally wrote this post in 2016, this reason was #3. Now in 2020, we’ve bumped it up to #1 because we can see the immediate impact that state funding cuts are having on our colleges. As an example in May 2020, the governor of Ohio cut $110 million from the budgets of public postsecondary institutions–this cut came from budgets ending June 30th. You can see how much each Ohio college lost in this article. Ohio State lost almost $15 million. We still wait to see how much the budget beginning July 1st will be impacted.

Cuts like these follow a trend which really began in earnest in 2008. Between 2008 and 2017 in Ohio, the state funding for higher education was cut by half-billion dollars (adjusted for inflation)–a reduction of more than 18%.  Imagine having your paycheck cut by nearly 20% over a period of 10 years. For the consumer, this problem is exacerbated by the fact that need based financial aid in the state of Ohio budget has been reduced by over $300 million dollars since 2008. These cuts leave gaping holes in budgets. Universities are forced to make up the short fall somewhere, and so they turn to their customers—the students.

2)   People want to go to college.

College is part of the “American Dream” and the path to success for many. The number of people applying to college is rising. As an example in 1995, Ohio State received 15,748 applications. In 2017/18, the number of applications to OSU rose to 52,425! In 2013, the total undergraduate enrollment in degree-granting post-secondary institutions was more than 17.5 million students, an increase of 46% from 1990. If demand for your product or service was up 50% over the last 25 years, would you be dropping your prices? The basic laws of economics tell us that when demand for a product goes up, so does the cost to the consumer. Colleges can cost more because people are willing to pay more. Heck, they are fighting to get a spot, and quite frankly colleges charge more because they can.

3)   The prestige (and price) of a brand name

More prestige…more applicants…more exclusivity. Part of creating that sense of prestige behind a name brand school is the cost. In our consumer driven society, it is ingrained in us almost from birth that the higher the price tag the greater the worth of an exclusive product. If you are paying more for a Mercedes, doesn’t it stand to reason that it is a better car than a Volkswagen? To be clear, price and value are two very different things. It is no secret though that some of our top colleges do not have an incentive to lower the price tag, but they actually continue to raise the price. They want to keep their own prestige on the rise. If XYZ University costs over $70,000 in the fall, it must be one of the best. Right? The reality is those schools provide a steep discount to the vast majority of students that attend and on average out of pocket cost for families is less than half due to the significant endowment money. But, the manufacturers suggested retail price (MSRP) is what gets reported.

4)   Some experts point to the increasing number of administrative staff at universities as a contributor to the rising cost of attendance.

At most colleges, the cost of staffing (and the cost of their benefits) are the largest budgetary expenditures. “According to the Department of Education data, administrative positions…grew by 60 percent between 1993 and 2009, which Bloomberg reported was 10 times the rate of growth of tenured faculty positions.” The rise in the number of administrative positions and their salaries is not matched by the rate of increase in the number of professors. In fact, the salary of professors has remained relatively flat. Now in the COVID-19 crisis, we are seeing colleges turn to cutting of staffing and retirement as their first cost cutting measures.

5)   Many people looking in at the new facilities offered by today’s colleges will blame the rock climbing wall, swanky dorms, and fancy dining halls as a contributor to the cost of college.

With the increased demand for college, also comes increased competitiveness to attract the best and brightest to your institution.  It may seem superficial, but the reality is we buy with our eyes. People buy the features, not just the benefits. You can’t just say you provide a world-class education anymore. They have to show you. And yes, construction of new facilities including lazy rivers and recreational facilities do cost money, but their costs are a fraction of a university’s expenditures.

6)   One tool families may be forced to rely on to pay these rising costs is student loans.

But those student loans are themselves contributing to the rise in costs—a strange cause and effect for sure. “Private colleges raise their tuition 65 cents for every dollar increase in federal subsidized loans and 55 cents for Pell grants given to low-income students, according to the report.” Because the government has made it easier to obtain student loans, colleges have less need to bring costs down. Why should they? Families will find a way to pay for it even if loans are involved.

If you do a google search on why college is so expensive, you will probably find some more reasons to throw into the pot. It is not a simple, easily explainable, or easily correctable problem.

So what is a family to do to keep their college costs in check?! The only answer is that you have to be a smart consumer of a college education. What does that mean?

• Recognize the demand for a college education and the competition it creates. There are schools out there that want your student (especially today!) and are willing to pay for them. You just have to find them.

• Take the “prestige” of a college’s reputation with a grain of salt. Is the prestige well founded? Can a similar college with an excellent program give a similar result? Focus on the value of the education itself relative to the price you pay, not just the sweatshirt you take home from the bookstore.

• Examine your college choices carefully and know your estimated out of pocket cost to attend each school. Sticker price is irrelevant.

• Don’t be blinded by “prestige” or amenities.

• Recognize the hard realities of student loans and their impact on the future of your student. Rule of thumb: your student should NEVER take on more student loan debt than your student anticipates making in their first job after graduation.

Yes, college is expensive. However, the reality is with the thousands of colleges to choose from your family can find an excellent school that your student will love at a price you can afford that won’t rob your retirement. You just need to be a smart consumer and take the time to kick a few tires before deciding.

Originally published 2/2016
Updated 5/2020