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Why College is so Expensive
By JLP | January 25, 2006
Did you know that total fees (tuition, room & board, and fees) for one year of Harvard is $41,675? In case you think I’m lying, you can see for yourself here. Just using straightline math (not accounting for inflation), four years of college at Harvard will cost at least $166,700! If you hang around to get a master’s degree, you’re looking at at least $250,000.
Now, think about this: Last year, according to the Wall Street Journal ($), the SIX investment managers for Harvard’s endowment fund made a total of $56.8 MILLION! To be fair, $56.8 million is only .22% of the $25.9 billion endowment (56,800,000 ÷ 25,900,000,000 = .00219 or .22%). Still, $56.8 million seems excessive to me, especially, when you consider that $56.8 million would pay the total fees for 1,363 students.
I have questions about this:
1. Why does the cost of college go up so much each and every year? Sure, there should be some inflation involved but why should it go up at an average of twice the regular inflation rate? I have a theory that it goes up because it is “expected” to go up. In other words, a self-fulfilling prophecy. The media, and everyone else talk incessantly about the high cost of college, which gives colleges a free ticket to raise tuition.
2. Why do college’s have these massive endowment funds? Harvard’s is $25.9 billion. Yale’s is nearly $12 billion (based on 2004 numbers, according to this WSJ article ($)). According to the first WSJ article, Harvard’s investment managers have an annualized return of 16.1% over the last decade and yet they only distributed 4.3% of the endowment in its most recent fiscal year. This brings us to the question: how much is enough? $30 billion, $50 billion, $100 billion? I understand that they have to build for the future, but there should be some sort of balance.
The really sad part about all this is that we just keep forking over these massive tuition increases year-in and year-out. Many people borrow from their retirement plans to pay for their kid’s and grandkid’s college educations, putting their future retirements at risk. Maybe that’s why the median 401(k) account balance for employees in the 50 – 59 age range is only $43,000.
I think it is time we start discussing this issue. Why should the government spend more and more of our tax dollars to support financial aid when some of the colleges are sitting on billion dollar endowments?
What do you guys think? I want everyone’s opinion.
Topics: College Funding, Miscellaneous | 11 Comments »
January 25th, 2006 at 11:49 am
I don’t think Harvard and Yale get any of our tax dollars (at least I hope not). It would be intereting to find out what the endowments are for some of the larger State U.’s. Maybe UCLA, Michigan, Tennesee, Texas, Colorado, others? These are the place where real people go to school (at leasy my children anyway).
January 25th, 2006 at 12:10 pm
Just like a retirement account you don’t want to outlive, colleges have to take
very conservative distributions from their endowments in order to be sure that
they’ll last for hundreds of years. That’s why they usually spend only 4% or so
each year.
Also keep in mind that most people who go to Harvard don’t pay the sticker price.
Harvard and the ivy leagues charge those who can afford to pay it $40K/year, but
they provide financial aid for most of their students (and I think Yale recently
stopped providing loans; they only give grants to financial aid recipients, with
no requirements to pay them back). So in the end, the rich folks end up paying
through the nose, but those with less pay only what they can afford. It’s
monopoly pricing to be sure.
January 25th, 2006 at 12:12 pm
If the Harvard endowment were someone’s retirement fund, conventional wisdom recommends that it be spent at a 4% rate regardless of the rate of return. If 4% of the endowment is enough to support the school’s financial aid pool and whatever else they use the endowment for, then they are being smart.
My husband went to Harvard and his total student loan debt was $8K. I went to a state school and my student loan debt was the same. Both of us are from more or less middle class families. I bet only the extremely wealthy actually pay upwards of $150K for a Harvard education, because Harvard knows they can afford to.
January 25th, 2006 at 1:54 pm
My younger sister is at Brown and costs are similar. I know she is eligible for some financial aid, but the costs are still huge compared to what it cost when I went through college 17 years prior to her. I had to rely on a lot of financial aid and I still had $10k to payback when I graduated. I’ve definitely seen some recent writing on the fact that the cost of education is FAR outpacing inflation and consumer pricing increases (here’s an article from 2002 that still seems relevant)
January 25th, 2006 at 4:11 pm
Reasons why college costs so much? Because of the perception that the cost paid for a college degree will pay for itself with increased earnings – no matter how much you pay. The perception that a degree from an elite school like Harvard is worth the extra cost in increased future earnings. Colleges and universities use these perceptions to avoid having to become more consumer-friendly or cost competitive, or to spend more of their endowments to benefit students.
The perception is starting to unravel some as recent graduates or their parents are saddled with tens or hundreds of thousands of dollars of student loans that take years or decades to pay off. A college degree is not quite the moneymaker it once was.
My take on all this is that Internet technology will mitigate the problem in a couple of ways. Making college course materials available to all for nearly free. (I help my college age daughter with her chemistry homework by accessing Wikipedia on the web.) I will also level the playing field between the elite schools and the rest as the best-quality teaching can easily be transported anywhere in the world over the Internet.
January 25th, 2006 at 7:15 pm
Where ever government picks up a large portion of the tab of assists in the purchase, costs spiral out of control.
Health care – government requires every hospital to provide emergency services to anyone who comes in the door, made up for by charging the paying customer’s insurance even more. Housing – mortgage deduction and various programs to subsidize lower income purchasers including leaning on banks to make loans to poor prospects in order to make any loans to good prospects. Education – k-12 total monopoly with enforced payment, value to customer horrible; colleges have grants and subsidized loans plus the government allows a level of collusion which would never mmuster aintitrust laws if a business. The big three areas where the government tried to lift the economic cost off many people’s shoulders is where the twice inflation level increases in costs are.
January 25th, 2006 at 10:57 pm
Only the wealthy pay list price at Harvard. Everyone else gets a discount based on their
financial need as determined by Harvard’s financial aid office. Many of wealthy families
actually are willing to pay full fare to send their kid to Harvard, so what’s the harm in that?
No doubt some middle-income families decide that Harvard is too expensive even after the
financial aid discount, and decide to send their kids elsewhere, where costs are lower or
financial aid is better. But thats how the free market works. Your life isn’t over if you
don’t attend an Ivy league school. At the low-income end of the spectrum, kids admitted are
getting close to a full-ride at Harvard.
I can’t recall exact stats, but only a small percentage of college students attend private
colleges with costs in the same ballpark as Harvard. The vast majority go to lower cost private
schools or state schools or community colleges with much lower costs.
And most people don’t fork over these massive tuition increases year-in and year-out. Most kids
finish college in 4 or 5 or 6 years. Unless you have a lot of kids spread out over a lot of
years, and most Americans don’t, your tuition paying years are limited.
January 26th, 2006 at 9:44 pm
The fact is that Harvard and other Ivy league schools can charge so much because people are willing to pay it. People are willing to pay it because your return on investment in the future outweighs the cost of education. Where else can you get such a high return on initial investment? I graduated 2.5 years ago from an Ivy League school and will have totally paid off all of my loans (after this year’s bonus gets paid).
As others have mentioned, only the people that can afford it pay list price. Also, what difference does it make to others how much colleges charge. Like any entity in a capitalist society, they can charge as much as the demand is willing to pay.
Also, these schools have a large endowment because of the alumni that have come out of them. These top tier schools produce students that will end up leading industries.
January 29th, 2006 at 8:53 pm
a. Jack Meyer, harvard’s ex fund manager, was one of the most capable investment managers in the world. Read an interview here – http://ddo.typepad.com/ddo/2005/04/former_harvard_.html. He and his team were opperating at an EXTREME DISCOUNT to their true value by only charging $60 million. He and his team were able to raise over $4 billion. http://www.iialternatives.com/default.asp?page=1&SID=588217&ISS=20617.
b. Harvard subsidizes even their $40k a year. From their website “All Harvard students receive a subsidy – even students who do not qualify for need-based aid receive a substantial subsidy, or implicit scholarship, from the university because the price charged covers only about two-thirds of the cost to Harvard for the education provided. The remaining third is paid for largely by endowments and gifts.”
Responding to questions:
1. I believe that the main cause of the rise in college tuitions is the rise in wages of professors. You have to remember that the labor market for university professors is competitive, and that these people by and large could make more money in the private market. When you talk about elite colleges, you’re talking about some of the smartest professors in the world – all of these people are working at a discount to what they could make in the private sector.
sam, i’m not sure where you went to college, but anything outside of a top ten school falls all over itself to attract students. It’s a tough market out there with all but a few dozen select schools admitting more than 50% of applicants (most schools admit around 60%).
2. I don’t know how much is enough, but $25 billion certainly isn’t. 4% withdrawn each year though sounds prudent.
Final thought: The government isn’t spending more and more on education. Under Bush it has been spending less and less. http://www.consumerismcommentary.com/2005/12/22/congress_raises_student_loan_interest_rates
January 30th, 2006 at 11:03 pm
Weekly Roundup – 01/27/06
Today marks the end of a busy first week at the MoneyBlogNetwork What follows are some links to articles that I found to be particularly interesting around the network and elsewhere
February 5th, 2006 at 12:35 am
Seriously though, I get a little tired of everyone saying that “college is the only way you
can learn”. Once upon a time college was almost impossible for the poor, but many positions
in engineering accepted you as long as you proved you had the knowlege. Nowadays, I’ve honestly
seen a McDonald’s that only hired people with a Bachelors Degree.
Why is it now that it doesn’t matter in companies what you know, but how rich your parents are?!
If anything, I think the reason that colleges are so expensive now is because they can get away with
it. I went to Umass Lowell for Chemical Engineering, which is fairly cheap compared to most other
state schools in New England. I remember during my undergraduate years that pretty much everything
discussed was all review for me.
Ohhh, if I was just able to take the PE before all those years trying to pay for that…