Is College (Finally) Getting More Affordable?

Is College (Finally) Getting More Affordable?

After years of skyrocketing tuition prices, public and private colleges may finally be lowering the gates: An annual survey by Moody’s showed that, for the 2012-2013 school year, public universities are predicting the lowest rate of tuition growth in the past decade. Tuition rates at private universities are also trending lower.

Does this mean the college tuition “bubble” is about to burst and costs will plummet? Probably not, say the experts, but it does mean universities are responding to a public that weighs the value of a college education against the burden of student loan debt.

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Why Has Tuition Risen So Much Thus Far?

"Tuitions have gone up at two to three times the rate of inflation every year for the last twenty years,” says Rob Franek, vice president/publisher at The Princeton Review. He tells us that higher education is actually an increasingly competitive market, and that many colleges are compelled to do what they can to attract top talent. As a result, one of the reasons for soaring tuitions is the cost of new facilities and services that will lure students.

Plus, more recently, the struggling economy has been to blame, via shrinking endowments and state funding cuts.

Scholarships are also a hidden contributor that knocks down the "official" tuition price: While the private universities in the Moody's survey project a 4% increase in sticker price this year, on average, they only foresee a 2.6% median growth in net tuition per student because they're giving away more scholarships to draw students.

How Public Sentiment Has Been Changing

Despite the upward creep of tuition prices, this year's tuition growth is predicted to be sharply down. You can see this trend clearly in the following chart, courtesy of Moody's:

Screen Shot 2013-02-20 at 6.17.52 PM

Why the sudden shift? Emily Schwarz, lead author of the Moody’s report, attributes the slowing tuition growth in part to “a public and political sentiment” in which people are scrutinizing tuition prices more than they used to.

During the initial stages of the financial crisis, more people flocked to colleges and graduate programs in hopes of obtaining a new or better job. Yet, over the last several years, falling income and “uncertain job prospects for many recent graduates are combining to soften student market demand" for a college education, according to the Moody's report.

“Long gone is the idea that you will attend a university for four years and then get a job right after,” says Franek. “Students are more pragmatic now, not just because tuition costs are going up, but also because of ballooning loans.”

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Two-thirds of people who earned bachelor’s degrees in 2011 had student loans to pay off. Last fall, the Department of Education estimated that, among students three years out of college, about 13% default on their student loans. For graduate students, the numbers are even more stark: Moody’s says the median average student loan debt in 2012 was $44,166 for private university grads and $35,695 for public university grads.

Those figures are enough to give many potential students pause, especially in light of free online courses from prominent universities including Harvard, MIT, Stanford and the University of California, in subjects like artificial intelligence, cryptography and game theory. While these courses, which have served tens of thousands of people worldwide, are mainly a branding strategy for big-name schools right now, they do offer a new alternative for those willing to forgo the on-campus experience—and a degree.

Moody’s report corroborates: “Students are increasingly attending more affordable community colleges, studying part-time or electing to enter the workforce without the benefit of a college education.” Half the colleges surveyed predicted declining enrollment this year, particularly in graduate programs. The declines will probably be minimal percentage-wise, but they could hurt universities' bottom line, especially since graduate programs tend to charge more and discount less.

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In the end, lower enrollment means lower revenue: 18% of private colleges and 15% of public colleges in the Moody's survey predict a decrease in overall tuition revenue for the current year. In the 2008 fiscal year, only about one in ten universities saw low tuition revenue growth of 2% or less—now that number has risen to one in three institutions.

Smaller Private Colleges Are Being Hit Hardest

Students who do decide to pursue a traditional college degree are becoming more selective. “We are seeing a flight to quality and a flight to size,” says Schwarz. Demand is still strong at large, prestigious universities, which means that smaller, regional, private colleges are having the hardest time attracting students. The same is true for public colleges in the Northeast and Midwest, where high school graduation rates have dipped.

Some schools have responded to the financial pressure by freezing or cutting their tuitions. The Wall Street Journal reports that two dozen private colleges froze their tuitions last fall, about twice the number that did so the previous year. For instance, Concordia University, a private college in St. Paul, Minnesota, pledged to cut its undergraduate tuition by one-third, from $29,700 to $19,700, for fall 2013.

Another private school, the University of Evansville in Indiana, will freeze tuition at $29,740 for the next four years for freshmen arriving this fall. Several public schools such as the University of Maine, the University of New Hampshire and the University of Minnesota have promised tuition freezes if requested state funds are available.

Sticker Prices Are High; Actual Costs Not So Much

Admittedly, schools with static or dropping tuition rates are the exception, not the rule. At most colleges, tuition is still rising (even if more slowly than before).

Yet, while the numbers sound scary, only one-third of college students actually pay sticker price, according to the College Board. In 2012-2013, students at four-year public colleges paid an average of $2,900 in tuition and fees after financial aid, which is much less than the published total of $8,665. Private school students paid an average of $13,380 after aid, compared to a sticker price of $29,056. If you adjust that post-aid total for inflation, you'll find they're actually paying less than they did in 2007-2008.

“Overall, sticker prices are still going up,” says Franek, “but some schools are doing a better job of offering aid to those who need it.”

All the same, Franek believes that the way students evaluate colleges has changed for good: “Students and parents are becoming more savvy at asking colleges, ‘What’s different about your degree that is going to get me an awesome first job or a superlative graduate degree?’ ”

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