The Shocking Increase Of College Tuition By State

Tyler Durden's picture

It is common knowledge that in the hierarchy of bubbles, not even the stock market comes close to the student loan bubble. If it isn't, one glance at the chart below which shows the exponential surge in Federal student debt starting just after the great financial crisis, should put the problem in its context.

And while we have previously reported that a shocking amount of the loan proceeds are used to fund anything but tuition payments, a major portion of the funding does manage to find itself to its intended recipient: paying the college tuition bill.

Which means that with student debt being so easily accessible anyone can use (and abuse), it gives colleges ample room to hike tuition as much as they see fit: after all students are merely a pass-through vehicle (even if one which for the most part represents non-dischargeable "collateral") designed to get funding from point A, the Federal Government to point B, the college treasury account.

It should thus come as no surprise that in a world in which colleges can hike tuition by any amount they choose, and promptly be paid courtesy of the federal government, and with endless amounts of propaganda whispering every day in the ears of impressionable potential students the only way they can get a well-paying job is to have a college diploma (see San Francisco Fed's latest paper confirming just this) there is no shortage of applicants willing to take on any amount of debt to make sure this cycle continues, that soaring tuition costs are one of the few items not even the BLS can hedonically adjust to appear disinflationary.

End result: tutitions have literally expoded across the country in both public and private colleges.

But while we know what the answer looks like at the Federal level, the question arises just how does this price shock look at the state level?

For the answer we go to the annual report by the Center on Budget and Policy Priorities, which periodically releases a report covering just this topic.

The answer, in a nutshell, is presented in the chart below which shows the state by state, inflation-adjusted breakdown how much the average tutition has changed in the period between 2008 and 2014.

Our condolences to students in Arizona, who have seen a near doubling of their college tuition in just 5 short years.

In fact our condolences to students in the six states where tuition have risen by more than 60%, in the ten states where it has increased by more than 40%, and in the 29, or more than half of all states, where college tuitions have risen by more than 10 times the Fed's inflation target of 2% per year.

Some of the other findings in the report:

  • Since the 2007-08 school year, average annual published tuition has risen by $1,936 nationally, or 28 percent, above the rate of inflation (in non-inflation-adjusted terms, average tuition is up $2,702).
  • In Arizona, the state with the greatest tuition increases since the recession, tuition has risen 80.6 percent or $4,493 per student after inflation.

But in addition to the "supply-side" easy credit that enables college Treasurers to demand whatever cost they want, is there any other reason for this relentless price increase? As it turns out the answers is year, and it goes back to the infamous Meredith Whitney prediction that across the US, various municipalities and states are insolvent. Because as it turns out, the main reason why so many state colleges have, at least according to the CBPP, boosted costs is to make up for the near complete collapse in state funding to higher education.

This is how the CBPP report frames the issue:

Deep state funding cuts have major consequences for public colleges and universities. States (and to a lesser extent localities) provide 53 percent of the revenue that can be used to support instruction at these schools.3 When this funding is cut, colleges and universities generally must either cut educational or other services, raise tuition to cover the gap, or both.

Indeed, since the recession, higher education institutions have:

  • Increased tuition. Public colleges and universities across the country have increased tuition to compensate for declining state funding and rising costs. Annual published tuition at four-year public colleges has risen by $1,936, or 28 percent, since the 2007-08 school year, after adjusting for inflation.4 In Arizona, published tuition at four-year schools is up more than 80 percent, while in two other states — Florida and Georgia — published tuition is up more than 66 percent.
  • These sharp increases in tuition have accelerated longer-term trends of reducing college affordability and shifting costs from states to students. Over the last 20 years, the price of attending a four-year public college or university has grown significantly faster than the median income.5 Federal student aid and tax credits have risen, but on average they have fallen short of covering the tuition increases.
  • Cut spending, often in ways that may diminish access and quality and jeopardize outcomes. Tuition increases have compensated for only part of the revenue loss resulting from state funding cuts. Public colleges and universities have cut faculty positions, eliminated course offerings, closed campuses, shut computer labs, and reduced library services, among other cuts. For example, since 2008, the University of North Carolina at Chapel Hill has eliminated 493 positions, cut 16,000 course seats, increased class sizes, cut its centrally supported computer labs from seven to three, and eliminated two distance education centers.

A large and growing share of future jobs will require college-educated workers.7 Sufficient funding for higher education to keep tuition affordable and quality high at public colleges and universities, and to provide financial aid to those students who need it most, would help states to develop the skilled and diverse workforce they will need to compete for these jobs.

Such funding is unlikely to occur, however, unless policymakers make sound tax and budget decisions in the coming years. While some states are experiencing greater-than-anticipated revenue growth due to an economy that is slowly returning to normal, state tax revenues are barely above pre-recession levels, after adjusting for inflation.8 To bring higher education back to pre-recession levels, many states may need to supplement that revenue growth with new revenue to fully make up for years of severe cuts.

But just as states have an opportunity to reinvest, lawmakers in many states are jeopardizing it by entertaining tax cuts their states and citizens can ill-afford. For example, Florida - where higher education funding is 30 percent below 2007 levels and tuition at four-year schools is 66 percent higher - is cutting taxes by $400 million in the current 2014 legislative session. Other states are also considering damaging changes to their tax codes that would make it very difficult to reinvest in higher education.

* * *

In other words, to mask their insolvency, funding for colleges has been the first outlay that states across the US were forced to trim: and the more insolvent any given state, the greater the offset that was passed through to any given state's colleges.

This is indeed confirmed by the chart below, which shows the change in state spending per student over the same time period.

And this is where students, and their massive debt loads have come in. Because as it turns out, instead of having the state fund itself and be able to return college funding to pre-crisis levels, that responsibility is now offloaded to the student.

From the report:

During and immediately following recessions, state and local funding for higher education has tended to plummet, while tuition has tended to spike. During periods of economic growth, funding has tended to largely recover while tuition stabilizes at a higher level as share of total higher educational funding.

 

This trend has meant that over time students have assumed much greater responsibility for paying for public higher education. In 1988, public colleges and universities received 3.2 times as much in revenue from state and local governments as they did from students. They now receive about 1.1 times as much from states and localities as from students.

 

 

Nearly every state has shifted costs to students over the last 25 years — with the most drastic shift occurring since the onset of the recession. In 1988, average tuition amounts were larger than per-student state expenditures in only two states, New Hampshire and Vermont. By 2008, that number had grown to ten states. Today, tuition revenue now outweighs government funding for higher education in 23 states with six states — New Hampshire, Vermont, Delaware, Colorado, Rhode Island, Michigan, and Pennsylvania — asking students and families to shoulder higher education costs by a ratio of at least 2-to-1.

The bottom line is that in order to perpetuate the myth of state solvency, the obligation to provide the funding needed for any one student's education has been transferred from the state itself to the student.

Is this a "fair" cost-shifting arrangement?

It depends on the perspective of the payor, and of course, the obligor. As Janet Yellen herself pointed out today, the fact that students are being saddled with record amounts of debt is regarded by the Fed as of the primary reason why the housing recovery has not materialized, and why household formation has collapsed and is far below historical (and expected) levels (and has indirectly led to such aberrations as the US "renter nation", and Wall Street firms such as Blackstone becoming the largest landlord in the US).

Some of the other side effects of this perverse funding shift, from the CPBB:

Rapidly rising tuition at a time of weak or declining income growth has a number of damaging consequences for families, students, and the national economy.

 

Students are taking on more debt. Student debt levels have swelled since the start of the recession. Collectively, across all institutional sectors, students held $1.08 trillion in student debt — eclipsing both car loans and credit card debt — by the fourth quarter of 2013. Between the 2007-08 and the 2011-12 school years, the median amount of debt incurred by the average bachelor’s degree recipient with loans at a public four-year institution grew from $11,900 to $14,300 (in 2012 dollars), an inflation-adjusted increase of $2,400, or 20 percent. The average level of debt incurred had grown from $11,200 to $11,900, an increase of about 6.3 percent, over the previous eight years.

 

Tuition costs are deterring some students from enrolling in college. While the recession encouraged many students to enroll in higher education, the large tuition increases of the past few years may have prevented further enrollment gains. Rapidly rising tuition makes it less likely that students will attend college. Research has consistently found that college price increases result in declining enrollment.35 While many universities and the federal government provide financial aid to help students bear the price, research suggests that both the advertised tuition cost and the actual price net of aid affect whether students go to college; in other words, a high sticker price can dissuade students from enrolling even if the net price doesn’t rise.

 

Tuition increases are likely deterring low-income students, in particular, from enrolling. Research further suggests that college cost increases have the biggest impact on students from low-income families. For example, a 1995 study by Harvard University researcher Thomas Kane concluded that states that had the largest tuition increases during the 1980’s and early 1990’s “saw the greatest widening of the gaps in enrollment between high- and low-income youth.

 

Tuition increases may be pushing lower-income students toward less-selective institutions, reducing their future earnings. Perhaps just as important as a student’s decision to enroll in higher education is the choice of which college to attend. Even here, research indicates financial constraints and concerns about cost push lower-income students to narrow their list of potential schools and ultimately enroll in less-selective institutions. In a 2013 study, economists Eleanor Dillon and Jeffrey Smith found evidence that some high-achieving low-income students are more likely to “undermatch” in their college choice in part due to financial constraints

There are many more unintended consequences of this cost shift, all of which are succinctly explained in the full study which can be found here: States Are Still Funding Higher Education Below Pre-Recession Levels.

But while questions of fairness are largely meaningless in the New Normal, especially once the Obama administration is done with them, one thing is certain: this arrangement is completely unsustainable.

It goes without saying that anything that is unsustainable eventually ends.

In the meantime the biggest loser is... you, dear students.