Avocado and debt

Today I aim to dive into a super interesting topic: Where does your college tuition dollars really go? This fascinating topic really got me thinking, especially considering I just wrote about how the interest on my wife’s student loans was killing us the last two years (You can read about how we had a $17,000 Interest Capitalization in 2017 here).

If you ever wonder why I passionately write about paying off debt, being good stewards of finances, and living below your means, this post will really shed some insight as to why the  student loan debt crisis is bigger then we can ever imagine!

On a personal note – November saw the most growth in views, comments, and shares on the Money Life Wax Blog! Thanks for reading and in the upcoming months I aim to reach out to readers to ask them what they would like to hear about in 2018!! Your likes and shares continue to motivate me to post 2x a week in hopes to positively shift financial mindset across the country.  

 

Avocado Toast or Soggy Pizza?

 

It is a honest question. If you were in college, would you prefer to have some ripe, not locally grown avocado for breakfast, followed up with a lobster bake for dinner? Or would you like some pizza baked to perfection in the high school style cafeteria  in the dorm room?

This might sound like a really silly question, right? I mean who wouldn’t choose the avocado and lobster over the soggy pizza. As silly as this question might seem, the truth is that choices like these are what are greatly impacting college tuition and expenses.

Food and Lifestyle. They are what drive the college arms race.

 

Malcolm Gladwell for President

 

I recently stumbled across an awesome three-part podcast mini series by Malcolm Gladwell discussing higher education. An avid reader, I am always fascinated by Malcolm Gladwell and his perspective on society, money and life (not wax).

If you thought I came up with the whole avocado toast thing on my own, thanks for the compliment, but I am just not that smart. However, Malcolm Gladwell is. I highly recommend you check out the Revisionist History – Higher Education series on iTunes, or just use these 3 youtube links the next time you are driving to work:

1 Carlos Doesn’t Remember

2 Food Fight

3 My Little 100 Million

As I listened to Gladwell, famous author of Tipping Point and Outliers, I was awestruck. Trying to understand why the cost of higher education is skyrocketing, I realized that the student loan crisis is a problem with many layers.

With the perceived necessity of a college degree to achieve success in life, Gladwell examines the challenges that exist for “poor smart kids” to reach college, how food and dorms drive college spending, and how  contributions exceeding 100 million go to the richest, most prestigious universities.

 

Price to be Paid

 

The most interesting aspect of the mini series, with regards to college spending,  all came down to two colleges. Vassar College and Bowdoin College.  

Vassar believes in admitting more students in need of financial support, aka Pell Grant students,  into their college. I learned that in order to receive a Pell Grant, a student must demonstrate a high NEED for financial support.  However, by allowing these students into their college, non-tuition paying FAFSA students, Vassar College needs to make up the difference with accepting wealthier, full tuition paying students.

The finance executive said it best, “It is like a barbell, the weight on each end must be equally distributed.” There is just one problem with Vassar’s philosophy, in order to cover the costs for the students not paying as much in tuition, those receiving more financial aid, they must increase the tuition for the paying students, tap into their endowment, and make cuts.

 

…Cuts on things like food and dormitory living.  (Side note – Read here how to cut on your huge grocery bill!)

 

So how does Vassar continue to attract high paying families to their college in order to stay afloat, when they serve soggy pizza during orientation and Bowdoin serves Lobster?

Like a double edged sword, can you blame Bowdoin for offering better food choices? And can you blame the families that choose to take their high paying tuition kids to a school that offers better food and luxury dorms if they will pay the same at both colleges anyway?

A large contributor to the overall higher education problem is a term called price discrimination, which  in college is essentially encouraged.

 

Price Discrimination

The definition of a price discrimination monopoly from Investopedia reads:

“Price discrimination is a pricing strategy that charges customers different prices for the same product or service. In pure price discrimination, the seller charges each customer the maximum price that he is willing to pay. In more common forms of price discrimination, the seller places customers in groups based on certain attributes and charges each group a different price.

Does this sound like colleges? You can read more about Price Discrimination if you want to,  but after reading that definition I immediately thought of my own experiences. How come I walked away paying more in student loans then some, yet not as much as others?

The seller (colleges) place the customers (students) in groups based on their attributes (grades, race, sex, income, etc) and charge each group a different price.  The college cash machine can then dictate how much a FASFA student might pay, often charging the max because of the available Federal Aid… the first reason why tuition is so pricy.

 

5 Reasons Why Tuition is so Pricey

 

# 1 Federal Aid

Federal aid can be the most problematic and layered problem when  discussing student loans and high education. FAFSA was designed to give qualified students financial assistance to attend college. The result? Colleges are battling for student enrollment to collect more aid

In 2014, 27% of operating costs for public colleges went to instruction, compared to 33% for private colleges.  Less than a third of the operating costs actually go to the instruction. This is alarming, considering the tuition hikes seen over the last decade.

If the instruction costs have remained relatively the same, where is the rest of the tuition money’s going?

 

# 2 Longer Curriculum Frameworks

Good luck graduating in under 4 years.  According the National Clearinghouse Research study, the average student is getting their bachelor degree in 5.1 years. And this not just a student problem, the curriculum frameworks are longer.

What is the difference between a 4 year and a 5 year degree you might ask? About $25,000.

Art, Psychology, Theatre, English, Math, Sociology, and introduction to major classes.  Sound like a typical freshmen year schedule? A well rounded population is great, but colleges should focus on diving into the major and experience, not hitting every subject for the third time since high school.

If the curriculum framework can not be accomplished in 4 years, it needs to be adjusted. However, colleges are not adjusting. In 2009 I graduated with 153 hours and a BS, the minimum requirement was 120… so why did our framework require 153?

The longer a student is in college, the longer the more they are paying, and the less they are earning. I wrote about a comparison in my third blog post ever here!

 

# 3 Demand For College

With social peer pressure and the professional career world requiring a college receipt just to walk through the doors for an interview, there is a high demand for college. Like any great consumer good, a high demand leads to one thing  – less questioning, more purchasing.

The whispers about college tuition costs are not making a dent in college tuition raises. As the push for college continues, even trickling as far down to kids who are in middle school, the tuition will continue to increase.

The college dream (Is it really a dream if over half the population goes now?) is engraved early – go to school, get good grades, get into a college, and do whatever it takes to pay for college – don’t question the costs.

By not questioning the costs colleges don’t need to worry about lowering costs. It is generally unquestioned that credit debt is bad debt, however, college debt is assumed as being a “good debt.” 

I got 99 Problems.. But Debt Ain’t One!

 lobster or debt

 

# 4 Student Acquisition Costs

Like the Cold War arms race, colleges are in a full scale race to attract and pull students to their colleges. It is the reason why colleges visit the high school I teach at just about every day. It is why the rate of professors across the country have remained relatively the same, yet administrative positions have increased 200% in the last 20 years.

Someone has to foot the acquisition bill, most likely your college tuition. Colleges are paying $35 to marketing firms for prospective college goers contact information. These same marketing companies collect personal information of unsuspecting potential college students only to sell it to colleges.

In other words, money you paid to go to college was used to recruit more students.

 

# 5 Food

And at the end of the day, something as small as what college students eat every day can be the difference in leaving college with the 2016 average student loan debt amount, $37,000 or walking away potentially ahead of the bell curve.

According to the a Time Money article, data from the U.S. Department of Education shows the average college charged $4,300 for a 19 meal per week program in 2015, about $7.50 a meal.  In other words, a four year total of $17,200 on food. The average adult American typically spends roughly $4,000 on food all year (53 weeks compared to 19 weeks).

The high income, full paying tuition students that all colleges love to recruit have a demand for better food, that ultimately all students pay the price for.

 

At the end of the day, this should all be alarming. I understand that operating costs, administrative fees, research, faculty expenses, and all the other things add up, but isn’t college about learning? With roughly only a quarter of college tuition going towards  instruction, one can only imagine…. what if you only had one quarter of your student loan debt? And does college have to be so expensive?

 

 Q: What do you go with,  the avocado toast or the pizza?

Your future self will be glad you read.                  – Josh

2 Replies to “Where Do Your College Tuition Dollars Really Go?”

  1. Great article.

    I think there are some other things that college tuition goes towards:

    -Athletic programs and events
    -Student organizations (especially Greek life)
    -Campus activities
    -Amenities each college has (e.g. Game room; Student hangout center)
    -Quality of faculty and instructors/ Quality of academic programs

    1. Hey man,

      Yup – and those are all awesome. I for one particularly loved WVU football & sports. I am not sure where I would draw the line. College in America vs Europe are completely different.

      I think out college system has turned into a 4 year party because people know they will be working for the next 50 years…. but maybe us bloggers can help change that mindset haha!

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