Where do college tuition dollars really go?
More and more you hear about the impact of student loans on college graduates, who as of 2016, had an average student loan balance after graduating of $37,000.
Never mind the fact that wages have remained the same but inflation has risen 650% since 1970. Forget the fact that college tuition for one semester used to be $2,000 as recent as the year 2000.
Student loans are unique and precarious.
By in large, the millennial generation is the first to really see the fall out of unfettered student loan lending. Most parents and grandparents didn't take out student loans and if they did, a summer's wages at a fast-food restaurant could pay most of them off!
And with the student loan balance toppling $1.5 trillion in 2020, my biggest question is… Where does your college tuition money really go?
Where College Tuition Money Goes
Recently, I wrote about how killer the interest on my wife’s student loans were to show the magnification of the student loan problem.
One of her loan's original balance started at $10,000 and as of 2017, the same loan had ballooned to $24,000 (Never mind the fact that we had a combined $300,000 worth of student loans at one point!)
Now besides the fact that the interest on her student loan resulted in a 200% plus growth, my first question was what the heck was the $10,000 loan for in the first place?
Did it go to tuition and books for one semester?
There is a good chance her tuition dollars did go towards her schooling… but there is also something else her tuition funded:
Food & Lifestyle
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 located on the bottom floor of 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.
They are what drive the college arms race.
Gladwell's Podcast on Student Loans & College Tuition
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 societal issues, like the student loan crisis.
I wish I could say I came up with the whole avocado toast thing on my own, 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:
As I listened to Gladwell, the 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 dorm room living drive college spending, and how contributions exceeding 100 million go to the richest, most prestigious universities.
But I couldn't get my mind off the “Food Fight,” podcast. Because it talked about something that hit home, college tuition and student loans.
Price to be Paid for College Tuition
The most interesting aspect of the mini-series all came down to two colleges competing for students. 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.
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, like a smashed chickpea avocado sandwich?
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 within the ranks of college is essentially encouraged.
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?
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 pricey.
5 Reasons Why College Tuition is So High
1. Federal Aid & College Tuition
Federal aid can be the most problematic and layered problem when looking to navigate student loans and higher education.
FAFSA was initially designed to help give qualified students financial assistance to attend college. However, several things happened in the 2000s:
- The demand for college increased
- Federal funding provided to the states for college was cut
- Lending was unfettered
Colleges battle it out for student enrollment to collect more aid! A recent Market Watch article put it this way:
Liquidity provided by the federal government enables colleges and universities to raise their prices.
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? (See #4 )
2. Longer Curriculum Frameworks
Good luck graduating in under 4 years.
According to the National Clearinghouse Research study, the average student is getting their bachelor's 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, Theater, 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. [See Also: Community college or bust?]
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.”
4. Student Acquisition Costs
Similar to 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, the money you paid to go to college was used to recruit more students.
>> Related: Should you refinance student loans?
5. Food increases college tuition.
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 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.
Where we are now with College Tuition Costs:
At the end of the day, the student loan crisis is alarming. Some experts weighing in on the subject think student loans could result in an economic crash at some point!
But more importantly, what is college really about? Is it learning or money.
With roughly only 25% of college tuition actually going towards instruction… I like to pose the what-if question… what if we only had 400 billion in student loan debt instead of 1.6 trillion?
But at the end of the day… it boils down to supply and demand!
Q: What do you go with, the avocado toast or the pizza?
Josh writes about ways to make money, pay off debt, and improve yourself. After paying off $300,000 in student loans with his wife in less than five years, Josh started Money Life Wax and has been featured on Forbes, Business Insider, Huffington Post, and many more! In addition to being a life-long entrepreneur, Josh and his wife enjoy spending time with their newborn son, their chocolate lab named Morgan, working out, being outside, traveling, and helping others with their finances! In case you were wondering, Josh uses Personal Capital to track his net worth and his first investment account ever was an Acorns account 😎