181-The Math Still Works

Since the year 2000, medical care has increased in cost by 49%. Food is up 32%. But automobiles are flat and apparel is down 8%. Part of the reason for the better performance of automobiles and apparel has been the extreme stress of competition both of those industries have suffered. But the growth in the cost of medical care pales in comparison with the increased cost of college tuition and fees. That’s up 92% since 2000. (See the Symptom & Implication, “The industry has been able to preserve margins by increasing prices” on StrategyStreet.com.) All of this data comes by way of the Bureau of Labor Statistics.

Some people are beginning to question whether the cost of a college education justifies the benefits. It appears they do. The average college graduate with a Bachelor’s Degree earns about $53,000 a year. In real terms, that’s down 1% since 2000. The average high school graduate earns about $33,000 a year. This figure is also down 1% in real terms since 2000. Clearly, the costs of college tuition and fees have gone up enormously compared to slight declines in the earnings of college graduates. Still, the difference in annual earnings is slightly over $20,000 a year. The average state school probably charges something on the order of $10,000 a year for tuition and fees. A private school would charge considerably more. Some are just crossing the $50,000 a year threshold for tuition and room and board. So, the cost of a college education, without counting opportunity costs of foregone working income, range between $40,000 and $200,000. The college graduate, then, makes up that cost with improved earnings over the high school graduate in as little as two years, or as many as ten. Even if you discount the difference in future earnings, the college graduate is better off well before he or she reaches early middle age.

The pain of high tuition and fees is just beginning to squeeze. The risk is more likely in competitive supply than it is in customer demand. (See “Audio Tip #130: The Problem with High Returns” on StrategyStreet.com.) Young people are likely to continue paying the cost of college fees and tuitions because they earn it back, even if it takes several years to do so. On the other hand, these rising fees and tuition attract new entrants into the education market. That is where the colleges and universities are likely to feel the pain and suffering that result from thirty years of tuition and fee increases greater than the rate of inflation. They are creating a price umbrella for new market entrants.

Posted 4/5/10

Update:

The increasing costs of higher education continue to pencil out for most students. However, these high prices for higher education are setting a wide umbrella over alternatives to on-campus learning. The most notable beneficiaries are online learning programs which are growing far faster than on campus educations.

Higher education continues to be worth the economic cost. By any measure, the cost of a college education has grown far faster than the rate of inflation for the last 40 years. This trend has certainly continued in the last 10 years. Have we reached the endpoint?  There are significant increases in annual earnings and employment benefits with increasing education. A recent study compiled the results of median annual salaries for various levels of education. The median high school graduate earned $38,000 a year. A baccalaureate degree brought in $62,000 a year for the median. Employees with masters degrees had a median salary level of $75,000 a year. In addition to these salary benefits, higher levels of education also produce less likelihood of unemployment.

While the cost of higher education for the median graduate is worth the investment, an increasing number of students find on campus education programs unaffordable. Recent studies have indicated that about 1/3 of high school graduates cannot afford to attend on-campus higher education. This has led to an increase in demand for alternatives to on-campus education, especially online education.

According to a joint 2018 report by the Boston Consulting Group and Arizona State University, the overall post-secondary student enrollment has been seeing a yearly decline of 1% to 2%, while the number of students taking online courses grows 5% annually.  These trends have accelerated through Covid and the recovery from the pandemic.

The high cost of on-campus advanced education has created an enormous opportunity for cheaper educational offerings. High prices for education are creating the conditions for a hostile market. See HERE and HERE for more explanation.

9/22

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