Don’t hold your breath for the cost of college to go down

Matt McDonald Partner, Hamilton Place Strategies
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How much is college actually worth? Every year, tuition goes up and every year students still pay (often with money they don’t have).  It all begs the question, when will people say, “enough?”

The answer: no time soon.

For all the concern, a college degree remains one of the best investments you can make.

The strictly economic perspective would say that we should pay less for college than we get out of it, but not more. So if we expected to have our salaries increased over the course of our life from a college degree, and that increase adds up to $200,000, then we should be willing to pay up to that point, but no more. And the current advantage of a four-year college degree over just a high school diploma is $1.2 million over a lifetime. In today’s dollars at present value, that amounts to $725,000.

This is a big number and means there is still plenty of value in a degree beyond what people are paying today, but to fully understand it we need to compare it to the increasing costs of attending college. Looking at the historical growth rate, the cost of college has been growing at 2.85 percent annually. Assuming the present value of a degree does not rise or drop significantly, these costs will catch up to the value in 2086, when tuition clocks in around $180,000 per year.

This means that the benefit of going to college and demand for a degree are big enough that colleges can keep raising prices well into the future. Assuming the status quo continues in higher education, it will be about 70 years until students would technically be better off not taking on the costs of attending and going straight to work.

This does not mean that we should stop worrying about costs due to the significant benefit. There are some caveats to go with these numbers. The biggest is the question of the signal effect a college degree provides. Regardless of how much somebody learns in college, there is an element of the degree that is simply a sorting mechanism. A degree says that you are the type of person who works hard and can finish what you start. These are qualities that employers look for, and a college degree signals that you are one of those people, even if you had those qualities prior to four years of studies.

The other big assumption is that nothing happens to upend the educational status quo for the next 70 years, and one could argue that this process is already starting. Part of what happens when there is upward pricing pressure on a service is more providers enter the market and innovate. When we think about the number of lower cost alternatives and innovations to a 4-year degree; such as online education, for-profit education, skills testing, school ratings systems, and other start-ups, there is significant challenge to the status quo already.

Despite these changes, if you’re looking for tuition costs to moderate in the near future, don’t hold your breath. There is still plenty of room for costs to rise, and considerable value to getting a degree. It is these economic returns to college that are driving tuition higher, and this will continue. Those who are hoping for moderation in cost would do well to encourage the alternatives to the “traditional” 4-year degree.

In the end, it is innovation in educational delivery that has the highest potential to impact cost. And for prospective students even if costs moderate, the most important thing is to have a plan for how you get your degree, how you use your degree, and how you pay for your degree.