Are Tuition Increases Like a Drug Addiction?

Many have predicted a higher education meltdown similar to the recent housing boom and bust.

Money was lent to home buyers who couldn’t afford the loan payments, and buyers spent that money on homes with the expectation that home prices would go up. As long as prices kept going up, everything was copacetic.

But the easy money stopped. Buyers couldn’t sell their homes and couldn’t refinance. Home sales slowed, prices started falling, the housing bubble burst and home prices crashed.

It’s far too easy to borrow money for college. There is more outstanding debt for student loans than there is for auto loans and credit cards. The numbers are staggering with more than $1.2 trillion in outstanding student loan debt and 40 million borrowers with an average balance of $29,000. As of July 2015, almost 7 million Americans with student loans hadn’t sent a payment to the government in the last year. That translates into about 17% of all borrowers with federal loans being severely delinquent.

The ease of getting student loans is serving as an enabling agent for higher education institutions. It’s easy to understand why some have no problem raising tuition each year, because they know someone will pay for it. It’s almost like a drug addiction.

At some point, the value of getting some degrees will be outweighed by the negative impacts of shouldering huge student loan debts. Institutions need to be careful and think about the negative ramifications of increasing tuition.

When I went to school in 1985, median income was $25,000. Today, it’s $50,000. That’s a 100% increase or a compound annual growth rate of 2% over those 30 years. Average inflation over that period was about 2.8%. It’s only averaged 2% over the last 10 years.

But I was paying $5,000 per year in tuition back in 1985. Today it would cost me $25,000 per year at the same institution. That’s a 400% increase, which equates to a 5% compound annual growth rate over those 30 years.

So, there’s a huge disconnect between tuition increases and inflation. And that’s just one institution.

From just 2013-2014, tuition increases have averaged 3-11%, depending on what sector an institution falls into. Nonprofit institutions have seen tuition increases from 8-11%, while profit institutions have raised tuition 3-6%. Those ranges can be broken down further into public or private and two or four year schools. You can see the breakdown in this Tuition Heroes™ Overview Interactive Infographic.

The smart institutions have already begun to get control of their tuition. They have their eyes on the horizon and see the bubble bursting. Some offer fixed-rate tuition policies similar to fixed-rate mortgages. Others are simply keeping their increases in line with normal inflation rates.

Tuition Heroes gives them a way to promote this competitive advantage. It tracks tuition for all US institutions and calculates a rolling four-year tuition compound annual growth rate (CAGR). Those that have 2.5% or less CAGR earn the designation of Tuition Hero™. They are given the option activate their Tuition Hero™ Badge, which will be displayed on their page of Tuition Heroes. Institution or anyone who supports it can display the badge on their site and link back to the institution’s page on Tuition Heroes.

In 2015, 39% of all institutions in America were Tuition Heroes. 29% of those were from the public sector and 71% were from the private sector. In just the public sector, 28% were Tuition Heroes, while 48% of the private institutions earned the designation.