Tuition Growth Gone Wild

The US Department of Education’s College Affordability and Transparency Center just published its most recent tuition report. They break it down by sector (public or private), type (profit or nonprofit) and duration (2 or 4 years).

From the period of 2011-2012 to 2013-2014, the average percentage increase in tuition for every sector, every type and every duration far outpaced inflation rates. According to the US Inflation Calculator, the highest inflation rate in the last 10 years was 4.1% in 2007. In 2014, inflation was at .8% and is hovering around .1% in 2015.

4-year public schools saw a tuition increase of 7.7%. 4-year private profit and nonprofit schools saw increases of 3.2% and 7.9%, respectively. 2-year public schools saw tuition increases of 10.8%. 2-year private profit and nonprofit schools saw increases of 5.7% and 9.5%.

The College Affordability and Transparency Explanation Form (CATEF), a mandatory survey for institutions in the top five percent of their sector which have the highest increases in tuition and fees and net price, examined seven major cost areas: Academic Support, Student Services and Institutional Support; Auxiliary Enterprises; Hospital Services; Instruction; Net Grant Aid to Students/Scholarships and Fellowships; Other Expenses; and Research and Public Service.

Of these cost areas, three are identified as having the highest cost increases: Academic Support, Student Services, and Institutional Support; Instruction; and Hospital Services.

The majority of institutions stated that rising student enrollment led to increases in Salaries & Wages and Employee Fringe Benefits. Increases in Salaries & Wages caused spending increases Academic Support, Student Services, and Institutional Support; Auxiliary Enterprises; and Instruction. These increases were most commonly attributed to the need for additional staff in support of the growth in student population and the costs associated with hiring them.

With increased student enrollment, institutions also cited rising costs related to residential life, campus security, and facility-related expenditures. Some institutions reported undertaking major construction or expansion projects to accommodate the growth in student enrollment. This included building new classrooms and housing facilities, renovating or expanding existing space, or relocating to larger facilities. Specifically, institutions noted the significant costs associated with the increased expense of maintaining these larger facilities, along with higher rent and additional utility costs. In regards to reducing these expenses, the overwhelming majority of institutions stated that they could not foresee lowering costs if student enrollment continues to grow. Institutions also noted that costs had stabilized once costly construction and expansion projects were completed, and their facilities were capable of sustaining current levels of enrollment growth.

None of us like to see our rates go up for anything, especially for major investments like tuition and mortgages. Most of us lock in 30-year rates for our mortgages. And, if we see interest rates going down, we look into refinancing our homes. Some institutions offer fixed-rate tuition policies, recognizing that it can help students and parents plan more effectively, and encourage students to graduate within a certain period of time. These fixed rate tuition plans all differ from school to school. Some offer a truly flat rate and some charge a premium for the first year or so. These contractual agreements also require students to meet specific criteria like taking a certain number of hours per semester or earning a degree within a certain period of time.

But most institutions don’t offer fixed-rate policies. And if their tuition rates increase too much, they can expect students to flee. According to the National Center for Education Statistics, student retention (returned the next year) among first-time, full-time students enrolled at 4-year public institutions was 80%, with a range from 60% at the least selective institutions (those with open admissions) to 95% at the most selective institutions (those that accept less than 25% of applicants). Retention rates for first-time students at 4-year private nonprofit institutions had overall retention rate of 81%, ranging from 64% at the least selective institutions to 97% at the most selective. The overall retention rate for first-time students at 4-year private for-profit institutions was 53%. At 2-year institutions, the total retention rate for first-time students was 60%. It was highest at private for-profit institutions (68%), followed by public institutions and private nonprofit institutions (both 59%). The reasons for students not returning run the gamut from family problems and loneliness to academic struggles and a lack of money.

A service has emerged to rate tuition growth rates. It’s very similar to what the Energy Star program does for energy efficient appliances. Tuition Heroes™ uses data from the College Affordability and Transparency Center and then calculates the compound annual tuition growth rate (CAGR) over a rolling four year period for all US higher education institutions. Schools with a CAGR of 2.5% or less are awarded the Tuition Hero™ designation and can receive verified, digital badges recognizing their achievement. They also provide the designations for institutions with a fixed-rate tuition policy. In 2015, 39% of the more than 3,700 tracked were granted the designation. Of that, 26% of public schools and 42% of private schools were Tuition Heroes, raising the question of disparity.

From 2000 to 2010, funding per pupil at public universities fell by 21%. Since 2008, total public funding for higher education has declined by 14.6%. In every year from 2001 to 2011, at least a third of states experienced funding cuts and in more than half of those years, two-thirds of states did.

So, is it a funding issue? I think it is the initial cause of the domino effect of tuition increases. But, the public institutions have a choice. They can either absorb the funding decrease by reducing their internal expenses, or they can pass along the cost to students. My previous employer, University of Missouri-St. Louis, did it right. Their state funding was dramatically reduced and were forced to shut down the School of Professional and Continuing Studies. We all lost our jobs, but the university reduced its expenses and tuition didn’t sky rocket. In fact, they were designated a Tuition Hero in 2015.

The schools that focus on their cash flows and run their institutions more like a business are more able to normalize their tuition response to market fluctuations. It goes without saying, the schools that can stabilize their tuition growth will retain more of their current students.