Income Inequality and the Cost of College

I’ve just finished reading Charles Ferguson’s Predator Nation, and there’s a brief section on college education that seemed germane to what Dean Dad writes about the continuing runaway college costs (boldface mine):

Here’s a toughie that many parents — myself included — face. How do you save up for college when the cost goes up anywhere from five to ten percent per year?

Investments aren’t earning anything close to that. Interest rates are historically low, which is great for borrowers but rough on savers. The stock market has returned approximately nothing, before fees, since TB was born in 2001. Bubbles come and go, but by definition, they generally aren’t great long-term investments. Our house is worth less than what we paid for it, though luckily we had enough of a down payment that we aren’t underwater. (Fates willing, I’m hoping to stick around here long enough that the current value won’t matter.) Salary increases aren’t automatic — I’ve had exactly one since 2008 — and they’re small when they happen.

A recent report took current costs and extrapolated, using fairly realistic higher-ed inflation figures and basic math. It came up with over $40,000 a year for public, in-state tuition 18 years from now, and over $90,000 for private non-profits. Granted, that’s a little misleading, since it doesn’t account for wage increases, but still; if salaries are going up maybe one percent a year, while tuition is going up five percent per year, the gap will widen quickly. And based on the last few years, I’d have to consider five percent increases a fairly conservative estimate. The public institutions have the same cost drivers as the privates, plus the added burdens of state cuts and unfunded mandates.

…And I don’t see the typical American family coming anywhere close to saving up hundreds of thousands per kid, especially when investments are returning approximately nothing. Not. Gonna. Happen.

This brings to what Ferguson discusses in Predator Nation–how college costs get so high. I’ve discussed this issue beforeincome inequality has led to enough wealthy people being able to pay $200,000 cash over a four year period per child. Ferguson (pp. 320-321; boldface mine):

When I attended the Universtiy of California, Berkeley, in the mid-1970s, tuition for California residents was less than $700 per year. In 2011 undergraduate tuition for state residents was $14,260. Private universities have displayed similar changes. When I entered MIT as a first-year graduate student in 1978, annual tuition was $4,700. For the 2011-12 academic year, it was $40,460. In that same year, Harvard’s tuition was $36,305. Harvard estimated its total annual costs (tuition, fees, room and board, supplies) at $52,652; so the total cost of sending your child to Harvard for four years, even assuming no further cost increases, was already over $210,000.

Harvard, and most other elite private schools, claim that their admissions are merit-based and need-blind, and that everyone who qualifies will receive enough financial aid to attend….But forget about that–just look at the money and the students. In the 2011 academic year, Harvard’s administration proudly announced that slightly over 60 percent of its undergraduates received some level of financial aid and also stated that no student whose family earned less than $180,000 per year would be required to pay more than 10 percent of their total costs.

Think about that for a minute. If you’re a Harvard student who receives no financial aid at all, you come from a family that makes much more than $180,000 per year. Let’s say the eligibility cutoff for receiving any financial aid at all is $300,000 (Harvard doesn’t reveal the number). This means that nearly 40 percent of Harvard undergraduates came from families whose income is at the very upper end of the American income distribution. This means that Harvard’s income distribution is probably even more skewed than America’s: in the nation as a whole, in 2010 the top 1 percent of families received about 20 percent of all annual income.

This is a problem across the board: as long as after-tax incomes are so skewed, every inelastic good, such as admission to a selective college or a house in a ‘good’ neighborhood, will be inflated. But we don’t take education into account at all when thinking about inflation and the loss of purchasing power of the median (or minimum) wage.

One other thing: unless you’re wealthy, they can always outbid you. Sure, they would rather pay less, but they can pay more. And you can’t. This is why progressive taxation matters.

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