Schools like MIT and Harvard use their huge endowments to build beautiful new buildings. Other schools have to spend to keep up in the eyes of the best prospective students

Everyone talks about the high cost of college, but nobody seems to know what to do about it. Across all colleges, tuition has risen more than any other good or service since 1978, and at the public universities where most students attend, tuition and fees rose 5.6% each year for the past ten–plus inflation. If the price of technology went up that way, a laptop that cost $1,300 in 2000 would cost $2,288 in 2010. (in real life, a much better laptop would cost you half as much–$600–today).

There’s a widespread lack of understanding of the reasons behind the growth in college tuition, and what exactly the numbers mean. It’s not really because of high salaries for professors or fancy food in the dining hall. Here are the top five most important factors SkilledUp has discovered that explain why college can now cost as much as your first house.

5. Perks Wars

At private nonprofit universities, according to the Delta Cost Project at the American Institute for Research, which does detailed research in these areas, most of the rise in tuition is driven directly by a rise in spending. Spending on student services–everything from counseling to recreation–has increased at a faster rate than spending on instruction. These colleges compete on a national basis for students, so they hire brand consultants, build dorms that look like luxury condos and gyms with climbing walls and Olympic pools. Also, colleges that raise a lot of money from wealthy alumni have an incentive to favor highly visible capital projects that donors can put their names on, instead of funding, let’s say, an improvement in online course offerings.

These colleges would argue that their increase in spending on services is offset by an increase in student aid. Which brings us to the fourth most important reason colleges are raising prices.

4. Enrollment Management

In the past five years, tuition at public four-year colleges rose about $1,800, but the NET tuition–the average sticker price paid by in-state students, after grants, tax credits and deductions–rose only $170.  Colleges raise their asking prices so they can practice “enrollment management”, maximizing revenue from the students who are able to pay, especially out-of-state or international students, while offering financial aid packages full of discounts to entice students who have higher test scores or supply diversity to their class. Public four-years used all of the above techniques to increase net tuition revenue per student by 39% between 1999 and 2009. The problem for students with this method, of course, is that you have no way to plan or understand exactly how much you’ll be paying. And if you don’t know how to play the financial aid game, you’ll be shouldering the burden for somebody else.

Speaking of students shouldering the burden, the third most important reason colleges are raising prices is…

3. Cost Shifting

At public, as opposed to private, universities, the Delta Cost Project found, tuition increases were directly related to declines in state subsidies. Spending was static and students simply paid more of the price of their own education. For example, at the University of California, the nation’s largest public system, between 1990 and 2010, the state’s contribution declined by 51 percent per student. Students went from paying 13 percent of their educational costs in 1990 to 49 percent in 2011-2012.  The pressure on state budgets, of course, is a direct product of the number-two most important factor driving cost and tuition increases…

2. Health Care and Pensions

Education has always been a labor-intensive industry. At both private and public universities, according to the Delta Cost Project, compensation, including both salaries and benefits, accounts for between 60% and 70% of all spending for the entire operation.  Surprisingly, most of that does not go directly to the classroom — 60 to 70% of compensation is for non-instructional roles (everyone from the president, to athletic coaches, to enrollment management specialists and development officers who help generate more revenue for the college, as described above.) In fact, colleges have gotten very good at cutting costs for instruction by simply having more part-time teaching assistants and low-paid adjuncts in the classroom, many of whom are literally working for poverty wages.

The rise of compensation at public universities, in turn, finds the Delta Cost Project, is largely driven by the rise in health care and pension costs for the remaining tenured faculty and growing administrative staff. Remember, public university employees are first and foremost, public employees with all the lifetime retirement and health care that implies. By 2009, one in four compensation dollars at public universities was spent on benefits alone.

And the number one reason college costs too much?

1. Student Loans

To understand how student loans drive tuition growth we need to take a look at some recent history. It’s widely acknowledged that the major driver for the runup in housing prices prior to the 2008 crash was the availability of easy credit to purchase those homes. By 2008 half of all mortgages in the US were guaranteed by Freddie Mac or Fannie Mae, both government-sponsored entities, and most of the rest were implicitly underwritten by the promise of a federal bailout–the idea that banks writing these loans were “too big to fail.” This gave confidence to investors around the world who poured more and more money into these loans, which in turn enabled people to pay more for their homes, which fueled the bubble and bust.

The student loan market of today has many similarities with the mortgage loan market of the mid-2000s. 80% of student loans are federally guaranteed and the remaining 20% private or alternative loans have an implicit federal guarantee–no bankruptcy protection, so they remain collectible until you die. Anyone who is accepted by any accredited institution may be eligible for up to $57,500 in federal loans, depending on your age, the cost of the school and other circumstances; private loans can go much higher, and parental PLUS loans have no set limits.

The availability of all this credit is the secret enabler of every other cost factor on this list. Easy financing makes families less sensitive to price, allowing colleges to layer on special perks, reap the most money possible from each student through enrollment management, and cope with the decline in state support by practicing cost shifting.

So how do we tame the college cost monster? It would be a great idea to put some limits on student loans, and in the meantime, we need to get to work developing some affordable, quality alternatives.

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