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A Shocking Thing Happened To College Tuitions In 2016...

The staggering inflation rates of college tuition over the past couple of decades has been a frequent topic for us.  As the Wall Street Journal notes today, the cost of educating our snowflakes has soared since the early 90's and outstripped overall inflation by nearly 4x.  It seems that the liberal indoctrination of an entire generation is very expensive business.

U.S. college tuition is growing at the slowest pace in decades, following a nearly 400% rise over the past three decades that fueled middle class anxieties and a surge in student debt.

 

Tuition at college and graduate school—after scholarships and grants are factored in—rose 1.9% in the year through June, broadly in line with overall inflation, Labor Department figures show. By contrast from 1990 through last year, tuition grew an average 6% a year, more than double the rate of inflation. In that time, the average annual cost for a four-year private college, including living expenses, rose 161% to about $27,500, according to the College Board.

 

Some schools are offering more discounts and cutting prices.

Alas, there may be hope yet as for the first time in nearly 30 years college tuition rates in 2016 only increased at approximately the same rate as overall inflation...shocking.

 

Of course, it's no surprise how we got here.  The combination of yet another massive debt bubble in student loans, rising government subsidies and soaring demand from a generation of snowflakes programmed to believe their self-worth is directly correlated to how much money their parents drop on their anthropology degree resulted in a predictable supply/demand imbalance and massive prices increases.

 

So, what caused the 2016 slowdown?  Among other things, Congress decided to stop arbitrarily hiking the student loan caps back in 2008.

Another factor: Congress last increased the maximum amount undergraduates could borrow from the government in 2008. Some economists have concluded schools raise prices along with increases in federal financial aid. A clampdown on aid, in turn, could limit the ability of schools to charge more.

Meanwhile, as anyone who has ever invested in commodity markets is undoubtedly aware, supply/demand gaps tend to normalize over the long-term.  And, with college's extracting massive price increases year after year, it should be little surprise that the number of colleges looking to get in on the action also soared.

Abundant supply is running up against demand constraints. The number of two-year and four-year colleges increased 33% between 1990 and 2012 to 4,726, Education Department data show. But college enrollment is down more than 4% from a peak in 2010, partly because a healthy job market means fewer people are going back to school to learn new skills.

 

Some of these trends may persist. The number of high-school graduates is projected to remain flat through 2023, according to an analysis by the Western Interstate Commission for Higher Education. White graduates, the most likely among races to attend college, are expected to decline over this period.

 

“The competition is bigger now than it has been, and I think we have more informed consumers,” said Sarah Kottich, chief financial officer at College of Saint Mary in Omaha, Neb.

Of course, it could also be that students and their parents are finally realizing that that silly little piece of paper passed out at graduation ceremonies every year may not be worth as much as it used to be. 

For now, the shakeout is hitting private schools hardest. For-profit trade schools and many private nonprofit colleges are under pressure to justify high prices, particularly because some graduates are failing to land high-paying jobs. The broad decline in undergraduate enrollment since 2010 has been concentrated mostly among small nonprofit colleges, for-profit trade schools and public community colleges, federal data show.

 

Izzi Moraschi, 19 years old, said she chose Rosemont College, a small private college near Philadelphia, after seeing a flier advertising a sharp tuition reduction. She wanted to reduce the burden on her parents.

 

Combined, she and her parents took out $15,800 in federal loans to cover her first year’s tuition. “It was just really important for me that I was able to make it so that my parents wouldn’t have to pay anything out of pocket,” said Ms. Moraschi, now a sophomore, who said she plans to pay back her parents’ portion of the loan.

 

Sharon Hirsh, Rosemont’s president, said her school reduced tuition to ease concerns of middle-income students, who seem more willing to choose public schools to save money.

 

“We are surrounded by private institutions that are openly talking about right-sizing,” Ms. Hirsh said. “Families have gotten to a point where they cannot consider a private institution with a high price.”

And, since we doubt anyone will go through the hassle of actually running the math, we decided to take a quick look at the return on invested capital of a college education.

First, according to Quora.com, attending college these days can cost anywhere from $22,500 per year for a public, in-state university to $75,000 for a private education.  So, lets just assume that, on average, our snowflakes are spending $30,000 per year on a 4-year bachelor, or $120,000.

  • Attend a public in-state university for four years, living on campus ($22,500 per year for four years) for $90,000
  • Attend a public out-of-state college for four years:  $35,000 per year for four years for a total of $140,000
  • Attend a private four year college in an expensive area like Manhattan at $75,000 per year for a total of $300,000

So what do they get for that?  Well, per the Bureau of Labor Statistics, that $120,000 degree in Anthropology will earn you roughly $464 extra dollars per week or ~$24,000 per year.

 

So, doing some quick math, we find that $24,000 tax-effected at a 25% tax rate equals about $18,000 of extra annual earnings for a college grad and implies a 15% return on invested capital. 

Not bad...but, unfortunately, the story doesn't end there.  You see, by choosing the college route our snowflakes not only incur the cost of college, in the form of massive student loans, but also forgo 4 years of earnings, which equates to roughly $110,000 ($692*52*.75) on a tax-effected basis. 

So lumping in that opportunity cost brings the true average cost of that Anthro degree up closer to $250,000, implying a roughly 7.2% ROIC. 

Of course, that's assuming that young Tripp Hollingsworth III actually graduates in 4 years and then promptly finds a job shortly thereafter rather than returning to mom's basement.

So you decide, is a 7.2% return on invested capital sufficient to take on a life time of debt?