Is College Tuition Inflation Really Starting to Slow Down?

In a recent NPR interview, Josh Mitchell of the Wall Street Journal argued that the cost of college, though still growing, has begun to grow at a slower rate than seen in previous decades.  This, of course, is welcome news to any parents or students planning to pay college tuition in the near future.  However, given the continuing magnitude of college expenses, it is important to clarify exactly what Mitchell has observed and how it should impact parents’ college savings plans.

What Is the Current Trend for College Costs?  Mitchell observed that in the past year college costs grew at about 1.9 percent, which was comparable to overall consumer inflation.  By contrast, college costs have been growing at 6 percent per year on average if you broaden the timeframe back to 1990, according to Mitchell, or even back to the early 1970s, according to the College Board and the Bureau of Labor Statistics.  For most of this time period, the amount by which college costs were growing exceeded overall consumer inflation by a significant margin, about 2 percent per year on average.

Is This Data Indicative of a Long-Term Shift?  Perhaps, though one year is a very small sample size.  Mitchell does provide a rationale for the change and why it may continue for a few more years–namely, that the economy has improved since 2010, resulting in more jobs and lower demand for college enrollment, and that public colleges are receiving more direct funding from states.  However, he also points to reasons why states are likely to experience a budget crunch in the near future, which will likely result in cuts to higher education spending.  Similarly, as the economy moves through its cycle of expansion and contraction, unemployment will rise again at some point in the coming years, increasing demand for enrollment and putting upward pressure on college costs.

Does This Trend Apply to Everyone?  Importantly, Mitchell’s study focused on “net price”–i.e. the amount that students actually pay after collecting scholarships and grants–rather than the sticker price listed by colleges for tuition, room and board, and other fees.  Therefore, some of the tempering in the growth of college costs that he reports may disproportionately impact lower income students and/or athletes or high academic achievers, who are more likely to receive scholarships and grants.  If one looks instead at the change in the sticker price of college costs, it continues to exceed consumer inflation by a significant margin.

How Should This Impact Parents’ Plans to Save for College?  This marginal (and likely temporary) change in the rate of inflation for college costs should not impact the extent to which parents plan and try to save for their children’s future college education.  As we have discussed in a prior post, the amount that one needs to save on a monthly basis to be able to fully pay for college costs out of pocket is significant, even for middle- and upper-class families.  (For example, assuming you start saving when your child is born, the monthly savings target could range from $300 to over $1k per month, depending on the level of college expenses that you expect to pay out of pocket.  And that’s per child!)  Even if college costs do continue to grow at a slower rate, parents should still remain vigilant about saving (and investing) in preparation for college expenses, if at all possible.  To avoid adding more young people to the 44 million Americans collectively carrying $1.4 trillion in student loan debt, it’s imperative to try to start saving early and often.

Saving for college can be a daunting task, so please call us with any questions along the way.  We have navigated the process with countless clients and want to help others to be prepared, regardless of the extent to which college tuition inflation slows down or speeds up in the future.