In the world of deception, there are lies, damned lies and statistics – in that order (as Mark Twain said). What makes statistics so dangerous is that it often comes under the garb of “data” but is subject to all sorts of cognitive biases.
Recently, The Wall Street Journal (WSJ) published an article – using anecdotal data in support of questionable statistics – and made a headline-grabbing news saying college costs aren’t rising much. I came across this article in response to a comment I made in a fellow blogger’s post.
The WSJ article said that the tuition rate annual increases across colleges have declined to a lowest-ever 1.9% in the recent year compared to 4-6% annual average increase over the last 10 years. The chart on the left below looks reassuring to prospective parents, except that it is reassuringly deceptive.
Intrigued by this chart, I went to the US Labor department website and studied the statistics they used. I found that there are methodological inconsistencies in how the data is collated and reported. Colleges themselves are feeding the confusion by not making apples-to-apples comparison easy.
There are so many charges and exclusions that “tuition” in 2000 is not the same “tuition” in 2017. Supplemental costs relating to college education are growing fast, but this is not all captured under “tuition” – yet, all of this contributes to total cost of higher education. Also, various scholarships, fellowships and grants are increasing across colleges (both in numbers and in size of average payout), so a common trick colleges use is to net them out to derive at average cost.
Can you see the craziness in netting out scholarships and grants (as a total) from the combined tuition paid (by all students) and then dividing by number of students enrolled to arrive at “average tuition cost”? This is what I call the “flaw” of averages. The students who receive significant free money from a college will always be a minority compared to the total student population. It makes no sense to apply this credit to the “average” fees paid by the entire student population. To be fair, the WSJ article did add this line:
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.
The key phrase is “after scholarships and grants are factored in“. Can you see the flaw now?
The fact remains that for most students, college costs continue to rise at a rate twice that of general inflation, or between 4-6%. There is a big difference between anecdotal information and broadly reliable information. Just because some colleges, especially those struggling to fill in their rosters, have reduced their tuition rates doesn’t mean the trend applies universally.
The better-ranked colleges and the Ivy Leagues are largely immune from this tiny “trend”. As long as the selectivity rates in top colleges remain low, I don’t think their tuition rates would ever come down or even stagnate at current levels. There is simply too much demand.
Moreover, higher education is not just a local service where prices are set based only on domestic demand. It is an international service. U.S. colleges don’t compete just domestically, but across the world in attracting students. I have seen many American college representatives in regional flights across Asia (flying into small towns) to pitch for graduating high school students in these towns.
Colleges everywhere in the world are increasing tuition at rates ranging from low single-digits (in Europe) to high single-digits (SE Asia and Australia) and even in double-digits (many countries in Asia). I am saying this after talking to parents, faculty and admissions officers in many countries that I travel.
As a land of immigrants and home to many of the world’s top universities – and despite the recent rhetoric – studying in the U.S. remains a coveted goal for many international students. There is sustained and growing demand for American higher education from international students, who actually pay more than local residents. Even the WSJ article acknowledges this fact, while making a different point:
State officials have also pressured schools, through legislation and public speeches, to rein in prices, and they are admitting more international students to boost revenues.
If you are a parent or a student planning for higher education, be prepared. I am preparing for a 5% annual rise in tuition rates over the coming 7 years, around the time my kid would enroll in a college. If the actual cost of college doesn’t rise as much by the time Junior enters college, I will put the difference into Junior’s special fund, which perhaps can shore up the down payment on his first house (though I would be happy if he remained a renter!).
Having been the recipient of a full-ride from my parents in a private engineering college, I want to be prepared to offer the same for my son. Graduating debt-free with a job in hand puts a young 20’s dude/gal way ahead of their peers, and that advantage positions them well in their financial journey, setting the stage for another FIRE aspirant to be born!
When we PF bloggers obsess so much over a ‘safe‘ withdrawal rate for retirement, should we not apply similar conservative metrics in planning for college finances as well?
Raman Venkatesh is the founder of Ten Factorial Rocks. Raman is a ‘Gen X’ corporate executive in his mid 40’s. In addition to having a Ph.D. in engineering, he has worked in almost all continents of the world. Ten Factorial Rocks (TFR) was created to chronicle his journey towards retirement while sharing his views on the absurdities and pitfalls along the way. The name was taken from the mathematical function 10! (ten factorial) which is equal to 10 x 9 x 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = 3,628,800.