Net tuition and fees — what students and parents actually pay or borrow for college — has been rising steadily for the last 6-8 years. While the US Inflation Calculator just posted an annualized inflation rate of 2.2 percent, net tuition and fees at public four-year colleges rose by 3.2 percent over the last year. It’s now $4,140 for in-state students.

For private, non-profit four-year schools, it rose by 4.6 percent to $14,530. Including room and board, the out-of-pocket price tag to students and families was an average of $14,940 and $26,740, respectively. These data are according to a pair of reports released by the College Board this past week.

I’ll touch on a few key findings and then offer some applications.

Price Increases Have Moderated at Public Schools

In 2015, 69 percent of high school graduates enrolled in college soon after wrapping up high school. That’s up from 62 percent in 1995 and up from 66 percent as recently as 2013. Why the uptick? Well, about 85 percent of students opt for a public college. Net price increases in those schools — while still at above-inflation rates — have actually moderated from double-digit increases in 2011-2013. That’s because state spending has recovered a bit from sharp reductions in the first few years after the recession.

Tuition Discounting — A Broken Model?

But what’s happening in the private, non-profit sector is more interesting. In the years immediately following the recession, these schools boosted their sticker price by as much as 6 percent per year. But this was something of a façade since average net tuition and fees actually declined. Wealthy students and international students paid full freight, but others received grant aid that more than compensated for the rise in sticker price.

But for the past 5 years, students at private schools have been asked to pay more. It’s not that schools have become less generous. On the contrary, they’ve dug deeper to attract students, particularly new freshmen. The Wall Street Journal reported that almost 90 percent of freshmen now get need- and merit-based grants from schools, up from 81 percent a decade ago. As a result, their tuition is discounted by more than 56 percent of tuition, up from about 49 percent a decade ago.

What this means is that costs are rising faster than the discount rate. How else do you explain the fact that 44 percent of tuition in 2017 (100 percent minus the 56 percent that schools are discounting) is more expensive than 51 percent of tuition was in 2007? Discounting works in the short-term, but as a long-term model, it’s shaky. Discount too little and you lose families accustomed to getting a deal. Discount too much and you don’t meet your expenses. What’s really needed are efficiencies that bend down the cost curve. Lower facility spending on non-essentials, less growth in administration, more focus on education than on amenities.

All of this is particularly challenging for smaller schools, ones with a couple thousand undergraduates or fewer. These schools can’t benefit as much from economies of scale. The greater your enrollment, the less the incremental cost associated with adding an extra student. If your enrollment goes up by, say, 10,000 to 11,000, tuition revenue goes up by 10 percent even if you keep your net tuition per student flat.

Students are Borrowing Less

The student debt horror stories have been effective: Borrowing for full-time undergraduate students is down for the 6th straight year. In 2016, the average bachelor’s degree recipient who borrowed left school with $28,100 in debt. But only 61 percent of them borrowed! What’s the average debt among all graduates, once you factor in the 39 percent who don’t borrow at all? Just $17,000. Annual borrowing per full-time undergraduate student fell to $5,430. That’s 13 percent below the high mark of 2010-11. And it’s the lowest level of borrowing since 2003-2004.

A Few Applications

The wage premium of a bachelor’s degree continues to rise. So college remains a good investment for those who graduate. But what people pay for college varies widely. In-state public schools — at less than $15,000 out-of-pocket including tuition, fees, room and board — remain relatively inexpensive. With private schools, don’t let the sticker price scare you. For many, the discount is going up almost as fast as the “full” price. On borrowing, don’t fall for the line that everyone is doing it. The trend is going in the other direction. Today, if you’re borrowing more than $6,000 per year, that’s more than most. Better to grow your savings in advance, shop for value, and aim to join the 39 percent who don’t borrow at all.
 

Dr. Alex Chediak (Ph.D., U.C. Berkeley) is a professor and the author of Thriving at College (Tyndale House, 2011), a roadmap for how students can best navigate the challenges of their college years. His latest book is Beating the College Debt Trap. Learn more about him at www.alexchediak.com or follow him on Twitter (@chediak).