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The College 'Investment'

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Is college getting unaffordable? By all reasonable takes on personal finance the answer seems obvious: yes, it is. But some scholars think we've got this all wrong and we just need to think of college prices as an "investment." Nice try.

A report recently published by the Institute for Higher Education Policy indicates that an American college education might be affordable, if only Americans thought about affordability a little differently.

Sigh. According to the paper, by Sandy Baum and Saul Schwartz:

Is college affordable? For policymakers, an important starting point is to recognize that affordability is unavoidably subjective. Some parents make great sacrifices to pay for their children’s education. Others who may have greater resources are unwilling to sacrifice current consumption for the uncertain benefits of a college education; their children may enter the labor force rather than going to college. The difference between these parents is not only in their incomes or in the options available to them, but in their preferences and priorities.

But perhaps, the authors suggest, affordable is the wrong way to think about this issue. So much of the discussion about the cost of college has to do with the published price of institutions, not what students actually pay. Sticker price can make college look a lot more expensive than it really is. Apparently, about 59 percent of college students select or reject colleges for application purposes by considering sticker price alone.

Net price, the average amount students at the college actually pay, after allowing for grants, is lower, often dramatically so.

Between 2006-07 and 2011-12, the average published cost at public colleges increased by about $1,800. Net cost, however, increased by only $170. In the 2011 to 2012 school year, the average published annual cost of attending a public university was $17,140. The net price, however, was a mere $11,380.

I guess that’s nice to know, but is $11,380 a year affordable? Would $20,000 be affordable? How about $70,000? While affordable is, as the authors explain, subjective, college has a real net cost. That cost is also increasing. There is a point that, given the other things people have to buy, going to college will become financially very difficult. Where does that point occur? Isn’t that the important number to understand?

The authors attempt to get around the question of real affordability by reframing the argument, writing that:

It makes sense to call consumption goods “unaffordable” if their purchase would leave too little money to pay for the necessities of life such as food and rent. If postsecondary education is seen as a long-term investment it is not meaningful to call it “unaffordable,” regardless of the size of net tuition and fees, if loans are readily available to pay the relevant costs and if it is likely that the future earnings premium will be adequate to repay the loans.

So because it’s an "investment" the fact that the cost is escalating (the net price of attending a public university was only $7,910 a year in 1996) makes this okay?

What's happening is that people are devoting an ever-larger portion of their income to education. One can redefine that portion of income as “investment” but that’s just semantics.

Let’s say someone has graduated from college and has a somewhat middling entry-level job. He has no retirement account, a crappy health care policy, and no savings or outside investments. But he pays $300 a month to service student loans. Does that mean he’s “investing” in his future? That's one way to see it, but that is money he can’t use on real financial investments or tangible goods and services.

Realistically the investment argument is a distraction from college costs. College costs were an investment in 1996, too. Students and their families now simply have to invest more money to get the same payoff.

So sure, we can start to consider massively overpriced college education a personal investment, if that will make us feel better about something that costs a lot more than it used to, but we still ought to consider the changing price of college a pretty disturbing trend.

[Cross-posted at the Washington Monthly]