College Tuition Just Keeps Climbing

As families are squeezed, public colleges look more attractive—but beleaguered state governments may need to hike tuition even further

Tuition and fees at four-year public colleges and universities rose faster than those of private schools, yet again outpacing the rate of inflation, the College Board said in a report released Oct. 29.

The continuing rise in the cost of higher education (see slide show) comes at a time when financial turmoil and recession is prompting more families to consider public colleges instead of pricier institutions. Applications at Binghamton University, one of the top-tier schools in New York's state system, are up 50% so far this year, a spokeswoman said this week. At the University of Massachussets at Amherst, the flagship campus of the Massachusetts state university system, admissions officers are seeing a "significant increase" in early-action applications, a spokesman said.

Yet this year's College Board report shows hikes of 6.4% for public in-state tuitions and 5.9% for private colleges. The consumer price index rose 5.6% between July 2007 and July 2008, the College Board said.

The pace of the increases is not quite as sharp as last year's, when tuition and fees at public and private colleges and universities rose at more than double the rate of inflation. This year, they were just slightly above the consumer price index.

"College prices are doing what other prices are doing," said Sandy Baum, senior policy analyst at the College Board and professor of economics at Skidmore College. "They are not going up more rapidly, they are just keeping pace. This is different from what historically has been the case in recent years."

Unfortunately, the new interest in public schools comes just as beleaguered state governments are under the gun to make hefty budget cuts, with the result that many public colleges and universities may need to hike tuition even further, said Terry Hartle, a senior vice-president of the American Council on Education.

Midyear Budget Cuts

"What we are deeply troubled about is that we see some very dark storm clouds on the horizon—[namely,] the economic circumstances facing state government," Hartle said. He said that the jump in public tuitions is a sign that state schools may already be having trouble making ends meet, he said.

There are 17 states looking at midyear budget cuts, which if undertaken could mean reduced funding for institutions of public higher education and, in the worst case scenario, midyear tuition increases, Hartle said. The move could have a chilling effect on the nation's 14 million students who attend these schools, he noted.

According to the College Board report, the average in-state tuition and fees at four-year public colleges for the 2008-09 academic year are $6,585, up $394 from last year. Those numbers don't include room and board, which adds on about $8,000.

Costs at private universities were also on the upswing, with published tuition and fees for this school year averaging $25,143, a $1,398 increase over last year.

However, those "sticker prices" tell only one part of the story, Baum said. A more accurate indication of what students pay for their college education is the net price, which is what the average student pays after grants, student aid, and tax benefits are factored into her college bill.

At four-year public colleges and universities, the average student receives about $3,700 in aid, bringing the average tuition cost to around $2,900. At private universities, aid totals around $10,200, bringing the average tuition to about $14,900.

Still, over the past five years, the net prices at four-year public colleges and universities have been going up faster than published prices, mostly because the amount of federal and state grant aid doled out to students has not been enough to minimize the impact of tuition hikes, Baum said. For example, the net price at four-year public colleges and universities jumped from $2,600 in the 2007-08 academic year to $2,900 in the 2008-09 academic year, an 11% increase.

Those increases could run even higher in the coming year if public schools find their budgets slashed, Baum said. "There aren't a lot of other options. The question is how much does tuition go up and how much does need-based tuition aid need to go up to help students pay these prices," Baum said.

Meanwhile, private schools are taking aggressive steps to minimize the impact of tuition increases on families. David Warren, president of the National Association of Independent Colleges and Universities, which represents private schools, said in a statement that member schools are cutting costs to keep student costs as low as possible. "Private colleges will think and act creatively to enhance their affordability while maintaining quality, within their financial means," Warren said. "Already, Augustana College has announced that its 2009-10 tuition increase will be its lowest in 25 years, Benedictine University is freezing its tuition rate for the next two years, and Vanderbilt University will replace need-based loans with grants beginning next year."

Private Loans vs. Public Aid

A good part of these tuition increases is being driven by the rising costs of items such as health care, workers' compensation costs, and salaries, schools report. Most colleges and universities spend between 60% and 70% of their budget on human resources, which doesn't leave them much room to cut other costs in order to keep tuition from rising, Hartle said. "They can't very well cut human resources without having a significant impact on the quality of teaching and learning at the institutions."

As schools struggle to make ends meet, students are scrambling to find financial aid packages. Those looking for private loans are finding it harder than ever to obtain them, as many private lenders have closed shop because of the credit crisis. During the 2007-08 academic year, private loan volume declined 1%, falling nearly $173 million, to $19.1 billion, reversing years of double-digit growth in the sector, the College Board said. The figures on private loan activity were only through July 2008 and therefore did not capture the full impact the credit crunch had on the private loan market, Baum noted. There are 36 lenders who have stopped giving private student loans since the credit crisis began, according to Finaid.org, a site that provides information about student loans.

For the first time, the College Board report included data on the amount of debt with which students graduate from four-year institutions, finding that in the 2006-07 academic year, students with bachelor's degrees graduated with about $22,700 of debt. Borrowers who went to private colleges hold about 25% more debt than those who graduated from public colleges, while students who graduated from for-profit schools have about twice as much debt as those from public universities and colleges, the College Board said.

Amid all the uncertainty about student loans and rising debt is one bright spot: Grants and federal loans for students increased this school year by a per-student average of 5.5%, after adjusting for inflation, the College Board said. Grant aid and tax benefits for students help cushion some of the rising cost of college.

But students and families will still be pressed to make ends meet, especially as the cost of college continues to outpace inflation, said Lauren Asher, associate director of the Project on Student Debt, a nonprofit that raises awareness about financial aid. She recommends students look beyond published prices and apply to a wide variety of schools, fill out the Free Application for Federal Student Aid from (FAFSA) and exhaust federal loan options before considering private loans.

"Inflation is affecting everything in the family budget, so not only is the price tag for college going up, but so is the cost of food, clothing, gas, and other things," she said. "There is still a lot of competition for the shrinking household budget."

See BusinessWeek.com's slide show of 50 of the most expensive traditional four-year colleges and universities.

Damast is a reporter for BusinessWeek.com.