The Rising Cost of College - Cabot Wealth Network

The Rising Cost of College

Higher education is more important than ever. The unemployment rate for college graduates, currently 4.6%, is less than half that of high school grads (at 11%). And workers with a college degree earn, on average, almost twice as much as those with only a high school diploma.

Unfortunately, the advantages conferred by a higher education are rapidly being priced out of many Americans’ reach. The cost of college has increased more rapidly over than the last two decades than almost anything else, as is clear in this graph from a report Moody’s released last summer:

Since 2000, the cost of attending college has more than doubled. And it’s not just $40,000-per-year Ivy Leagues either. The College Board’s 2011 report on trends in higher education found that, “Over the decade from 2001-02 to 2011-12, published tuition and fees for in-state students at public four-year colleges and universities increased at an average rate of 5.6% per year beyond the rate of general inflation. This rate of increase compares to 4.5% per year in the 1980s and 3.2% per year in the 1990s.”

Average tuition and fees for in-state students attending four-year public colleges rose to $8,240 in 2011, an 8% increase from the previous year. And while many state schools were responding to cuts in state funding with tuition increases, tuition increased at private nonprofit schools too, from $27,265 last year to $28,500 for the 2011-12 school year.

Some might look at those trends and assume the suppliers of higher education are responding rationally to increased demand for their goods by raising prices. Which is partially true: a four-year college degree has never been more widely valued, culturally. Even students entering fields that require primarily technical knowledge are encouraged to obtain one.

But that’s not the full story. The market for higher education is not a simple supply-and-demand situation because the majority of buyers (about two-thirds) pay for their college degrees with easily borrowed money. Perhaps too easily borrowed.

Because student loans can’t be cancelled by bankruptcy, they’re very low-risk for lenders. So student loan lenders have very little incentive to deny any loan, no matter the size, despite the fact that most are requested by borrowers who are teenagers with no jobs and no credit history. Because students can get more money so easily, the pricing mechanism in the market for college is destabilized. When colleges raise their prices, students just borrow more.

In 2010, about two-third of graduates left college in debt, compared to less than half in 1993. And they owed an average of $25,250 a piece, up 5% from the average debt of 2009 grads.

Total outstanding student loan debt outpaced total outstanding credit card debt for the first time in 2010, surpassing $800 million. As recently as 2000, it totaled less than $200 million.

Of course, it would be unfair to place all the blame for this situation at the feet of overeager lenders and tuition-raising colleges. Students are borrowing this money willingly and sometimes irresponsibly. And they in turn are driven by the immense societal value placed on a four-year college degree.

That societal value is demonstrated by the vast majority of graduates who say that their college education was worth the cost. Though two-thirds are graduating in debt, 86% still say it was a good investment:

But while most individuals might say their own education was worth whatever they paid (and are still paying) for it; en masse the situation is untenable. If college tuition keeps increasing by 5.6% for the next decade, students starting college in 10 years will be paying over $44,000 for four years of education at a state school (not including room and board). In another decade that will rise to over $57,000. (You can play with the numbers yourself by clicking here). And student loan debt will just keep increasing until the average college graduate is paying off their student loans, with interest, well into their middle age.

Unfortunately, changing that course is far from simple. Providing more low-interest Federal student loans only adds to the situation by causing tuition to increase commensurately. Patrick M. Callan, president of the Higher Education Policy Institute, told The New York Times November, “We’ve put huge amounts into Pell grants under Clinton, Bush and Obama, but the money that went to financial aid has been absorbed by tuition increases. And with all that we’ve invested, we have a less affordable system than we had a decade ago. We’re on a national treadmill.”

Faced with these facts (and a growing number of angry, unemployed, indebted graduates), the Federal government has made some attempts to address the problem more creatively.

Already, they have tweaked the government’s income-based repayment policy so that enrollees have to pay no more than 10% of their income in student loan payments, and loans are forgiven after 20 years of payments.

But getting to the root of the problem, of course, requires slowing down the tuition increases. So the administration recently introduced some new ideas, which President Obama mentioned in his State of the Union address a few weeks ago.

The proposal includes a $1 billion grant competition, similar to the Race for the Top program for elementary and secondary education, that would reward states that take action to keep college costs down. Another component is $55 million in rewards for individual colleges that improve their value and efficiency. Another idea would increase transparency and possibly market pressures by requiring all colleges to publish information on post-graduate earning and employment data, and make it easier for potential students to compare financial aid packages.

Of course, all of these proposals would have to be passed by Congress before they could be enacted, so they’re far from reality. But I’m glad to see a creative attempt to address the problem at its root—increasing tuition—rather than a continued policy of throwing money at the symptoms.

There’s certainly other ways this could be accomplished though. Making student loans subject to the same bankruptcy risk as other debt would make lenders more responsible, although it would probably create a host of other issues as well (and I’m not sure if it’s feasible). More feasible would be improving the image and appeal of two-year colleges, community colleges and technical schools, which would allow students to choose the educational path that’s most sensible for them, and not just most prestigious. If any of you have other ideas on the subject, I’d be happy to hear them, and possibly share them in a future Investment of the Week.

For today’s stock, I’ll stick with the educational theme. DeVry, Inc. (DV) is one of the largest for-profit educators in the U.S., and the stock was recently recommended in the Investment Digest as a Top Pick, chosen by Russ Kaplan, who publishes a newsletter called Heartland Advisor. Here’s what he wrote:

“One of the advantages of the current downward trend in the stock market is that you can find values that would not exist in an upward market. One of these companies is our latest recommendation, DeVry, Inc. They have over 90 locations throughout the United States. Their degree programs match what is needed for the current job market. In fact, 96 of the Fortune 100 companies employ DeVry graduates. As I see it, DeVry is providing a very necessary service to remedy our current work force’s deficiencies, whose skills are increasingly mismatched with what is now required. … DeVry is currently trading in the [$40] range, which is way below its high of almost $75 a share in 2010, even though earnings have been up every year for the last eight years. It is a definite value with a P/E ratio that is one-third of its average and is not far above its book value. This indicator is rare for a service company. DeVry’s balance sheet is strong with $450 million in cash and zero long-term debt. This gives the company the ability to make strategic acquisitions. Growth is also evident with a 23.8% return on equity. One important variable that I always look for is how much stock management owns. In DeVry’s case, their management owns 4.4% of company stock. This gives them the kind of positive long-term outlook that is essential for a company’s long term.”

Although the downtrend Kaplan mentioned look broken, DV is still trading around $40 today, so if you’re a patient investor, this is one university that looks like a bargain.

Wishing you success in your investing and beyond,

Chloe Lutts

Editor of Investment of the Week

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