Colleges Need to Deal With Costs, Too

09/21/2009 12:01 am EST

Focus: MARKETS

Terry Savage

Author, The Savage Truth on Money

Amidst worries about job losses and problems paying the mortgage, many American families are facing another financial crisis: how to pay for college.

There’s no doubt that a college education will be a necessity in the economy that emerges from the current recession. Even though a college degree can’t prevent a layoff, it will give an edge for the jobs of the future. 

But what if American families can’t afford college for their kids?  Despite the economy, college costs continue to rise. It’s now estimated that the four-year cost of college will be $124,000 for today’s high school seniors, with many private schools costing much more.

Last year—2008-2009—public college costs increased by an average of 6.4% and private college costs rose 5.9%. For many years, these costs have risen far more than most traditional measures of consumer price inflation. 

To pay those bills, families are resorting to drastic measures, according to a new Fidelity Investments survey. Seventeen percent of families with children under 18 plan to have a nonworking spouse return to work, while an equal number hope to take on a second job. 

Half of those surveyed plan to have their child live at home and commute. And 43% of parents say they will have to delay retirement to help pay for a child’s education.

Even the students are changing their tune, with 90% saying they believe they should help pay for at least some college costs, either out of their own savings (42%) or by working while in school (76%).

If families are doing their best to save for college, it’s only fair to ask what colleges and universities are doing. State university tuition increases recently have been rising faster than those for private colleges. And the outlook is gloomy. Every state is facing budget nightmares because of the recession. The big budget allocations to public universities are a tempting target.  In fact, many parents complain that their rising tuition bills are just being used to make up for cuts in state support.

Private schools rely on income from their endowment funds, many of which have shrunk dramatically in the market decline. They’re usually loathe to dig into principal—especially when they’re hoping for more of a stock rebound. Instead, they pass on those costs in the form of higher tuition, which families have meekly accepted for many years.

The problem is, colleges have not traditionally been run as businesses. Few businesses offer job security like “tenure”—except for federal bureaucrats and postal workers (two “businesses” that continually lose money). 

And few businesses can survive without reacting to market forces by cutting less profitable product lines. Yet universities continue to offer marginal courses in the name of offering a “broad and diverse” educational product! Take a look at your child’s course catalog and you’ll see what I mean.

Certainly, universities have rising costs of maintaining their buildings, classrooms, and libraries.  But university “management” and board supervision may be more focused on the profitability of the football team than the kind of prudent cost-cutting every other business is facing these days. 

In an era when “everyday low prices” or discount stores are the only places consumers will shop, why don’t colleges get the message that their customers cannot afford their current and rising product prices? 

How long will it take until universities recognize that their “customers” are no longer willing, or able, to go into debt to buy their educational product? 

Let’s hope that will not be too late for a generation of students that will be sidelined because they simply can’t afford college now. Losing today’s students would have a terrible impact on America’s future economic growth. 

Do you think America’s colleges and universities will get the message in time? Please have your say and join the conversation.

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