Audio File: mp3Ten Talk: Episode 1
Rick Babson: Hi, and welcome to TEN Talk, a podcast by the Kansas City Fed. I’m Rick Babson, managing editor in public affairs and your host for this episode. With me today is Brent Bundick, an economist in our Economic Research department. Thanks, Brent, for taking time to be with us today.
Brent Bundick: Hi, Rick. Thanks so much for the opportunity to come on the show today.
Babson: You’re welcome. You and Emily Pollard recently published an article in our Economic Review, which also was a basis for a cover story in our TEN Magazine called “The Rise and Fall of College Tuition Inflation,” and while that’s a subject that’s near and dear to everyone who’s ever paid for tuition, I think we need to point out right from the get go that this article did not address the issue of mounting student debt.
Bundick: Yeah. So college and tuition is indeed something that many people experience on a personal level. Either they’ve attended college themselves or paid for the college tuition of somebody else at some point. In our most recent article, Emily and I wanted to look at how the price of college has changed over the last few decades. The cost of college has indeed received a lot of attention in the media recently and is potentially a large expenditure for many households. Now various studies have shown that workers with a college education tend to earn significantly more than workers without a college education, so, therefore, you know the price of college tuition has an import implication for upward income mobility for households.
As you mentioned, that article really only talks about the price of college not about how people actually are paying for it. For example, student loans, student loan debt has indeed grown rapidly the last decade or so, so we do look at this as a possible factor that might explain change in college tuition inflation. The issue of mounting student debt isn’t something we directly focus on the article.
Babson: OK, and thanks for that clarification. Something else I’m curious about is what sparked your interest in looking at inflation in college tuition. Is this something that you’ve been studying previously?
Bundick: No. Actually this is something that’s a little bit outside of my normal wheelhouse. I’m an economist here at the Bank and in particular one of my roles is to study the macroeconomy and in particular how changes in monetary policy affect the broader economy, think like production, labor markets, household spending and different types of indicators. In addition to doing research on the economy, I also support the Bank president, Esther George, in her preparations for the eight FOMC (Federal Open Market Committee) meetings each year. So in that policy work, one of my roles with my colleague Lee Smith is to study how inflation’s involving economy. So inflation is basically how the overall basket of prices for goods and services are changing the economy. When think about inflation you can basically look at it from a top down perspective, which is when we think about the basket of goods and services we consume, how is that aggregate basket changing over time. However, sometimes it can be more helpful to look from the bottom up. So basically, you can look at the underlying components of everything that we consume, so housing, cars, medical services, education services to get an idea of how those underlying components are doing in the economy. So in the process of regularly examining these lower-level components, Lee and I noticed that college tuition inflation has, in fact, been changing a lot over time. So many people think that prices in the education sector really don’t respond to broader macroeconomic conditions. However, as we started to look at the data, what we notice in fact is that these are changing over time and encourage Emily and I to start looking and thinking out these trends in college tuition prices and what might explain these changes over time.
Babson: OK. So, is there anything that you were expecting going into this or hoping that you might find when you started your research?
Bundick: Sure. At the beginning of the project, we really just wanted to kind of document the trends that we’re observing, and so basically what we saw is that we saw that college tuition prices grew rapidly from between the 1980 and 2004 period. So basically they were growing at somewhere around the 7 percent per year. So just to give you some idea about numbers so the average yearly cost of attending a four-year public university rose from about $2,500 to about almost $11,000 over that period. And so just to give you some idea this is growing significantly faster than the rest of the basket of goods and services which is on average you know somewhere between 2 and 3 percent growth per year. However, beginning in 2004 what we notice is that college tuition inflation began to slow down and the last several years is actually average much closer to 2 percent. Now obviously when we observe that tuition rates change over time, then kind of a natural question from a scientific perspective is “OK what’s causing these changes in tuition prices” and that’s what we tried to more rigorously investigate in the article.
Babson: OK. Good. I think some of our listeners, a lot of them who regularly hear in the general media that student debt of course is skyrocketing, I think they may be surprised to hear that you find that the actual cost of tuition has been relatively stable in recent years and, in fact, is really pretty much in line with inflation overall, which in 2019 is about 2 percent. Is that right?
Bundick: Yeah, that’s exactly right. So you know I think indeed college tuition has become quite expensive over that 1980 through 2004 period. Just to give it some perspective, if you take data on college prices from the National Center for Education Statistics, and then you can take household income data from the Current Population Survey, you can basically calculate that one year of college tuition at a four-year public university was about 7 percent of the median household income in 1980. Now after it grew rapidly, as I talked about from 1980 to 2004, over the next 25 years a year of college tuition represented about 16 percent of the median household’s income in 2005. So this increase in college costs has obviously received a great deal of attention in the media and other public discussions. However, the slowdown in college tuition that occurred over the last few years has received much less attention, and so while certainly college remains expensive, the growth rate in those tuition prices have slowed in the last couple years, which is what we really wanted to point out in the article.
Babson: OK. So what were some of the factors that you found that influenced college tuition?
Bundick: There can be a wide variety of stories and different factors that might think about explaining college tuition. So we wanted to look at both a number of different supply and demand factors that might affect how colleges set prices. So you can think about from the supply side it could be things that happening on the university side. On the demand side you think about households and you know how the demand for a higher education is evolving over time. So one thing it becomes clear when you start think about higher education is one thing you realize that college is incredibly different along many dimensions and it’s really tough to tell a one size fits all story that that fits for all possible higher education providers. However, we wanted to try and just using some basic aggregate statistics look at some broad factors which might have contributed the rise and then the subsequent slowdown in college tuition inflation. So clearly there are a lot of factors and we don’t pretend to account for all of them for every possible college.
On the supply side we wanted to look at whether change in the cost side of colleges such as wages in the higher education sector you know look at whether these might help us explain why college tuition changes over time. Another possible supply side explanation you might think about is that changes in state appropriations for higher education may force colleges to change tuition prices. So the story there we’re thinking of is something along the lines of economic activity slows down a bit, so you can think of the economy apply possibly in a recession, this causes state tax revenues to decline. As a result, states cut discretionary spending for higher education which, since colleges have to balance their budget, then forces them to pass on higher tuition prices to consumers, or basically students in that case.
Babson: Which, of course, is not a terribly surprising occurrence is it?
Bundick: No, not really. No.
Babson: So how about the demand side. Did you find anything significant there as well?
Bundick: Yeah. So when you think about some possible explanations you know this from the demand side or think about from the consumer side of the higher education market, we talked a little bit early about student loans. So one possible argument that’s been put forward in the past is that the increasing availability of student aid, some particular student loans might lead to higher tuition prices So you can think that colleges may be more willing to pass on cost to students in the form of higher prices if students have a higher willingness to pay. Now aside from these student loan programs, changes in the premium which college workers may earn may increase their demand for higher education. So I talked about at the start that college-educated workers tend to earn higher wages than non-educated workers. Now this wage premium may lead households to demand more college education services, which may lead to higher demand and ultimately higher prices for college tuition. So in the end, our statistical analysis found that supply factors, so particularly wages in the higher education sector, and change in the state appropriation to higher education, play important roles in explaining changes in college tuition inflation over time. You know on the other hand we found that very little evidence that demand factors such as change in the availability of student loans or other demand-side factors have a significant effect on college tuition inflation.
Babson: Now how deep of a dive do you make into the subject overall? For example, did you look at public versus private colleges and universities and were there any other significant differences that you found?
Bundick: That’s a great question. So again using data from the National Center for Education Statistics we were able to look at different breakdowns for institutions across public versus private institutions. What we find is that a lot of the changes in college tuition inflation actually have come from the public colleges. So tuition rates at private colleges in contrast, at least according this data, seem to be more stable than what’s been occurring with at public colleges. So as you might expect, you see the effects of change in state appropriation for higher education, those really only affect public universities, and these declines that have occurred in state appropriation of the last decade seem to one of the most important factors driving the tuition increases during the 1990s and early 2000s.
Babson: Alright. Let’s fast forward for a minute from the early 2000s. From your research are you able in any way to predict where tuition inflation is headed?
Bundick: No. I certainly don’t have a crystal ball or anything like that. So in the article you know we kind of extract from any explicit predictions about where college tuition might go in the future. Our one thing we want to make sure that listeners understand is that college tuition rates do in fact change over time in response to developments in the broader macroeconomy. So just an example of this, The Kansas City Star recently reported that the University of Missouri’s board of curators approved a 5 percent increase in tuition this year. So just to give you some idea, during the previous five years what we found is that the article stated that undergraduate tuition rates only rose by about 1.2 percent per year.
Babson: Small increase indeed. So overall looking back at your article and our discussion today what should we take away from your research, this discussion, is there anything that maybe we didn’t talk about that you think we ought to fill in listeners on now?
Bundick: Yeah. I think the most important to keep in mind is that these tuition rates do change over time, but one thing we didn’t really get a chance talk about in the article is that these tuition rates have important implications for people wanting to save for college in the future. So you can think about somebody who’s got young kids and they want to be able to save for their college education; they have to figure out how much they need to save over time in order to pay for that college tuition in the future. So basically using some simple calculations you can basically make some assumptions about how the rate of college tuition is going to evolve over time and then versus the rate of return on savings for college. And so you can easily see—and there’s a number of calculators online and different things you can see this—but if college tuition runs at about 6 or 7 percent per year as it did during that 1980-2005 period, versus the 2 to 3 percent that it’s run over the last couple years, basically a household needs to double its monthly savings contribution to be able to fully pay for the cost of college tuition. So you know therefore these college tuition rates and how they evolve over time have a significant impact on a household’s ability to save for college in the future.
Babson: So maybe the best takeaway would be to start saving now.
Bundick: Exactly right.
Babson: Thanks, Brent, for your time and your insight today on college tuition inflation. You can find more of Brent and Emily’s research online at KansasCityFed.org. The views expressed today are those of the host and the guest and don’t necessarily represent the Kansas City Fed or the Federal Reserve System. Thanks for listening to our TEN Talk podcast. You can find more of our podcasts at KansasCityFed.org/tentalk. Thanks for listening.