College tuition has been rising faster than inflation, but is now set to accelerate even more in the near future. And this trend could last for years due to the number of factors involved.
The cost of higher education is one of the most significant costs that families face. It is more important than ever for families to develop a plan for college expenses. While a plan does not ensure success, no plan at all could have a devastating affect on long-term family financial health.
College Tuition Set To Increase
The American Council on Education, comprised of more than 1,600 college and university presidents, are predicting sharply rising college tuition costs. The College Board, a non-profit association of educational institutions, released data showing costs rising 1 to 3 percent above inflation, with Private colleges jumping 5.9 percent and Public colleges up 6.4 percent.
And those numbers do NOT take into account the significant changes coming from the current economic downturn and credit crisis!
College Income Sources Being Squeezed
A college is a business, and in many ways operates like a large company, with several sources of income and various expenses. Several income streams are taking a hit all at once; revenues are going down.
Income Sources:
- Tuition
- Government funds (state, federal, etc.)
- Private Funds -alumni, fund raising, charitable donations, etc.
- Endowments - investments (from previous gifts and other revenue)
- Loans - banks, private, bonds, etc.
Expenses can be cut only so much, so one of the few remaining options is to raise prices. Prices translates to student tuition in the business of higher education.
Market Conditions Impact College Revenue
Everyone knows the stock market, and in fact nearly all markets, have been dropping. Values for stocks, mutual funds, even money market funds are losing up to 40% of their value.
The economy in general is either in a recession or headed for a recession depending on who is talking. This reality is a global issue which will likely mean that a down economy is going to be a reality for a longer time, probably measured in years.
The direct impact of the stock market drop is a direct loss of revenue. Endowments are investments in, among other things, stocks so the value of endowments held by colleges and universities has taken a beating. Lower value of these types of investments means they generate less revenue.
Another impact of the stock market drop is that businesses and individuals also lost a lot of value in their investments. Therefore, they are both less likely to donate to the colleges. Alumni and businesses are both significant sources of revenue for colleges.
Governments, especially state governments, are seeing lower tax revenue due to the falling economic activity. Therefore, they are cutting spending and some are already reducing current year funding for Public colleges. Virginia and Maryland both cut funding to state schools.
Credit Crisis Impacts Colleges
The Credit Crisis has dramatically, and rapidly, reduced the availability of loans across the entire US and global economy. Of course this has a direct impact on colleges and universities who, like businesses, routinely borrow to finance short term as well as long term funding needs. Loans are not just expensive, they are non-existent for many borrowers, colleges included.
The lack of available credit has impacted government loan programs and private loan programs. The effect is that both of these sources of loans to parents and student specifically for college are less able to lend for this purpose.
One more look at endowments is in order because colleges rely on this revenue for operating expenses; they typically utilize the earnings and not the principal, thereby ensuring long-term earnings from these investments.
The speed as well as the severity of the drop in market values coupled with the lack of available credit had a further effect of weakening college endowments.
They had no other source of funds and many schools are burning through the Principal of their endowments, just to stay afloat in the short-term. That means that endowment fund not only generate less income for college today, but will generate significantly less in the future, further exacerbating the revenue problem.
The outlook for college tuition costs is that they will increase at a faster rate in the near future than they have recently. Major economic factors are combining to push college costs up.
Families should evaluate their plan to pay for college costs and ensure that they are still well positioned to obtain available financial aid. The increases may be so severe that many families will need to adjust their strategy in order to manage rising costs of higher education.