Healthcare, energy drives up cost of college
States struggling with shortfalls pass costs on to students while tuition takes a bigger slice out of family incomes.
By Christian Zappone, CNNMoney.com staff writer

New York (CNNMoney.com) -- State university tuitions have leaped 40 percent in the past five years, hitting the three out of four American college students who attend public universities.

Tuition has risen 126 percent (after inflation) since 1984, and is eating up an ever-growing chunk of family incomes. In 1984, the tuition and fees at a public, four-year college was just 4.8 percent of the median family income; today it's 9.5 percent.

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The heart of the problem is that states must juggle the cost of funding their education system alongside two other major funding obligations: state-funded Medicaid and the state criminal justice system.

When states are forced to make cuts in education, they typically spare K-12 education programs because they're politically sensitive, according to Michael Dannenberg, Director of Education Policy Program at the non-partisan New America Foundation.

State universities, however, have a mechanism for making up their shortfalls - tuition hikes. So "beginning 2000-2001, governors whacked funding for higher ed," said Dannenberg and the tuition went soaring.

"The percentage of revenues from the state has plummeted for public universities," said Sandy Baum, Senior Policy Analyst for the College Board. In the past five years state budgets have gotten tight as "Medicaid and the criminal justice systems have taken over" [as funding priorities], Baum explained.

"Unless you stem the tide of Medicaid costs, there's no turnaround in sight," for public university tuition hikes, said Baum.

But healthcare costs don't just pressure state tuition prices by competing for state budget dollars.

Benefit costs for universities, including the cost of employee health insurance, grew 175 percent from 1985 to 2005, while professional salaries grew only about 125 percent in the same period, according to the College Board.

And healthcare costs are not the only surging expense for universities: energy and utility costs, which had remained relatively stable from 1985 to 2000, nearly doubled in the past five years, according to the College Board

The cost of utilities for all universities - public and private - have jumped 27.1 percent since 2005, according to the Commonfund Institute's Higher Education Price Index.

Cutting costs is tough

Universities are disadvantaged by the fact that students and teachers must both be present in full numbers in order for education to take place.

"The quickest way to reduce costs is to put more students in the classroom," according to Baum. "Then the education is compromised."

Consequently, there's less room for universities to cut corners on basic costs, such as insuring employees or keeping the power on. Nor can universities outsource core activities or achieve the economies of scale businesses can.

Finally, the increasing costs of public universities would hardly be such a pressing personal finance issue if so much of the rising expense were not borne by individuals.

"Today college costs are increasing and federal student aid hasn't kept pace," said Dannenberg. "At the same time, grant aid has consistently fallen back as a form of aid."

"Twenty five years ago the typical student aid package was made in a majority of grants not loans," said Dannenberg. "Today that ratio has inverted. It's flipped."

In the 1980-1981 school year, grants funded in large part by federal student aid made up 55 percent of the total aid available to students with most of the rest coming from loans.

By the 2004-2005 school year, the ratio had inverted with 54 percent of aid coming from loans while 40 percent came from grants.

So no matter what the cost of college, the impact of the price on students, graduates and their families has grown deeper.

And with the state universities' costs tied so closely to the economy at large, there's little on the horizon hinting toward any long term relief.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer LIBOR Warning: Neither BBA Enterprises Limited, nor the BBA LIBOR Contributor Banks, nor Reuters, can be held liable for any irregularity or inaccuracy of BBA LIBOR. Disclaimer. Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.