Is college still worth the price?

Costs are soaring twice as fast as inflation, even as salaries for graduates are falling. Time to examine the old belief that college is worth whatever you can pay.

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By Penelope Wang, Money Magazine senior writer

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(Money Magazine) -- In May, more than 20,000 spectators gathered under blue skies at Wesleyan University in Middletown, Conn. to hear Democratic presidential candidate Barack Obama deliver the commencement address.

After recalling his days as a low-paid community organizer, Obama urged the graduates to consider careers in public service. "I ask you to seek these opportunities when you leave here," Obama declared. "The future of this country - your future - depends on it." His message was received with enthusiastic applause.

Calls to "give back" always seem to resonate at elite schools like Wesleyan, a picture postcard of academic abundance on its 360-acre wooded campus, complete with state-of-the-art film center, 7,500-square-foot fitness facility, skating rink, 11-building arts complex and a new $47 million student center offering everything from Mongolian grill entres to organically grown coffee.

As for actually entering a career in public service, Graduate, good luck with that. Given the steep price tag for a Wesleyan degree ($200,000 for four years) and the substantial amount you may have borrowed to pay those bills ($21,500 for the average student, with some families carrying loans of $50,000 or more), choosing a profession that often pays less than $30,000 a year might be, well, let's just say a bit of a financial challenge.

For more than two decades, colleges and universities across the country have been jacking up tuition at a faster rate than costs have risen on any other major product or service - four times faster than the overall inflation rate and faster even than increases in the price of gasoline or health care (see the chart to the right). The result: After adjusting for financial aid, the amount families pay for college has skyrocketed 439% since 1982.

Granted, the fact that college costs are spiraling wildly out of control is not exactly a news flash. The real eye-opener is why.

College finance experts point to a record number of applicants in recent years as the baby boomlet comes of age (many of the more selective schools reported double-digit increases for 2008); that trend, coupled with growing demand for degrees (undergraduate enrollment has jumped more than 20% over the past decade), puts heavy upward pressure on prices. Dwindling support for higher education from cash-strapped federal and state governments doesn't help the situation.

Normal supply and demand can't begin to explain cost increases of this magnitude, though. If the usual rules applied, tuition would eventually stop rising because families would cut back enrollment, especially at the most expensive private schools, just as they curtailed consumption of gas once prices hit $4 a gallon.

Colleges would then be forced to cut costs or entrepreneurs would flood the market with lower-cost alternatives. But for the most part - all those invitations you see to get your degree online notwithstanding - that hasn't happened.

Instead, prices for college have begun to follow their own peculiar logic. In the absence of any objective measure of the value of an education, price becomes the default yardstick. The more expensive a college is, the better the education it presumably provides. (After all, if other families were willing to pay this much to send their kids here, it must be worth it.)

And the better the education is presumed to be, the higher the price the college can charge. In that respect, it's like home values during the housing boom or dotcom stocks during the late-'90s tech frenzy: Prices go up on sheer momentum.

But families don't shell out money for college in the belief that their investment will someday bring them riches, as they did with real estate and tech stocks. Rather, the perceived payoff is that going to a brand-name school will one day make their children richer.

Even if the financial value of a degree is hard to measure, however, one thing's for sure: It's not infinite. Already a backlash is brewing in Congress about the spending and pricing policies of the wealthiest schools, and some parents may soon join in.

Says Charles Miller, who chaired the U.S. Department of Education's Commission on the Future of Higher Education: "If college costs continue to escalate at this rate, you may reach a point where the investment simply isn't worth it."

The critical question for you to ask: When it comes to college, will you and your child get what you think you're paying for? Here are the facts. You decide.

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