Why College Prices Rise So Fast To put it bluntly: because parents are willing to pay the ever-higher bills. But take heart. The increases may be slowing down at last.
By Denise M. Topolnicki

(MONEY Magazine) – Forget what you learned in Physics 101. When it comes to college costs, what goes up just keeps going up. Tuition soared 126% during the 1980s, more than twice as much as the consumer price index, up 56%. So far in the 1990s, the news is hardly better, with the cost of higher education rising 16%, vs. 9% for inflation. This year, six schools -- Bard, Barnard, Brandeis, Hampshire, MIT and Yale -- are charging more than $25,000 for tuition, fees, room and board, catapulting their four-year costs over the alarming $100,000 barrier. Worse yet, college is gobbling up an ever-growing share of household income. Today the average tuition at a four-year private college ($10,498) equals 21% of the median two-earner family's income ($48,169), vs. 13% in the mid-1970s. Why do college costs defy gravity? To understand, you have to forget a lot of the explanations you've heard up till now. Start with these questions, parents -- and these sometimes surprising answers: Why do college prices keep going up? Colleges, like businesses, set prices according to what the market -- in this case, parents -- will bear. As long as colleges can hike prices without driving away too many customers, they will. Even with total costs approaching $25,000, top schools like Harvard, Princeton and Stanford routinely have four or more students applying for every opening. Bruce Johnstone, chancellor of the State University of New York system, takes a skeptical view of the cost controversy. However loudly parents complain about high tuitions, he says, "They vote with their feet, and they are obviously delighted to spend $100,000 on Harvard and Williams." And some schools find that increasing the price can attract more applicants. Take Muhlenberg College, a 1,640-student liberal arts school in Allentown, Pa. In the mid-1980s, like many lesser-known regional private colleges, Muhlenberg saw the number of applications drop. Even more distressing, the quality of its applicants declined as well. To bolster its image, Muhlenberg spent $25 million to build a new library, an arts center and a recreation building. It also expanded its academic offerings, adding a drama major, for example. And it began recruiting students from around the country. To help cover the added outlays, Muhlenberg raised tuition 99% in six years to $13,115 for the 1989-90 academic year. And the strategy worked: Applications rose 51%, and Muhlenberg now draws students from 30 states. Are colleges' rising expenses a factor? Yes, but a much smaller one than administrators want you to think. College price-setting is a lot more complicated than simply passing along increased costs. Typically, the trustees first set yearly goals that involve such things as new courses, faculty staffing, library resources, student counseling programs and, of course, marketing campaigns. Then they figure out how much tuition must be hiked to pay for it all. If the increase seems too high -- that is, out of line with what the school's competitors are expected to charge -- the year's goals may be scaled back. But usually the overriding concern is raising enough money for the school's programs, not finding ways to keep the lid on tuition. Do colleges ever compete on price? Yes, though rarely. Let's go back to Muhlenberg. Toward the end of the 1980s, says dean of admissions Christopher Hooker-Haring, administrators decided that with the public showing increasing resistance to higher prices, "it might be to our advantage to be lower priced than our competition." Thus, over the past four years, Muhlenberg's prices rose an average of only 6% annually, vs. 8% for private colleges nationally. That brought its total cost to today's $20,680, just below that of such competitors as Bucknell ($22,320), Dickinson ($22,705) and Franklin and Marshall ($23,655). Again, the strategy paid off. This year's freshman class of 472 is the largest ever. While other schools have also moderated price increases to stay competitive, drastic discounting is almost unheard of. One exception: 1,000-student Park College in suburban Kansas City, Mo., which this year slashed its tuition in half to $1,770 for someone with an average course load. So far, the gambit seems to be working: 110 freshman and 190 transfer students enrolled for fall '93, up from the usual in each category. And there's no sign that the price cuts have hurt the college's reputation. Says admissions director Randy Condit: "People in the Kansas City area are confident of Park College's quality. Most just say: 'Dang! This is a good deal!' " What is the outlook for tuition increases at private colleges? They will probably hold tuition hikes to two percentage points or so above the inflation rate; with inflation expected to average 3% to 4% during the 1990s, that would mean annual rises of 5% to 6%. Of course, similarly upbeat forecasts have proved wrong in the past. But this time there is evidence that significant numbers of families are finally beginning to balk at the ever-increasing prices. One telling statistic: In a recent College Board study, 30% of students called low tuition a very important factor in selecting a college, up from a low of 17% in 1978. Where are state school prices headed? The publics, which averaged 10% tuition increases over the past two years as financially pressed state legislatures slashed appropriations, will probably keep hikes within the 5%- to-9% range this year. "The college and university presidents I talk to think that tuition is simply at the point where some low-income students cannot afford to come," says James Appleberry, president of the American Association of State Colleges and Universities. All in all, have these rising costs made college unaffordable for most middle-class families? Fortunately, no. Several factors have kept college within reach. One is financial aid, which totaled $30.8 billion last year and can knock thousands of dollars off the official price (see "How to Get Your Fair Share of Financial Aid" on page 60) for families who qualify. Moreover, a mere 5% of students attend colleges where annual tuition exceeds $15,000. Indeed, there are only 129 private colleges that charge more than $14,000 a year; more than three times as many (393) cost $7,000 or less. Finally, don't forget about state colleges and universities. In-state tuition is only $2,030 this year at our No. 1 school, New College in Sarasota. That amounts to just 4.2% of the median two-earner family's income -- hardly a budget-buster, considering the same family spends nearly as much (3.4%) of its earnings on restaurants and takeout food. And that fact should add some hope to your happy meals.